More Negative Muni Trends Expected in 2013

” Meredith Whitney was applauded for her call about the impending doom of the banking sector ahead of the recession, but she has been criticized ever since her call for billions and billions at risk of default in the municipal bond segment. Maybe her call was too bold, but the world of local government finances in the United States faces some of the same problems that the federal government faces. Today Moody’s has issued a report that remains negative on the finances of the local U.S. government sector.

Moody’s new report is called “Outlook for U.S. Local Governments Remains Negative in 2013″ and it says that the outlook for the U.S. local government sector continues to be negative due to revenue constraints and persistent expenditure demands. Moody’s also warned that the weak economic recovery remains a source of many of the ongoing pressures.

Here is about the only bit of good news, or less bad news:

Nearly all rated local governments, however, will manage through another year of stress with no material impact on credit quality, given the sector’s fundamental and unique strengths. More than 99% of ratings in the US local government sector are investment grade.

One warning is here about a trickle-down effect on the cautious side. Moody’s believes that the economic recovery remains sluggish with some bright spots, but the fear is that the looming federal spending cuts may exacerbate what are already weak growth rates.

Local government revenues are expected to remain constrained and budget decisions, along with spending cuts and deferrals, make the situation increasingly difficult. As far as how many downgrades are expected, Meredith Whitney’s gloom of the recent past is still far gloomier than what Moody’s is projecting for the next 12 to 18 months. The report says”

A small number of local governments may face downgrades in the coming year. At greatest risk are entities with accelerating operating costs associated with mounting pension liabilities, outsized exposure to underperforming enterprises, or an elevated reliance on federal employment or funding given the chance of federal spending cuts….”

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