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August 9, 2011

Re:       S&P Downgrade

Dear Mayor:

In light of Standard and Poor’s (S&P) recent downgrade of the credit rating for the United States, we reached out to our Special Counsel on Bond and Redevelopment issues, Ed McManimon of McManimon & Scotland, to determine what impact the downgrade would have on municipalities.  According to Mr. McManimon at this point, we should let this unfold over the next few weeks in the market before drawing any meaningful conclusions.  

The reaction to the S&P downgrade is somewhat an overreaction that may be fueled, to some extent, by politics.  It is not that the S&P rating is not significant.  It certainly is and it may lead to significant consequences, but the credit markets are used to split ratings among the national credit rating agencies involving State and local government credits without consequences (at this time both Moody’s and Fitch have retained the AAA rating for the U.S. credit). The reaction to the S&P downgrade should be the same but there is more at stake and more “experts” giving their opinions in addition to a political reaction not usually associated with credit rating issues, which is more intent on casting blame than focusing on the problems that led to the downgrade.

We are, however, a media driven society that tends to react immediately to negative news and assume the worst. That seems to be happening here. If current withdrawals from tax exempt mutual Funds (the major buyers of municipal debt), were to continue, this could affect interest rates negatively. Hopefully financial common sense will prevail and the markets will still reach for the credit quality of the United States and the municipal market will remain stable.

There may, of course, be a trickle down effect on some States and local governments who rely heavily on funds from the Federal government.  That was the speculation when the debt ceiling debate was occurring since it appeared that the Federal Government was actually considering defaulting. Since that did not occur that should be of less a concern in view of the fact that this issue was not about the Federal Government’s ability to pay but rather about their political willingness to pay.  There is a big difference.  In addition, no whole sale rating actions for local government issuers is expected by S&P.

We will continue to monitor the situation and provide updates as appropriate.

Very truly yours,

 

Hon. James Maley, Jr.
Mayor, Collingwood Borough
Chair of Economic Development Task Force

William G. Dressel, Jr.
Executive Director

 

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