Local Texas Governments Could Face Ratings Downgrades

Nine Texas government borrowers including Dallas, Bexar, Tarrant and Travis counties could face costly downgrades in their bond ratings if the federal government doesn't quickly resolve its debt ceiling problems.

Moody's Investor Service put a total of 177 public finance issuers "under review for possible downgrade" Thursday in anticipation of what might happen with the federal government.

Lower ratings translate into higher interest rates, meaning the cost of those local government bonds could rise.

The  GOP-lead U.S. House of Representatives has delayed its vote on the debt ceiling legislation, which was scheduled for early Thursday evening. The credit ratings agencies could begin to downgrade the federal government's debt if the ceiling is not lifted by Tuesday, and may do so in any case if they believe whatever legislation gets passed is insufficient to deal with the nation's debt. A spokesman for Moody's said that what Congress ultimately does will determine what happens to the local bond ratings.

If the federal government's AAA debt ratings drop, it could ripple through other governments that depend on the federal government for money. The Moody's list includes 162 local governments, 14 housing finance programs, and one university. All of them have AAA bond ratings and in total have issued $69 billion in debt.

The list includes several Texas borrowers:

• Alamo Community College District
• Bexar County
• Dallas County
• City of Richardson
• City of San Antonio
• San Antonio River Authority
• Tarrant County
• Tarrant County Hospital District
• Travis County

The rating service put the federal government on notice of a possible rating downgrade on July 13 and a week later put five AAA-rated state governments (not including Texas) on similar notice. Those state ratings and the local government alert that went out Thursday "reflect the rating agency's assessment that some AAA public finance ratings would likely be indirectly affected by potential credit deterioration of the sovereign," Moody's said via press release.

"In the event the U.S. government's AAA rating is downgraded, Moody's will determine the outcome of each review by evaluating the strength of the sovereign linkages to each affected credit, including direct and indirect reliance on federal spending, sensitivity to deteriorating macroeconomic conditions and vulnerability to disruptions in the financial markets. Moody's will also consider positive credit attributes of each issuer such as financial position, operating flexibility and management responsiveness."

Several factors determined who got on the list and who didn't, including high federal employment in particular areas, exposure to capital market disruptions and other factors. Governments in 31 states were listed, with the greatest numbers in Virginia and Massachusetts.

The overall list includes 66 cities, 53 counties, 29 school districts and 14 special tax districts. A large number of AAA-rated local issues — around 400 — weren't put on the list. Moody's said a bigger downgrade at the federal level could effect those.