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Whiteman Responds to U. S. Credit Downgrade

Not only is last week’s downgrade of the United States’ credit rating having no effect on local governments’ ratings, it’s not even affected borrowing by the federal government.

“I don’t think people should take what Standard and Poor’s says as god’s honest truth,” said Charles Whiteman, director of the Institute for Economic Research at the University of Iowa. “What really matters is what people in the market believe.”

And despite S&P’s downgrade from perfect Aaa to Aa-plus, yields on treasury bills continued to decline over the past week, meaning lenders are willing to earn next to no interest in exchange for next to no risk.

“People are still saying it’s the safest thing around,” said Whiteman.

What does that make Iowa, Iowa City, Cedar Rapids, and Linn County, all rated Aaa?

“We feel we’re part of an elite group,” said Deputy State Treasurer Stefanie Devin.

Devin said Iowa is one of just eight states rated Aaa by all three major ratings services – S&P, Moody’s, and Fitch. That doesn’t mean the state would get an interest rate than the 2.34-percent offered Thursday on 10-year T-bills, but then again, the state’s not looking to borrow anyway.

“Iowa’s not out on the market issuing debt, but it still is an indication of our finances,” said Devin. “It’s like a report card – you want to get an A.”

Actually, you want to get Aaa, which means your city, county, or state will pay less interest when issues bonds or borrows money. Iowa and local governments have few worries, but Moody’s announced July 28 it was reviewing five states, 66 cities, 53 counties, 29 school districts and 14 special-tax districts for a potential downgrade from Aaa.

Moody’s considers other local governments “resilient to a one-notch downgrade” of the federal bond rating, but the agency would likely re-assess those ratings in the event of a further federal downgrade.

The governments under review are considered to have more reliance on federal spending, sensitive local economies, and vulnerability to market conditions.

“The economy here in Johnson County just keeps rolling on,” said Johnson County Treasurer Tom Kriz. “We’re pretty resilient, because of the university.”

Moody’s rates Johnson County at Aa2 (within the A and Aa ratings are sub-ratings from 3 to 1 in ascending order). Kriz said that’s largely because the county rarely borrows on the bond market.

“One of the reasons we didn’t get Aaa was that we don’t traditonally carry much cash over from year to year,” Kriz said.  “We just borrow locally and negotiate.”

Linn County’s Aaa weathered the June 2008 flood, although Moody’s did place the county on a watch list after the disaster, said Finance Director Steve Tucker. The county was later removed from the list, “which you do not get unless it’s deemed you run your finances well,” he said.

Moody’s will review the county’s rating this fall when it bonds bout $7.25 million for a new public safety communications system.

“Coupled with what’s going on in the stock market, the concern  was interest rates were going to go up,” Tucker said. “But with people getting out of the stock market they’re getting into bonds” driving rates down.

Coralville is rated Aa2, Marion and Hiawatha both Aa1.

“I think what’s worrying the (stock) market is all these budget cuts are going to push the economy back into recession,” said Whiteman. “The market still evaluates U.S. debt as the safest thing around. It’s still safer than anything else that’s out there.”

Source: Iowa, local governments shrug off U.S.’s debt rating downgrade
By Steve Gravelle

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