National League of Cities Responds to S&P Statement on State and Local Government Ratings

WASHINGTON, Aug. 9, 2011 /PRNewswire-USNewswire/ -- The National League of Cities issued the following statement in response to Standard & Poor's statement on municipal credit ratings:

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Standard & Poor's announcement that cities and states may keep their AAA bond ratings despite the recent downgrade of the U.S. federal government demonstrates the difference between U.S. federal debt and the municipal bond market.

Unlike the federal government, municipal debt is typically not used to finance day-to-day operations.  Local and state governments use municipal bonds to finance infrastructure projects. Nearly all local and state borrowing is longer-term (20 or 30 years) and debt service payments are predictable (usually the same amount each year).  Additionally, local and state debt levels are low, about 16 percent of GDP, and usually representing a relatively small portion of local and state budgets, about 5 percent on average.

Standard & Poor's announcement that it was downgrading some municipal bonds - those primarily related to conduit bonds (typically issued, for example, for housing agencies, hospitals, and school construction) – while unfortunate, was not a surprise given the recent decision to downgrade the federal government's credit rating.  But, the overwhelming majority of municipal debt issued by general-purpose local and state governments remains highly rated and secure, as confirmed by S&P's and Moody's recent announcements.

Municipal bonds are an important tool for regional economic development and major infrastructure projects. Potential downgrades could add higher costs for infrastructure projects, further constraining local and state budgets. Local and state governments comprise three quarters of U.S. infrastructure spending and debt financing has been the primary mechanism for funding the nation's system of public works – nearly four million miles of roadways, 500,000 bridges, 1,000 mass transit systems, 16,000 airports, 25,000 miles of intercoastal waterways, 70,000 dams, 900,000 miles of pipe in water systems, and 15,000 waste water treatment plants.

Despite the statements and the downgrades, residents should still be assured that cities will continue to provide the critical services residents demand. The fundamentals of cities haven't changed. Cities still operate under debt cap limits and must go through exhausting processes prior to any borrowing to ensure their ability to repay.  Virtually all state and local governments have balanced budget requirements. Many state and local governments also have provisions that require steps to be taken to address problems before defaults can occur, or prioritize debt payments over spending for other government services.

Concern about the municipal market is now being driven by lack of confidence in the economy and the rating agencies' assessments that federal policy responses have been inadequate -- not local leaders failing to pay their debts or balance their budgets.

To be sure, local and state governments continue to confront declining or slow growth in revenues as a result of the Great Recession and 2011-2012 will present many general purpose governments with difficult choices.  But, the overwhelming majority of local and state governments are continuing to balance their budgets and meet their debt obligations.

The National League of Cities is the nation's oldest and largest organization devoted to strengthening and promoting cities as centers of opportunity, leadership and governance. NLC is a resource and advocate for 19,000 cities, towns and villages, representing more than 218 million Americans.  

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SOURCE National League of Cities