example of the disparate state and local economies that comprise the United States. We will therefore continue to evaluate each state and local obligor in its own economic context.

Potential Analytic Implications Of Debt Ceiling Agreement To Local Governments Cash flow and budgets Historically, local governments have tended to rely on a combination of locally derived revenues (property or sales taxes) and state aid or state shared revenues. For cash flow planning pur- poses, fiscal 2012 began favorably for local governments since all but one state had an enacted budget by the start of the fiscal year. Local governments relied on federal funding for less than 4% of total revenues in 2008. And, while local governments receive higher amounts of federal aid indirectly (via their state governments), as mentioned above, we expect federal funds to be disbursed in a timely manner and as scheduled. Future spending cuts associated with the BCA may present budgetary complications, but we do not anticipate unforeseen cash flow disruptions for local govern- ments as a result of the agreement.

Economy We expect any negative economic impact from reduced federal spending to affect local governments by con- straining further an already-slow recovery, similar to the effect we expect on state economies. Special projects funded by earmarks or discretionary federal appropriations could be jeop- ardized. We believe that our ratings of obligors with economic exposure to fed- eral military base realignment and clo- sure offer an analytic paradigm. In practice, many communities have suc- cessfully redeveloped previous military bases resulting in less economic damage than initial estimates.

Economic And Fiscal Horizon Underscores Importance Of Financial Management We see a complicated credit landscape on the horizon for state and local gov-

ernments now that they have weath- ered several years of difficult eco- nomics. The federal debt ceiling increase averted the potential for acute liquidity shortfalls that could have arisen if the federal government had shut off significant amounts of disbursements to state and local gov- ernments. However, while enactment of the BCA may have mitigated near- term liquidity risk (associated with federal funds), we believe that medium-term budgetary and economic risks for state and local governments persist. With an already tepid eco- nomic recovery, the additional reduc- tion of federal funds could fuel retrenchment among consumers.

This said, we expect many state and local governments to be better-poised to manage federal cuts to their grant funding than the recessionary-based revenue declines of 2008 and 2009. Compared to the revenue losses from the Great Recession, the initial fed- eral cuts appear to be smaller in mag- nitude. And, further potential cuts that Congress and the President may approve will be preceded by advance notice based on the timeline laid out in the BCA. But considering that many governments’ finances are still in the early stages of fiscal repair from the recession, the BCA offers little respite from further emphasis on budget austerity. In our view, the additional budget strain from the potential federal cuts underscore the importance of the financial manage- ment components of our criteria. CW

Olivia Bizovi provided research assistance.

Standard & Poor’s CreditWeek | August 17, 2011 74

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