Local governments' fixed costs for debt and retirement obligations will take up a greater share of revenue because of the ongoing coronavirus pandemic, Moody's Investors Service said Monday as the ratings firm announced it had changed the 2020 outlook for them to negative from stable.
"The full impact on pension costs will not arrive for several years, but the economic fallout from the coronavirus is threatening local governments' ability to afford higher pension liabilities," Moody's analyst Natalie Claes said in a statement. "Finally, state actions to balance their fiscal 2021 budgets on the back of local governments by reducing transfers will negatively affect the sector."
The downgrade cited immediate drops in income and sales taxes due to unemployment and reduced consumer spending, and expected declines in property tax revenue, adding that states dealing with their own fiscal demands related to the coronavirus are unlikely to offer local governments much support.
Moody's is projecting that the U.S. economy will contract by 5.7% in 2020, not fully returning to pre-coronavirus levels until the third quarter of 2021, and that the pace of recovery will vary by how regions relax social distancing guidelines.
As revenues decline, "fixed costs for debt and retirement obligations will consume a higher proportion of local government revenue over the 12-18 months, while recent pension fund investment losses stand to severely compound the pension liability challenges already facing many local governments," Moody's said in the statement. "These losses will require many local governments to increase pension contributions in order to maintain funding ratios for defined benefit plans, although the increased contribution requirements will not take effect immediately."