Standard & Poor's said this week that it will take into account the economic stimulus package that is approved by Congress and signed into law by President Obama in its credit review process for state and local governments.
"If a stimulus plan becomes final, we will assess its potential impact on state and local governments' budgets and financial positions, capital improvement plans, debt profiles, and overall economic activities," the rating agency said in a three-page report released Wednesday. "We will also view the size of the program, the level of direct assistance, and how beneficiaries use it, and the allocation process as key credit considerations."
Moody's Investors Service and Fitch Ratings said yesterday that they also will take into consideration the stimulus package's effect on state and local governments' credit ratings.
Standard & Poor's analyst Robin Prunty said that because there is a "fair amount of certainty" that a stimulus package will be enacted, the rating agency decided to announce that it will include it in its analyses.
"We've had a lot of questions about how this will affect ratings and we're seeing [anticipated stimulus dollars] included in budgets and gap-closing plans," Prunty said.
Though many states - including Ohio, Maryland, Virginia, and the District of Columbia - have already factored expected federal stimulus aid in their budget proposals, they and other state and local governments will still face budget gaps, Prunty said.
"Certainly, it's pretty clear that this alone is not going to solve state budget problems," she said. "I don't think anyone is counting on it being the only way of resolving budget gaps."
For example, the House version of the stimulus bill would allocate $87 billion to help states provide Medicaid coverage for unemployed workers, but even that amount will not be sufficient to address the growing unemployment rate, the report said.
The rating agency will also review how state and local governments use stimulus funds for infrastructure projects because capital improvement plans are a large part of its credit analyses.
In addition, any legislation enacted that provides federal liquidity or guarantees for municipal debt will also be a factor in assessing credit ratings, Standard & Poor's said.
"We believe that if the capital markets remain constricted, the ability of state and local governments to borrow for infrastructure may be constrained," the report said. "Standard & Poor's will evaluate any changes at the federal level pertaining to credit enhancement or guarantees as they relate to state and local governments' debt management."
Bob Kurtter, senior credit officer in Moody's public finance group, said Moody's also will consider stimulus funds.
"This is an important major new source of revenue for these entities at a time when they are very fiscally stressed," Kurtter said. "This will, of course, be a critical component of our analysis."
Fitch managing director Amy Laskey and executive managing director Richard Raphael said they will pay particular attention to how state and local governments use the funds as a temporary solution to budget troubles and that they use the money to complement wider measures taken to address budget gaps.
