By Peter Schroeder - 08/09/11 04:17 PM EDT
State and local governments can still keep their AAA ratings in a AA+ America, Standard & Poor's announced, as the credit rater continues to suss out the implications of its historic downgrade of U.S. debt.
In a report issued Monday night, the rating agency said that its downgrade of the overall nation does not necessarily mean all the top-ranked states and localities need to fall as well — even as many in the municipal bond market thought they would be dragged down by the downgrade.
However, it noted it would be unlikely for a municipality to retain a rating more than one notch above the nation's overall rating, suggesting that any additional downgrades from S&P could destroy any government AAA ratings held across the nation.
S&P currently gives 13 states its top rating, while 14 others now share the AA+ rating with the nation.
While state and local governments do receive help to shore up their books with assistance from the federal government, S&P noted that they also enjoy a distinct level of independence from Uncle Sam, which helps them retain their own unique ratings as the nation's overall fiscal reputation takes a hit. It touted the nation's public finance system as one of the "most stable and predictable in the world."
"U.S. state and local governments enjoy considerable financial autonomy from federal intervention," the firm wrote, citing their ability to levy their own taxes and manage their own funds.
S&P's move to reassure state and local governments and their investors come as the firm continues to issue trickle-down downgrades for financial institutions and other entities that are heavily reliant on the federal government.
On Monday, the firm downgraded mortgage giants Fannie Mae and Freddie Mac, which have been under complete government control since the fall of 2008. It also downgraded or put on negative watch a group of 10 insurance companies, citing their high exposure to Treasury bonds, which now are riskier in S&P's view.
It also downgraded more than $100 million of industrial revenue bonds issued by localities across the nation, since they were structured so their repayment was reliant on Treasury securities.
And a wide range of institutions saw their bond offerings downgraded because they were reliant on federal leases as a source of funds. The cities of Miami and Atlanta, the University of North Carolina and even the National Archives and Architect of the Capitol in Washington, D.C., saw some of their bonds downgraded to AA+ by the move.
The Tennessee Valley Authority, a corporation wholly owned by the government that provides power to parts of several Southern states, also saw its rating downgraded alongside the nation's.