Obama Signs Stopgap
WASHINGTON — President Obama on Wednesday signed a stopgap measure to keep the federal government funded through March 18 just hours after the Senate approved it by a vote of 91 to 9.
Moody’s Investors Service issued a report the same day concluding that a shutdown of more than 30 days would have a negative credit impact on certain municipal bonds, but would not likely lead to defaults.
The stopgap measure would cut $4 billion from current spending levels and replaces a continuing resolution that would have expired March 4.
The president has called on leaders from both parties to begin talks on legislation that would keep the government funded through Sept. 30, the end of fiscal 2011. If they cannot reach agreement, a government shutdown is still possible. The longest shutdown, in 1996, lasted only 21 days.
According to Moody’s, a shutdown of 30 days or less could result in the delay of federal payments to municipal issuers, but would have minimal or no credit impact on muni debt because nearly all issuers have other resources to carry them through such a short period without federal funds.
“We think there is remote risk that there would be some protracted delay. But if there is, we identify the bonds that would be most affected,” said Anne Van Praagh, the Moody’s group credit officer who authored the report.
“A budget shutdown lasting more than 30 days would be a negative development for certain types of municipal bonds such as state highway bonds and bonds supported by federal leases.”
The report makes no mention of Build America Bonds and other direct-pay bonds, for which issuers receive subsidy payments from the federal government. “Our approach to rating BABs is that we evaluate the issuer’s ability to pay debt service with or without the subsidy” payments, Van Praagh said.
Most issuers can continue to pay debt service on BABs even if they must temporarily forego the federal subsidy payments, she said.
Moody’s said that grant anticipation revenue vehicle, or Garvee, bonds are secured by anticipated grants of the federal highway trust funds, consisting of gas tax and other revenues.
The use of the highway trust fund is governed by Congress’ authorization of transportation programs. A shutdown could result in the furlough of federal employees who would be needed to make payments to states on schedule.
At least 18 state highway programs and five mass transit agencies rely exclusively on federal funds to repay their bonds, Moody’s said. But most of them have high debt-service coverage ratios, indicating they could withstand a significant period without federal funds.
Moody’s said it rates 28 state highway bond programs backed in part or in whole by federal highway aid and five mass transit programs backed by federal funds. The agency said it will review their ratings if the federal government’s commitment to funding these programs changes.
Lease financings that are secured by federal payments are backed by the full faith and credit of the United States but could be operationally affected if a shutdown renders personnel unavailable to process the payments, Moody’s said.
The majority of the financings have been structured without debt-service reserve funds and maintain only small operating reserves, it said. Furthermore, debt service typically accounts for most of the lease payment, resulting in limited alternative-cash resources and little ability to preserve cash ahead of debt-service payments.
Moody’s said it rates 16 federal lease transactions, seven of which are subject to appropriations.
The report described other bonds that rely on federal payments but are less exposed to risk from a shutdown.
It said that while public housing authority bonds are secured solely by the anticipated receipt of annual federal capital fund appropriations, payments have already been appropriated for 2011.
New housing authority bonds are secured by annual contributions unconditionally payable by the U.S. Department of Housing and Urban Development. But HUD contends the funds for such financings were appropriated at the time of issuance.
Multifamily housing bonds that receive Section 8 payments from HUD typically are financed with a maximum annual debt-service reserve fund, the rating agency said.
Military housing project bonds should not be affected by a government shutdown because military personnel are considered essential to the national defense and would still receive compensation, including the basic allowance for housing that supports the debt service payments on the bonds.
Moody’s said states, local governments, universities, research institutions, hospitals, and health care systems, as well as airports and state housing finance agencies, may also rely on federal funds as budget items.
However, they are less exposed to risk resulting from a shutdown because they can slow down payments, draw on reserves, or undertake cash-flow borrowings, among other options.
Municipal bonds or financings that rely on federal guarantee programs or credit support also are less at risk from a shutdown because the payments from the guarantors are funded from their own reserve funds and are not subject to appropriations, Moody’s said.
These include Federal Housing Administration insured mortgage loans, Government National Mortgage Association guaranteed mortgage-backed securities, and Fannie Mae and Freddie Mac guaranteed securities.
In the past, these guarantors have continued to pay claims during shutdowns, Moody’s said.