Impact of Federal Shutdown Minimal for U.S. Municipals; Debt Ceiling a Bigger Concern

The shutdown of U.S. government operations and services due to the political stalemate in Washington will have a minimal impact on U.S. municipal credits provided the shutdown is short lived, as expected, according to Fitch Ratings. However, if extended, the impact of funding reductions will become more pronounced.

If the stalemate carries over into inaction in lifting the debt ceiling mid-month, there could be broader disruptions in the financial markets and the pace of the economic recovery. These disruptions could negatively affect state and local governmental revenues and cause volatility in the valuations of public pension funds and endowments of not for profit entities, such as college and universities.

While reserve levels and conditions are generally improved since the summer of 2011 debt ceiling crisis, full cyclical recovery has not been broadly achieved. For many public finance entities, continued recovery is a condition necessary to address longer term challenges, such as funding post retirement costs.

Fitch will continue to monitor the ongoing dialogue surrounding both the government shutdown and the debt ceiling debate, and will continue to assess the credit impact on U.S. public finance credits.

The following summarize the potential impacts of the government shutdown, in distinction from any broader debt ceiling issues, on specific US Public Finance sectors:

Not-For-Profit Hospitals and Healthcare

The shutdown will have little, if any, impact to the operations and cash flow if resolved within a reasonable amount of time. Funding under both the Medicare and Medicaid programs are mandatory and are not subject to annual appropriations. However, payments to HHS employees and CMS's Medicare vendors for claims processing comes from the CMS operating budget (subject to congressional appropriation). HHS employees would likely be considered 'performing essential work', although reduced HHS staffing could slow the payment process. It is not clear if payments to the vendors processing claims are considered as payment for 'performing essential work'. During the 1995-1996 shutdown, for instance, claims vendors continued to process claims during the stalemate without any impact to providers. However, a longer term shut down could result in delayed claims processing of Medicare claims should vendors not get paid.

Fitch expects any governmental shutdown to be relatively short lived. If the shutdown is more prolonged, however, not-for-profit hospital and health care providers are adequately positioned to weather a more drawn out resolution due to their strong balance sheets. With a median days cash and investments on hand of 183.9 days, the hospitals rated by Fitch have ample liquidity to sustain a period of delayed government reimbursement in the short term. However, significant deviation exists within Fitch's rated portfolio with some individual hospitals possessing less than 30 days cash on hand. Fitch will monitor the impact to those rated entities with lower cash positions.

State Governments

The shutdown's impact on the states should be muted. The largest federal aid program is Medicaid, whose funding is not expected to be curtailed. Furthermore, states have been rebuilding financial cushions and could carry temporary delays in aid program payments.

Local Governments

Similarly, for local governments, it is unlikely to present significant challenges. Local governments do not generally receive significant amounts of direct federal aid?roughly 4%for local governments and 9% for school districts. Thus, any short-term disruptions in cash flow should be minimal. Delayed governments worker paychecks may produce a noticeable economic effect. This is likely to be most pronounced in the Washington D.C. region and other areas with sizable numbers of federal civilian workers, such as cities with large military bases.

Higher Education

Should the shutdown be prolonged, higher education institutions may begin to see some effect due to the level of federal research funding available, in addition to the access to some financial aid programs.

Housing

The government shutdown will have no immediate impact on Fitch rated housing bonds. All Fitch rated Public Housing Capital Fund bonds and bonds backed by Section 8 contracts have debt service reserve funds in place and therefore we do not expect any disruption in bond payments.

Under the Military Pay Protection Act, which was passed by the House and Senate, military pay will be exempt from the appropriations crisis. The Basic Allowance for Housing (BAH), which serves as the primary revenue source for military housing transactions, is considered part of military pay and therefore should not be affected. Additionally, all Fitch rated military housing bonds have debt service reserve funds in place.

Additional information is available at 'www.fitchratings.com'.

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