Effects of Debt Crisis Extend Beyond Beltway

As the debt crisis continues on Capitol Hill, officials from Vienna, Fairfax County and other Virginia municipalities are protesting a decision by Moody's Investor Services to review their bond ratings for a possible downgrade.

The town and county were among more than 100 local governments put on notice because of the federal debt crisis. Local governments protect high bond ratings because it generally reduces interest rates when they borrow, saving their taxpayers money.

Virginia has more municipalities under review — 15 — than any other state in the country. Aside from Vienna and Fairfax County, they include Alexandria, Arlington County, Fairfax City, the Fairfax County Water Authority, Herndon, Loudoun County and Prince William County.

In a joint statement Friday, area officials called Northern Virginia "the economic engine of the Washington area" and that continued indecision and bipartisan bickering could hurt local budgets, capital improvements and basic services as they are "slowly emerging from the multi-year, cyclical economic downturn."

"Nothing has changed in terms of our local financial and debt management practices and our continued strong fiscal management and low overall debt burdens bring stability to the region," they said. "Northern Virginia does not have a debt problem, the federal government does."

"For the localities, it comes down to the fact that the rating agencies say because of the lack of federal money that may not flow your way, then we think it will have an adverse effect on your borrowing ability," said Mark Flynn, Director of Legal Services for the Virginia Municipal League.

David Jacobson, a spokesperson for Moody's, said because of their ties to the federal government, Fairfax County and Virginia would be susceptible to a downgrade if the U.S. defaults next week. Four variables played into Moody's decisions on putting municipalities on review: reliance on capital markets; dependence on federal revenues; sensitivity to macroeconomic cycles; and financial resources to offset the risks, such as a rainy day fund.

Data on Fairfax County regarding these variables was not available.

Jacobson said both Maryland and Virginia are in a similar boat because of their proximity and ties to the federal government.

"Virginia was above average in federal employees in percentage of the state's total employment. Virginia also has a lot of federal procurement contracts as a percentage of state GDP," Jacobson said. "We found it was more sensitive to national economic trends based on employee volatility due to U.S. fluctuations.

A downgrade is not definite if the U.S. government defaults.

"There are a lot of ifs here, but the bottom line is the rating remains the same for now," Jacobson said. "We will see what happens on Aug. 2. Our analysts will study it, will make any decisions if they deem it necessary."

County Downgrade Would Be First In 36 Years

The downgrade would be the first for the county's credit rating since 1975, Fairfax County Board of Supervisors Sharon Bulova said in a statement.

"The continued inaction and partisan bickering over the very high amount of debt the federal government is carrying and how to deal with it is putting at risk the credit rating Fairfax County has worked so hard to achieve and maintain for the last 36 years," Bulova said.

Bulova said the county's reliance on federal contractors as a reason for the county being singled out. 

"The decision by Moody’s to declare the Commonwealth of Virginia’s Aaa rating as vulnerable to a downgrade was based on Virginia’s heavy reliance on federal spending," she said. "Fairfax County is home to a large population of federal workers and businesses that rely on federal contracts. This linkage, and the impasse at the federal level, puts our rating at risk."

Federal contracts to businesses in Fairfax County totaled $24 billion in fiscal year 2010, providing services like defense support, information technology, accounting and more to the federal government.

Tea Party Says Capitol Hill Needs To 'Get Serious'

John Jaggers, of the Northern Virginia Tea Party, said the threat of local municipalities’ downgrade is “an overreaction on behalf of Moody's”  likely because of the criticism they received for not correctly assessing the risk of Fannie Mae and Freddie Mac.

He called the crisis serious and said the party was concerned. But “when you spend too much money sooner or later the creditors cut off the money and that’s what we’re seeing here.”

“Washington tried to kick the can down the road and it’s simply run out of road,” he said.

Daniel P. Cortez, a tea party activist, said failing to pass a resolution would be "catastrophic" for both Virginia and the country.

"The legislators need to legislate, and the president needs to lead. What we can't do is take our country into ruination on a principal issue — at this point, legislators don't need to compromise, they need to negotiate. If America fails, everybody fails and that's going to be tragic, and ultimately it will fall on the president." 

Cortez said he believes Congress needs to stand behind House Speaker John Boehner (R-Ohio).

"We have to do what we have to do," he said. "We’ve got to get serious here. We have to be responsible on both sides of the aisle. The President needs to wake up and smell the coffee — fast."

Oakton Patch Editor Nicole Trifone contributed to this report.