Localities Don't Expect Rating Downgrade

By Desiree Parker Friday, August 12, 2011

The federal government’s credit rating downgrade last week is not expected to affect Triangle localities, as municipalities are rated differently. Future federal cuts may have more of an impact, though.

Local governments are involved in the municipal bond market, explains Brinkley-Mason Professor John Boschen of William and Mary’s Mason School of Business, which means local bonds are secured by tax revenues or specific project revenues.

“Ratings agencies evaluate expected cash flow generated at the state or local level,” Boschen says. “The state and localities have fairly light debt loads compared to revenues. The modest downgrade won’t impact [them] too much, if at all.”

County Administrator Robert Middaugh expects James City County will be fine, for now. “At this point we do not think [the county’s rating] will be affected. The rating agencies have come out with a statement that they rate municipalities differently than the U.S. and that we are not tied to the federal rating.

“They have also indicated that they can and will rate jurisdictions at AAA even if the federal is lower.” James City County has a AAA bond rating from two of three agencies.

York County has the same expectations, according to county spokeswoman Christie Phillips. “Given the different financial models that we operate under, mainly that the county does not borrow funds for operations, we borrow money for infrastructure, and we have to have a balanced budget each year and the federal government does not, we think the recent national downgrade will have little or no impact on the county's bond rating,” she says.

York County announced in April that S&P upgraded its rating from AA to AA+.

Future spending cuts at the national level might have more of an impact on the local level, though. “The spending cuts D.C. needs to address in the future may be more impactful, as it might to the entire country,” according to Middaugh.

Boschen agrees that “cuts could affect [local] revenue, like when the stimulus funds ended.”

He also points out that “cutting military spending is on the block in the future,” and that the Hampton Roads region, which is especially reliant on the military, could see an impact in this area.