WASHINGTON -- Despite increased fiscal pressures in recent years, county governments have maintained credit quality through strong accounting systems and responsive administrative actions, Standard & Poor's Corp. reports in today's issue of CreditWeek Municipal.
But the rating agency warns that an extended recession could erode the credit strength of countries and that significant challenges remain.
As a point of reference, Standard & Poor's said it downgraded about 140 municipal issuers last year, including only a handful of countries.
Noting that many countries responded to budgetary stress by cuttting capital spending or by drawing down reserves, the article says, "the ultimate success of these programs... will depend on [the ability of countries] to sustain these solutions."
The article, written by Joseph O'Keefe, a Standard & Poor's vice president, adds that "capital spending programs can be deferred for only a limited period before the infrastructure shows deterioration; and reserves cannot carry existing service programs indefinitely through a slow economic period."
The rating agency says the counties that have most successfully handled their financial difficulties are those with strong accounting and controll systems; clear capital improvement priorities and debt managemnet strategies; uncommitted reserves that had been built up in good economic times; and sound financial plans.
The rating agency said accounting and control systems helped counties identify cost pressures and increase the accountability of government managers. That, in turn, provided officials with greater flexibility in deciding whether to reallocate resources or require greater efficiency.
In addition, counties made hard decesions about the priority of capital projects, Standard & Poor's says.
"While it is difficult to distinguish between projects that are essential to maintain the infrastructure and those that can be delayed, counties decided which projects were both necessary and affordable," Mr. O'Keefe says in the article, called "Counties Cope with Fiscal Challenges."
Mr. O'Keffe says that although the use of debt may be preferable to saddling current taxpayers with strict internal financing for projects with long economic lives, most counties during the current economic slowdown have opted instead to reduce the scope of their capital programs or to cut the level of contributions from their operating budgets.
"The existing quality of the infrastucture base has a large bearing on the prudence of this decision," he says.
Another hallmark of fiscally strong counties is the presence of an adequate, uncommitted reserve to meet slower-than-expected tax revenue growth and spending pressures. While reserves generally are not expected to carry a county through an entire recession, they should provide enough time to develop a long-term revenue and spending strategy.
According to Standard & Poor's, the adequacy of such rainy-day funds depends upon local factors, such as the strength ans diversity of a county's economic base, the volatility of tax revenue streams, and the proportion of debt service and other fixed costs in a country's operating budget.
"For example, a county that depends on a manufacturing economy and collects a large share of its revenues from sales taxes is subject to several cyclical revenue movements and probably could justify greater reserves to handle the uncertain outcome of revenues," mr. O'Keefe writes.
Another positive rating factor for counties has been their ability to develop long-term plans handle their economic problems rather than rely on one-shot, nonrecurring revenue sources or accounting changes.
Standard & Poor's notes, that relying on short-term rather than long-term measures "entails considerable risk" because difficult decisions are merely postponed and could prove more difficult to master at a later date.
While counties generally get high marks from Standard & Poor's for strong financial management, further tests may loom. Two recent surveys by the National Association of Counties reveal that the recession has taken its toll on counties of all sizes.
In many survey of the nation's 80 largest counties, the association found that 80% of those surveyed had to reduce services, delay capital projects, and cut their work forces over the past year. The other survey, which examined counties with populations under 100,000. revealed that more than one-third found themselves at midyear with unexpected budget gaps.