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

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

Moody's said a prolonged shutdown will have a negative impact on income tax revenues of counties in Maryland, while local governments in Virginia will feel the pinch of declining sales taxes.

In addition, local governments in both states face the risk of reduced aid from their respective states and the possibility of the region's economy slowing, the rating agency said in a statement.

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

No one knows how long the shutdown will last, but recently the House of Representatives approved a measure to pay all furloughed employees retroactively once the government reopens and the Defense Department is recalling hundreds of thousands of its employees.

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

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

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

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

Maryland might lower state aid to counties and cities, but local governments have little dependence on direct federal transfers, Moody's said.

Counties in the state, though, rely heavily on income tax revenue, which could dip as workers go unpaid. The counties close to the nation's capitol - Montgomery, Frederick, Charles, Prince George's, and Calvert - derive more than a quarter of their general fund revenues from income taxes, according to Moody's.

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

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

Large tax bases, high wealth levels and solid reserves should help the DC metro area withstand an extended government shutdown, the agency said.

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