Housing bust to hurt municipalities

Bloomberg

State and federal aid cuts, lower income from economically sensitive fees and increased demand for services will also pressure local finances, the New York-based debt-grading company said in a report. Governments dependent on short-term financing may be denied credit-market access, it said.

"The downturn in real estate values has exacerbated the general economy’s impact on municipal governments’ budgets," Moody’s analysts including Lisa Cole wrote in the report. Some local governments "will potentially face material stress over the next few years."

Falling home values will reduce income from property taxes, which account for 72 percent of local-government income nationwide, Moody’s said.

In California and Massachusetts, which have limited increases in property taxes by law for about 30 years, local governments are more experienced in finding other revenue sources and cutting spending, Moody’s said. That will be more difficult in Florida and New Jersey, it said, where property-tax limitations were enacted only during the past year.

A diverse range of commercial, industrial and residential properties can bolster city finances. Moody’s estimated the peak- to-trough decline in residential home prices at 30 percent, compared with 15 percent for commercial property.

Lower-rated municipalities will find access to the short- term debt market "challenging," Moody’s said. The need to finance cash flow and borrow to meet budget shortfalls will put pressure on their long-term credit ratings, it said.

"A municipality’s failure to adjust its budget in a timely fashion will be a clear indicator of weak fiscal management and will likely place significant downward pressure on its credit rating."