U.S. state & local governments face financial pressure amid economic rebound

by Matthew Rusling

WASHINGTON, March 2, 2010, (Xinhua) --

In spite of indicators suggesting the United States is pulling out of the worst recession since the 1930s -- albeit at a snail's pace -- state and local governments are likely to lag behind the national recovery and face financial pressures for some time, experts said.

But the extent to which this will occur varies from city to city. While Harrisburg, Pennsylvania, officials have talked of declaring bankruptcy, observers speculate more such cases could follow.

Moody's Investors Service said in a recently released report that it expects state and local governments to lag behind the national rate of recovery and face a number of financial challenges through 2010 and into the following year.

Many will continue to face credit pressures due to declining tax receipts, pressures to boost spending and weakened balance sheets, the report said.

But while it expects defaults and bankruptcies to be rare, the organization maintains that such possibilities exist and the likelihood of defaults could increase in the future.

"In our opinion, it is extremely unlikely that there will be a cultural shift in the market towards increased use of Chapter 9 bankruptcies or a wholesale erosion of investor appetite sufficient to threaten liquidity to this market," Moody's said.

Most states and municipalities are financed by income or property taxes, but with a national unemployment rate of 9.7 percent -- and with some states' jobless rates as high as 14 percent -- many are feeling the sting of lackluster revenues.

Economists also note that the jobless are less likely to spend during times of economic turmoil, which tends to hurt sectors such as retail and reduce sales and other taxes.

Adding to those shortfalls is the problem that funds from last year's 787 billion dollar stimulus package, which helped prop up states' budgets, will be running out.

"The economic slump ... is forcing debt-laden cities, towns and smaller taxing districts throughout the U.S. to consider using Chapter 9. As their revenue declines faster than expenses, some public entities are scrambling to keep making payments on municipal bonds," the Wall Street Journal reported.

Editor: Li Xianzhi