Washington-area municipalities sweat out federal ratings downgrade

Local government officials are struggling to gauge the impact of the Standard & Poor’s unprecedented downgrade of federal credit even as Washington watches global reaction to its latest financial setback.

Will the ratings agency downgrade counties and states? Will the federal government’s predicament cost local taxpayers? And can local governments have better credit than the federal government?

“We are in uncharted territory,” Prince William County Board Chairman Corey A. Stewart (R) said. “No one knows what the ultimate long-term ramifications are. . . . But we know they’re going to be significant.”

Word of the S&P downgrade Friday shook local municipalities, many of which had just weathered the scrutiny of another rating agency, Moody’s Investors Service. Moody’s, concerned about the chaos surrounding the federal debt ceiling, had been reviewing the ratings of the federal government and municipalities with close ties to Washington.

After the debt agreement was reached, the agency continued the federal government’s triple-A rating on Aug. 2 — but with a “negative outlook.” Two days later, it continued the triple-A rating of, among others, Prince William, Fairfax, Prince George’s and Montgomery counties, and the states of Maryland and Virginia, but echoed the negative outlook for those jurisdictions.

Then came the federal downgrade. Thomas Himler, director of the office of management and budget for Prince George’s County, said it was no surprise that Standard and Poor’s lowered the federal government’s rating. “They’ve been talking about the potential for a while now,” he said.

But states, counties and other jurisdictions in the region are in close contact with the ratings agencies, mindful of the way their own debt ratings can affect their ability to raise funds.

“We actually have a conference call with all three rating agencies next week,” Himler said, referring to Fitch Ratings as the third major rating service. “We’re optimistic that they will retain our triple-A rating.”

In Fairfax, Board of Supervisors Chairman Sharon S. Bulova (D) said leaders “held our breath” waiting for last week’s Moody’s decision. “We’re happy to hear that we’ve retained our triple-A bond rating.”

She said the county plans further talks with Moody’s, adding, “We’ll stress that we have made every effort to diversify our industry sectors in Fairfax County.”

The federal downgrade does not necessarily mean a downgrade of “sub-sovereignties” such as Prince William. S&P thinks states and localities can have higher ratings than the federal government, according to Stewart.

But Moody’s does not, he said. “Moody’s believes that if the parent government is downgraded then they will automatically downgrade the sub-sovereign entities to the same level as the parent governmental entity,” Stewart said.

Local officials plan to lobby Moody’s to change that policy in the coming weeks, said Steven A. Solomon, finance director for Prince William County.

Mike is a general assignment reporter who also covers Washington institutions and historical topics.
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