WASHINGTON — Triple-A rated municipal issuers responded swiftly and strongly to being placed on watch for a possible downgrade, saying a federal debt default would not hinder their ability to pay bondholders.
Moody’s Investors Service on Thursday listed 162 local governments, 14 housing agencies, and one public university that would be directly and indirectly affected should the United States lose its triple-A rating. Moody’s said it is evaluating each issuer’s reliance on federal spending and other economic factors.
The report raised concerns for some investors, who said it illustrates which issuers are at greater risk should the federal government embrace fiscal austerity, even if the debt ceiling is raised and default averted. The issuers, meanwhile, stressed to investors that the federal downgrade risk does nothing to prevent them from making debt-service payments.
“Certainly in the short term, we don’t have any significant concerns,” said Michelle Cowan, chief financial officer in Arlington County, Va., which is home to the Pentagon. “We have substantial reserves, we have great cash flow and liquidity.”
Virginia saw 15 issuers put on the downgrade watch list, the largest concentration among all states. Issuers in northern Virginia, which is a bastion of triple-A credits, have relied on government employment to insulate their economies from the worst of the economic recession. Now, the issuer officials are blaming Congress for the downgrade risk.
The Moody’s decision “was made because of federal inaction, and in no way reflects the continuing strength and good fiscal management of our local communities,” eight northern Virginia local governments said in a joint statement Friday.
“Nothing has changed” amid the showdown in Washington “in terms of our local financial and debt management,” the governments asserted.
In the longer term, the region will need to plan for an age of reduced government spending, officials said. Arlington has been able to adjust to federal cost-cutting changes, most recently with the Defense Department’s Base Closure and Realignment Commission of 2005, Cowan said.
“We’ve already sort of been through this with BRAC and I think our plans are already demonstrating progress,” she said.
Moody’s list included two nonprofit issuers: the University of Washington and the Smithsonian Institution, which has issued debt through the District of Columbia and the Fairfax County, Va., Economic Development Authority. Both nonprofits receive about half of their revenues from the federal government.
The Smithsonian “is the only major rated borrower in the muni market that gets such direct operating funding from the federal government,” said John Nelson, a managing director at Moody’s.
The University of Washington “has an unusual combination of a very large research program and a very large patient care hospital program,” he said, and both programs rely on federal funding.
But in Washington’s favor, the country’s top research universities “tend to gain a bigger market share” of federal research funding when the purse strings are tightened nationwide, Nelson said.
One Democratic congressman took advantage of the Moody’s downgrade watch for the University of Washington to bash Republicans for their intransigence on the debt-ceiling solution.
“This is a great example of how out of control House Republicans are,” Washington State’s Jim McDermott said in a statement.
There were 14 state housing finance agencies put on downgrade watch by Moody’s. The credits were selected based on their reliance on federal mortgage insurance, delinquency levels, and asset-to-debt ratios, said Florence Zeman, vice president and housing team leader at Moody’s.
Moody’s on July 19 put five triple-A states on watch for a downgrade based on their connections to the federal government.
Both reports are “creating some focus and concern” among investors, said Chris Mier, managing director at Loop Capital Markets LLC. But the worry “is really too big to practically do anything about” for portfolio managers, he said.
Going forward, investors may put greater emphasis on an issuer’s reliance on the federal government, he said.
For years, a state or municipality’s “connection to the federal government had been considered a positive,” Mier said. “Not all, but some credits that were more heavily reliant on federal government employment and money, some of them will be regarded going forward a little bit more negatively.”