Caterpillar's 22,000 Job Cuts Will Strain Illinois Localities: Moody's

CHICAGO - Peoria, Ill.-based Caterpillar Inc.'s recent decision to trim 20% of its global workforce of 110,000 will put added strain and pressure on the budgets and credits of its hometown city and other nearby governmental units, Moody's Investors Service writes in a new commentary.

The heavy equipment and machinery maker's late January announcement of 22,000 jobs cuts following a disappointing fourth quarter and lowered 2009 outlook was highlighted by President Obama, who visited a Caterpillar plant in East Peoria earlier this month to promote passage of his economic stimulus package.

The final number of job cuts is not yet clear as funding for new construction projects in the stimulus package could increase demand for the company's equipment. Many of the cuts have occurred, however, and chief executive officer James Owen recently said he does not expect to recall employees until the end of the year.

So far at least 2,100 cuts have occurred in Illinois, where the manufacturer employs 28,000, including 21,000 in the Peoria area.

"For cities, the cutbacks are likely to contribute to a further decline in sales tax collections already weakened by the general economic slowdown. Counties are likely to see increased spending for social services," the Moody's report authored by analysts Jeannie Iseman, Edward Damutz, and Kenneth Kurtz reads. "In the longer term, cities, counties and school districts may see a reduction in assessed values and property tax collections."

The risks come from the region's still heavy reliance on the company as a taxpayer and employer. The company accounts for 25% of total employment in the area despite successful efforts in recent years to broaden the region's economic base.

Caterpillar operates five facilities in the region including its corporate headquarters. The company has cut 700 jobs in East Peoria, 800 in Mossville, 1,000 in Decatur, and another 500 in Aurora, a far west suburb of Chicago.

Peoria's $188 million of general obligation debt is rated Aa3 and the company represents 1.10% of its taxable property valuation. Peoria County is rated Aa3 with only $9 million of GO debt. Decatur is rated A1 and the company represents 1.63% of its valuation, while Aurora is rated A1 with valuation at just 0.1 %. The Metropolitan Airport Authority has an Aa3 rating on $60 million of GO debt and the Community High School District's $2 million of debt is rated A3. The six are among 12 credits most exposed to Caterpillar's struggles.

The job cuts alone won't necessarily pose an economic challenge but could contribute to building economic pressures by driving further declines in sales taxes as consumers in the hold back on spending over economic worries. Property taxes may be pressured in the long term if layoff numbers worsen or result in plant closures, hurting both local government and school district coffers. As unemployment rises, counties will face greater costs for health care services.

"Moody's considers the recent announcement of Caterpillar's 22,000 job cuts to be of material significance on the creditworthiness of municipal issuers within the Peoria metropolitan region," according to the analysts, who are reviewing individual credits and expect to publish those reports within the next three months.

Analysts also noted that local governments can offset some of the strain by further economic diversification efforts, developing long-term financial strategies, and maintaining reserves. Some help also is expected through the stimulus package.

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