By Yali N’Diaye

WASHINGTON (MNI) – Moody’s said Friday it is maintaining a negative
outlook for local governments, and it is likely to keep it that way
until “there are more significant and longer-lasting gains in the
economy that foster improvements in local government budgets.”

In addition to sluggish economic conditions putting strains on
property taxes, local government budgets face pressure on the state aid
revenue front — likely to continue “for the foreseeable future as
states contend with budget challenges of their own” — while pension and
health care costs continue to rise.

“As budget reserves and other sources of liquidity dwindle, some
issuers are turning to borrowing for operations and more are facing
severe financial strain,” Moody’s said in its mid-year outlook.

Hence the negative outlook for the next 12 to 18 months.

That being said, Moody’s pointed out that the debt burden was
typically low, and most local governments “still have room to manage
financial burdens through spending adjustments and by raising property
taxes, fees, and user charges for essential utility services.”

Yet the performance of the economy remains central to a change in
the outlook.

And on that front, Moody’s expects “tepid” and “uneven” growth
across regions, while the housing price recovery will take time — at
least until 2014 — before it is reflected in property tax revenues.

And before things get better, Moody’s anticipates that “More
instances of severe credit stress will surface on the back of mounting
wage and benefit costs, failing enterprise risks, and tightening
liquidity.”

Bankruptcies and defaults remain “rare,” however, among local
governments.

Besides, Moody’s recognized steps that have been taken by local
governments to balance their budgets, with spending cuts going beyond
discretionary program and affecting core government functions.

“Drawing down reserves has been another strategy used to close
budget shortfalls,” Moody’s also noted, warning, however, of the
potential negative implications of this strategy and the number of local
governments with negative fund balances — indicating low cash positions
— has increased in recent years.

Fund balances, expenditures and cash positions are all components
of a “Proposed Fiscal Stress Monitoring System” announced in September
by the New York New York State Comptroller’s Office as another way to
address local governments’ budget issues.

Comptroller Thomas DiNapoli announced on September 24 that his
Office was planning to implement an “early warning monitoring system
that would identify municipalities and school districts experiencing
signs of budgetary strain so that corrective actions can be taken before
a full financial crisis develops.”

The corrective action is not a financial aid, but would take place
in the form of technical assistance from the State to avoid a fiscal
crisis.

The State will assign “scores” to municipalities and school
districts to classify them into three categories: “significant fiscal
stress,” “moderate fiscal stress,” or “nearing fiscal stress.”

The comptroller’s office will start implementing the system around
February to localities whose fiscal year ends December 31, 2012.

The “Proposed Fiscal Stress Monitoring System” is out for comment
for a 60-day period.

The financial indicators it relies on include year-end fund
balance, operating deficits, cash position, use of short-term debt, and
fixed costs such as employee benefits.

New York State Deputy Comptroller Steven Hancox told MNI Friday
there is no plan to expand this system at the national level.

“We have not had any discussions with other states on it at the
moment,” he said.

He said he is not certain it would be possible to elaborate a
national system because “each state would have to make a determination
whether they had the authority to do such a thing,” he said.

He added the relationship between a state and local governments
varies from one state to the other.

Given those differences, he concluded “it is a little hard to have
a national system.”

In New York State, the goal of the proposed monitoring system is to
enable early action to avoid a crisis, with potentially an improvement
in local governments’ credit ratings.

The ultimate impact on local government’s ratings, however, remains
unclear, although comments from Standard & Poor’s suggest they would
tend to be positive.

Standard & Poor’s said Thursday in a commentary that “state
oversight of local government fiscal affairs can play an important role
in financial stability and can be a credit positive where it has
contributed to pro-active management policies.”

It added, “We consider budget adjustments and multiyear financial
planning to be valuable mechanisms for addressing fiscal stress, and
significant components of overall financial management, which can be an
important factor in determining rating outcomes.”

Still, “it is too early in the process to determine if this
enhanced fiscal monitoring will ultimately improve a local government’s
credit characteristics,” the rating agency said.

** MNI Washington Bureau: 202-371-2121 **

[TOPICS: MR$$$$,M$U$$$,M$$FI$,MFU$$$]