State and local goverments’ credit ratings should withstand sequestration

Analysis of key economic factors indicate state and local government credit ratings should weather the storm of sequestration, according to a new report from Standard & Poor’s rating services (S&P).

The good news, according to the report, is that at the start of 2013’s second quarter, the U.S. economic recovery was accelerating. The bad news, however, is that the federal sequestration cuts of $85 billion took effect at the beginning of March. While S&P recognizes that sequestration will affect regional economies differently, they believe the cuts alone will not be enough to dampen overall economic expansion — the key determinant of credit quality for the public finance sector.
 
In the most recent report, S&P found that most of the key credit drivers for state and local governments have strengthened since the January forecast. The drivers S&P considers critical in determining credit rankings are the U.S. GDP, federal and consumer spending, stock market prices, housing starts, unemployment statistics and the core consumer price index.
 
Analysis of these factors, (a projected real GDP growth of 2.7 percent, stock market gains, growth in the housing market and constrained inflation) indicate stable conditions for the credit rankings of state and local governments.

While S&P says credit quality for state and local governments will remain constant for the remainder of 2013, they feel this sector is more sensitive to a downturn than it would be following a period of stronger economic performance. Although sequestration alone shouldn't be enough to halt economic growth, should recovery falter, negative pressures on credit ratings could emerge relatively quickly.