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Budget & Finance

Moody's Looks at Sequestration Impacts on Local Governments

Moody's Investors Service issued a report on Wednesday that examined the local governments and school districts that rely on federal employment, procurement, Medicare reimbursement and education grants that would be most affected by sequestration.

Sequestration mandates about $1.2 trillion in federal spending cuts to be phased in over 10 years, with $85 billion to be made by Sept. 30 of this year.

Moody's said that while the cuts will "strain the U.S. economy to some extent," "relatively few local governments will experience significant financial pressures" except those in "areas with substantial dependence on defense spending or health care."

"In those regions, local governments that rely on revenue from income taxes and sales taxes may face budget pressures as layoffs, furloughs, and hiring freezes by area employers weaken economic activity," the rating agency said. "Additionally, a small number of school districts that rely heavily on federal funding may face material budgetary challenges."

About $42 billion of the $85 billion of spending reductions for this fiscal year are to be obtained by a 7.8% cut in discretionary defense spending, Moody's noted. The report listed 10 metropolitan statistical areas that rely on federal employment and are vulnerable to the cuts. The MSA's ranged from Warner Robins, Ga. and Hinesville, Ga., were federal employment is 27.3% and 21.8% of total employment (respectively), to Huntsville, Ala., where it is 10.1%.

The largest employer in Warner Robins is Robins Air Force Base, which employs more than 22,000 civilian workers, Moody's said. In March, base officials gave early retirement incentives to about 400 of them. Soon after that, U.S. Defense Secretary Chuck Hagel announced more than 700,000 civilian defense employees would be required to take 14 furlough days before Sept. 30, amounting to a 12% pay cut. That would affect more than one-fifth of Warner Robins' total civilian labor force of 700,000, Moody's said. The ripple effect throughout the region could cause fiscal stress for the city of Warner Robins, which has a Aa3 general obligation bond rating, and the Houston County School District, which has an Aa2 rating, the report said.

The rating agency also looked at regions with a high dependence on federal procurement contracts. It listed 10 MSAs with federal procurement contracts that ranged from 88.3% to 17.3% of their regions' gross domestic product. Highest on the list was Oshkosh-Neeah, Wis., where the largest employer is the Oshkosh Corp., which manufactures specialty trucks used by the U.S. military. Over the past six months, the company has announced more than 1,300 local job cuts, citing military retraction in Afghanistan and Iraq, as well as sequestration cuts. The cuts represent about one-third of the company's local workforce and 1.4% of the city's civilian labor force of more than 95,000 people, according to the report.

Moody's said that about $11 billion or 13% of the $85 billion of sequestration cuts for the fiscal year will come from a 2% reduction n Medicare reimbursements to hospitals and other health care providers.  Rochester, Minn., has one of the biggest health care-driven economies — with health care employment 39.2% of all county employment — because the Mayo Clinic is the largest employer in the area with more than 30,000 employees. The 2% reduction in Medicare reimbursements will lower the clinic's annual revenues by about $47 million, the clinic's president has announced.

Nearly $26 billion or 30% of the $85 billion of cuts for the fiscal year will be made through a 5% reduction in discretionary non-defense spending, including several Department of Education programs, such as Title I funding for high poverty school districts and Individuals with Disabilities Education Act grants for special education.

Moody's looked at 10 school districts ranging from the Dulce Independent School District in New Mexico, where federal impact aid is 54.0% of general fund revenues, to the Muroc Joint Unified School District in California, where it is 16%.

The rating agency also noted that some local governments will be effected by funding cuts from the Federal Emergency Management Agency. About $928 million in disaster relief funding is to cut, as well as $113 million in emergency preparedness grants for state and local governments, the report noted.

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