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Downgrade Week

Louisiana and Atlantic City, N.J., were slapped with credit rating downgrades this week as both continue to struggle with revenue shortfalls and other budget problems.

In the Bayou State, lawmakers are still stuck with a $750 million budget gap for the 2017 fiscal year, which starts on July 1, even after approving some tax hikes this year. Fitch Ratings said the current budget deficit has been caused in part by “overly optimistic revenue expectations” and by not budgeting enough for Medicaid. The agency downgraded Louisiana’s rating from a AA to a AA-, noting the budget problem has only worsened thanks to a prolonged plunge in oil prices.

The rating downgrade affects nearly $4 billion in outstanding debt. It will also play a role in the interest rate the state gets later this month on about a half-billion in bonds it plans to refinance. The rating comes after Moody’s Investors Service downgraded Louisiana earlier this year, citing the state’s budget issues.

Gov. John Bel Edwards, who pushed for and won some tax hikes this year, largely laid blame with his predecessor Bobby Jindal and the state legislature. Edwards plans to call a special session to address the shortfall, the second in a year.

In Atlantic City, Moody’s downgraded the town further into junk territory. The two-step downgrade to Caa3 reflects the city’s “greater likelihood of default within the next year,” said Moody’s. The agency added it is also concerned that bondholders will lose some of their investment if the city either defaults or if a state rescue package entails restricting the city’s debt. “The Caa3 rating indicates an expected loss to bondholders of up to 35 percent,” said Moody’s.

Gov. Chris Christie this week said he’s confident the legislature will pass a rescue package for the city. At the same time, however, the House Speaker has said the two sides of the assembly are at an impasse. Meanwhile, the city is at risk of not having enough cash to cover its next debt payment in May. Christie has said the state would not step in to make that payment.

In a separate note, Moody’s warned that an Atlantic City default could have negative repercussions for other New Jersey cities that are struggling financially.

An Olive Branch in the War on Cities

This month’s Governing cover story looks at states’ growing ideological divide from their major cities. In right-leaning states, left-leaning cities are feeling particularly put upon when it comes to state financial support.

But the city/state quarrel is an old one and even occurs in states where state and urban politics align. Take Massachusetts, where municipalities have increased taxes and fees to account for the slower growth in state aid. Between 2003 and 2015, according to the state auditor’s office, local revenue as a percentage of a city’s total revenue grew seven percentage points to 58 percent, while the share of state aid decreased by the same amount.

The auditor’s report released this week reviewed 1,560 state statutes and identified 97 provisions that have a significant fiscal impact on local governments. The most heavily legislated issues that impacted municipalities fell in the areas of education, employment benefits, public safety and elections.

To mitigate these impacts, Auditor Suzanne Bump recommends requiring a municipal impact report whenever a state regulation is changed and when new bills are proposed in the state legislature.

And Now for Some Good News

Struggling governments -- like the aforementioned Atlantic City -- tend to grab more headlines and raise questions about the stability of government bonds. But a report this week by Wells Fargo reminds us all that a few bad apples don’t spoil the bunch.

The report, by Natalie Cohen, notes that more governments are issuing new bonds, as opposed to refinancing existing debt. New issues are up nearly 42 percent.

In addition, municipal bonds as of late are providing a better value than the S&P 500. During the first three months of this year, munis returned an average 2.3 percent on investment while the S&P returned 1.4 percent.

Lastly, Cohen notes that interest rates are still likely to remain low, which means that more governments can continue to save money by refinancing outstanding debt.