Moody’s Investors Service is retaining its negative credit outlook on local governments.

In the next 12 to 18 months a slow economy, property tax and state aid strains, and rising pension and health care costs will stress local government finances, Moody’s indicated in a report “Outlook for US Local Governments Remains Negative.”

Moody’s expects property taxes, which account for about 30% of total local revenue, to not recover until 2014. Home sales, inventory levels and building permits have shown hopeful signs, lead author and senior analyst Kristin Button wrote. However, “stubbornly high foreclosure activity has dampened the medium-term prospect of material home price gains.”

State aid cuts continue to pressure local governments, Button wrote. “According to the National Governors Association, seventeen states reduced local aid as a measure to address budget gaps for fiscal year 2012 and fourteen states expect to use this strategy for fiscal year 2013,” Button wrote.

“The percent of Moody’s-rated local governments with a negative fund balance is relatively small but has increased in recent years,” Button wrote. A review of the available fiscal year 2011 audited financial data indicates continued growth in issuers with negative fund balances.

“On the positive side, local governments typically have low debt service burdens, and the majority still have room to manage financial burdens through spending adjustments and by raising property taxes, fees, and user charges for essential utility services,” Button said.

Moody’s will retain its negative outlook until the economy experiences an extended period of strength, Button wrote.

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