WASHINGTON — For the first time in five years, Moody's Investors Service has revised its outlook for U.S. local governments to stable from negative, as housing markets continue to stabilize, municipalities' fund balances remain healthy and cities and school districts control their costs.
But in its "2014 Outlook — U.S. Local Governments," released Wednesday, the rating agency cautioned that conditions will remain more difficult for local governments than before the 2008 recession and that "'pockets' of serious credit pressure remain."
Moody's said there is a "new stable," which means that credit risks are more visible and predictable and that localities have reduced costs and expectations to cope with limited resources.
"The 'new stable' will be an era of constrained resources but the worst is over for local governments in most of the country," said Naomi Richman, a Moody's managing director.
The housing sector has stabilized and is recovering nationwide, four years after the collapse of housing prices, Moody's said in its outlook.
"With the stabilization in housing, we expect local government revenues to increase over the next two years, which is a credit positive," it said.
One of the main reasons the local government sector has remained a highly-rated sector is that property tax revenues proved to be durable during the Great Recession, staying mostly flat in contrast to income taxes and sales taxes, which fell for many governments.
States have begun to restore some of their funding cuts to local governments, Moody's said. In addition, local governments "have recognized the new fiscal landscape" and taken steps to give less to labor in negotiations, slow the growth of salaries, trim staff, and de-leverage, it said, adding, "All of these cost-cutting efforts are credit-positive."
However, Moody's said rating downgrades may remain concentrated in states and sectors where: the local housing market has lagged or not recovered at all; localities have not cut costs or spending; there is a continued loss of state aid; the political will to use available tools is lacking; and unemployment remains consistently high.
"The bottom rung of the rating distribution has already expanded," the rating agency said. "There are currently 114 local government ratings in the speculative-grade range of Ba1 or lower. This is a more than five-fold increase from the 20 local governments ... in 2008."