The recent moves toward bankruptcy by the California cities of Stockton and San Bernardino do not presage a wave of defaults by state and local governments, according to a new report from Standard & Poor’s.
A downward revision to S&P’s baseline economic outlook for the remainder of 2012 and 2013 . . . suggests that most governments will not enjoy the organic fiscal relief that rising revenues from an accelerating economic recovery would bring.
Financial management can mitigate the negative pressures on credit quality that difficult economic conditions can bring about or intensify. However, governments with limited tax-raising ability and high fixed costs may be less able to respond to underperforming revenues. Examples of this have arisen in Stockton and San Bernardino.
. . . expenditure management (by localities) underscores our frequent refrain that the vast majority of government obligors will navigate the difficult conditions now and on the horizon.
While we avoid generalizing credits, certain traits can make governments more susceptible to credit deterioration than others. In our view, these include jurisdictions with the following characteristics:
- Low per capita incomes and higher rates of unemployment than the U.S.;
- A tax base that has undergone a relatively more exaggerated boom-bust housing market experience; and
- Low revenue-raising flexibility combined with inflexible expenditure budgets — especially where this has led to a reliance on unsustainable budget maneuvers to fund operations.
The forecast reinforces that governments with the above factors may be susceptible to fiscal pressure.
See also Moody’s view.