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Municipal debt downgrading hits a record high.

Standard & Poor's Corp., one of the largest rating agencies for municipal debt, last week reported that downgradings of such debt reached a record $53 billion in 1991.

According to the agency, one of the most serious categories of downgrading directly affected the nation's cities and towns. Some 96 general obligation bonds of cities and towns were downgraded, affecting over $33.3 billion of municipal debt backed by the full faith and credit of the issuing city or town. In contrast, 44 issues were upgraded, but the upgradings only affected $1.2 billion worth of municipal debt.

A downgrading adversely impacts a local government by forcing it to pay higher interest rates to investors. A rating agency generally makes such a decision based upon a perception of greater risk, so that investors demand a higher return for accepting the greater risk if purchasing or owning such a tax exempt bond as opposed to one from a better rated state or locality.

The agency said that overall it downgraded 601 issues, a 29 percent increase over 1990. It pointed out that the recession created a negative impact on municipal revenues, but forced up municipal expenses. The agency added that cities and towns were especially vulnerable as more and more states foisted their fiscal problems onto the backs of local governments through cuts and increased state mandates.

The downgrades affected every kind of municipal debt except for municipal revenue bonds. According to the agency report, these bonds have been relatively protected by both consumer need and federal mandates--thereby exempting them from state or local cutbacks as revenues have dried up.
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Author:Shafroth, Frank
Publication:Nation's Cities Weekly
Date:Jan 13, 1992
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