Fitch Ratings has followed Moody’s and will change the way it rates municipal bonds. As a result, thousands of munis are expected to receive a bump up in their ratings.
The move by Fitch will bring greater consistency in its assessments of government and comparable corporate bonds and comes after significant political pressure. Proponents of the change have argued that with exceptionally low default rates, municipalities have been penalized by the dual ratings system and have incurred greater borrowing costs.
Investors can expect to see state and local general obligation ratings adjusted upward two notches for bonds rated between “BBB-” to “A,” and one notch for those rated “A+” or better. Water and sewer utility bond ratings will follow the G.O. adjustment, while special tax-backed and public higher education bonds will generally have a single notch increase. Healthcare, private higher education, airports, toll roads, tax exempt housing and other municipal sectors will not be adjusted.
Fitch originally announced its intention to “recalibrate” many of its public finance ratings in the summer of 2008, just prior to the financial crisis. In its recent announcement, Fitch noted the perennial strength of traditional municipal bonds.
“Fitch believes that public finance issuers such as state and local governments and certain essential service municipal enterprises have inherent strengths that allow them to maintain fiscal balance…” As a result of their ability to raise taxes and fees, municipal issuers have remained capable of meeting their debt service obligations. Fitch also echoed Moody’s in noting that, “…defaults are expected to be isolated occurrences.”
Moody’s announced its changes last month.
State and local revenues looking up
A positive sign for state and local government bondholders comes from the U.S. Census Bureau, which recently reported total tax revenue collections for all states and localities improved in the fourth quarter of 2009 over the same period in 2008. Signs of a tax revenue rebound may be signaling the end of the worst state and local budget crisis in years. Although the increase was small (0.76%), the rise in revenues reverses a negative trend which has been in place since the recession began. The upward movement is a positive sign that economic activity is improving. Property, corporate net income and alcoholic beverage sales taxes were all above prior year levels, while individual income, general sales and gross receipt taxes continued to lag. If this positive economic news continues, state and local governments will see budget pressures easing, and credit quality will gradually begin to improve.
Data on individual states may also be starting to rebound
The Clarion Ledger of Jackson, Mississippi, indicated that Mississippi is expected, for the first time in 19 months, to exceed revenue projections for March – a welcome sign inside that state’s capital.
Thus far, collections for March indicate a strong showing for corporate income tax receipts, and could signal an improvement of the state’s economy. North Carolina, also a state with growing revenues, reported an increase of 11.4% in overall taxes for the last quarter of 2009, mainly attributable to corporate income taxes.
The strong growth in property taxes helped offset weakness elsewhere in the Census Bureau report, and may indicate localities that rely more on this revenue source may see an earlier rebound.
While other states have not yet reported individual results, early indications are becoming increasingly more optimistic than in the recent past.