WASHINGTON — A short-term federal government shutdown will have minimal impact on issuers, though some areas with a significant federal presence like Washington D.C. may see some lost economic activity, ratings agencies said.
“We believe the direct credit impact on state, city, or municipal enterprises is not immediate,” Standard and Poor’s said in its report.
The rating agency believes that a shutdown that does not last longer than a few weeks is unlikely to have a significant impact on states’ credit quality. But states could face a temporary delay in receiving some federal funds and will have modestly weaker economic expansion, it said.
Both Standard and Poor’s and Fitch Ratings noted that states’ financial situations have improved in the past few years, allowing them to better handle temporary delays in federal funds.
If the shutdown becomes prolonged, Standard and Poor’s still does not expect “automatic, wholesale downgrades on states.” While the rating agency would look to see how states are handling any reductions of federal funds, the bigger risk to state budgets would be threats to broader economic performance. A breakdown in negotiations over ending the shutdown could hurt consumer and investor confidence, the rating agency added.
Standard and Poor’s does not expect states to issue revenue anticipation notes to deal with potential cash-flow shortfalls during a short shutdown. But the potential for states to use cash-flow financing could increase if the shutdown persists.
Most local governments are also generally not likely to be significantly challenged by a short-term shutdown, though a longer shutdown could cause more issues. The greatest impact would be on local governments with large numbers of federal government employees, rating agencies said.
Fitch and Moody’s Investors Service both described how the shutdown could impact the District of Columbia. The rating agencies noted that the shutdown has resulted in furloughs to a large number of federal employees in the district and the closing of many of D.C.’s tourist attractions.
The closures of attractions will result in missed economic activity and tax revenues, Also, there is no guarantee that furloughed employees will be reimbursed when the shutdown ends. Moody’s noted that the tourist sites add more than $6 billion to the local economy each year. But Fitch said that the furloughs might only cost the district $5 million to $6 million per week in lost income tax revenues, based on 2011 data.
Unlike other jurisdictions, the district’s budget requires federal authorization. Since the shutdown began, the district has been spending from its contingency reserve fund, which had enough money to last up to two weeks.
Fitch anticipates that D.C. is capable of handling the drawdown of reserves without negative credit implications and will fully replenish the fund for the withdrawals after its’ fiscal 2013 surplus is certified by independent auditors.
Moody’s predicted the federal government shutdown will not cause disruptions to the district’s debt service payments. D.C. does not require federal appropriations to make interest payments on general obligation or revenue bonds. While federal appropriations are needed for debt service on the district’s certificates of participation, Moody’s does not expect the shutdown will last long enough to pose a threat to the Jan. 1 deadline.
Moody’s also said the shutdown is a credit negative for local governments in Maryland and Virginia that are part of the D.C. metropolitan area. Furloughs of federal workers is of special concern for the D.C. area, where federal employees make up 12.6% of the area’s total employment, the rating agency said.
If the shutdown becomes prolonged, Maryland counties would see declines in income tax revenue, the rating agency said. Income taxes made up about 34.2% of general fund revenues for Maryland counties in the D.C. area in fiscal 2012, though cities in the state only receive a relatively small amount of their revenues from income taxes.
Economic or financial strain on Maryland could lead it reduce aid to cities and counties, but state aid made up an average of only 0.6% of the general fund revenues of the three counties for which Moody’s had specific data. Localities in the Maryland suburbs of D.C. are also not very dependent on direct transfers from the federal government.
In Virginia, the shutdown may lead to declining sales tax revenues for local governments, though sales taxes make up a relatively small percent of localities’ revenues. Also, the commonwealth could reduce aid to local governments to alleviate its own economic and financial strain from the shutdown, which could impact localities. State aid accounts for an average of 10.4% of total revenues of Virginia cities in the D.C. metropolitan area and 10.9% of Virginia counties in the region, Moody’s said. The cities and counties receive only a small percentage of their revenues directly from the federal government.
Moody’s noted that local governments in the D.C. area tend to have “strong credit fundamentals that will help them withstand a prolonged government shutdown.”
The localities generally have large tax bases, high values of taxable real estate and solid reserve levels. Property taxes make up about half the localities’ revenues, and this type of taxes will not be noticeably affected by the shutdown, Moody’s said.