Shutdown could hurt credit of counties, cities near Washington, DC -Moody's

Reuters

Oct 7 (Reuters) - Moody's Investors Service said on Mondaythe credit outlook forlocal governments in Maryland and Virginia close to Washington,D.C., is negative due to the federal furlough of some employeesduring the current budget shutdown.

Moody's said a prolonged shutdown will have a negativeimpact on income tax revenues of counties in Maryland, whilelocal governments in Virginia will feel the pinch of decliningsales taxes.

In addition, local governments in both states face the riskof reduced aid from their respective states and the possibilityof the region's economy slowing, the rating agency said in astatement.

The U.S. Congress has been deadlocked over passing a budgetfor the country, as Republicans balk at spending on thenational healthcare law commonly known as Obamacare. The federalgovernment shut down operations last week and sent 800,000workers home without pay.

No one knows how long the shutdown will last, but recentlythe House of Representatives approved a measure to pay allfurloughed employees retroactively once the government reopensand the Defense Department is recalling hundreds of thousands ofits employees.

In general, rating agencies have said that a short-termshutdown does not pose great risks to states and cities.

Last week, another credit agency, Fitch Ratings, said thesuspension of federal operations had no negative creditimplications for the District of Columbia.

Maryland and Virginia are home to many civilian, defense andcontract workers, who help bolster the states' income and salestax revenues.

According to Moody's, federal workers make up 12.6 percentof the Washington, D.C., area's total employment, versus 2.1percent nationally.

Maryland might lower state aid to counties and cities, butlocal governments have little dependence on direct federaltransfers, Moody's said.

Counties in the state, though, rely heavily on income taxrevenue, which could dip as workers go unpaid. The countiesclose to the nation's capitol - Montgomery, Frederick, Charles,Prince George's, and Calvert - derive more than a quarter oftheir general fund revenues from income taxes, according toMoody's.

Local governments in Virginia will probably feel slightlynegative effects from the shutdown, with revenues from salestaxes most affected. Still, sales taxes make up only a smallportion of Virginia local governments' revenues, Moody's said.

Virginia also might reduce state aid to local governments torelieve economic and financial strains caused by the shutdown,but, like Maryland, Virginia's cities also receive only a smallamount of revenues directly from the federal government.

Large tax bases, high wealth levels and solid reservesshould help the DC metro area withstand an extended governmentshutdown, the agency said.

"Despite the risks, most D.C. metro area local governmentshave strong credit fundamentals that will help them withstand aprolonged government shutdown," Moody's said.

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