The outlook for the local government sector continues to be negative as revenue constraints and expenditure demands persist, says Moody's Investors Service in its report "Outlook for US Local Governments Remains Negative in 2013."

The weak economic recovery remains a source of many of the ongoing pressures.

Nearly all rated local governments, however, will manage through another year of stress with no material impact on credit quality, given the sector's fundamental and unique strengths. More than 99% of ratings in the local government sector are investment grade.

"Our sector outlook speaks to the challenging environment in which most US local governments will likely operate over the next year," says Rachel Cortez, the Moody's Vice President and Senior Analyst who was the main author of the report. "Overall, the economic recovery remains sluggish despite some bright spots, and looming federal spending cuts may exacerbate weak growth rates."

Revenues from state aid and property taxes remain constrained, while local government budget decisions, after years of spending reductions and deferrals, will be increasingly difficult, says Moody's. A small number of local governments may face downgrades in the coming year. At greatest risk are entities with accelerating operating costs associated with mounting pension liabilities, outsized exposure to underperforming enterprises, or an elevated reliance on federal employment or funding given the chance of federal spending cuts.

The outlook expresses Moody's expectations for the fundamental credit conditions in the sector over the next 12 to 18 months. It does not speak to expectations for individual rating changes and is not a prediction of the expected balance of rating changes during this time frame.

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