Municipalities across the U.S. are at risk of having their credit ratings downgraded or withdrawn by S&P Global Ratings because staffing shortages have delayed financial disclosure documents.
S&P has placed 149 long-term, underlying and program ratings on a negative credit watch this year because the ratings company hasn't received 2021 financial statements from the issuers. That's the most since at least 2018, and materially higher than the prior five-year average of 95 such moves, according to S&P data.
"If we don't have the financials, then bondholders don't have the financials," Jaime Blansit, a rating associate at S&P, said in an interview. "We don't want financial deterioration happening without our knowledge and updating our rating accordingly. Without financials we don't know if the rating is accurate or not."
In 2023, there has been a "notable increase in negative rating actions due to information sufficiency and quality considerations," S&P analysts led by
The issuers placed on negative watch have 30 days to file their required documents or risk a rating change, namely a ratings withdrawal, suspension or downgrade.
Fewer CPAs
Based on outreach to "issuers and their agents, this year has seen a marked increase in staffing shortages at auditing firms, resulting in significant setbacks to complete issuers' financial disclosures in a timely manner," S&P said in the report. A 2021 trend report from the American Institute of CPAs shows a shortage of certified public accountants with fewer students graduating with accounting degrees.
Staffing issues within government audit and financial departments are also contributing to delays, according to S&P's report, which cited staffing turnover in key departments.
Localities have struggled to hire workers over the last several years when private sector jobs promised higher pay and typically more flexible work environments. State and local government payrolls have recouped only about 70% of the jobs that were lost at the start of the pandemic, trailing the broader economic rebound.
'Unique' range
While many of the governments that were placed on negative credit watch as of Monday are small towns, major municipalities also made the list. Jersey City, the second-largest municipality in New Jersey, is included, as is Santa Fe, New Mexico, according to S&P's list. Representatives from Santa Fe didn't immediately respond to requests for comment.
Kim Wallace-Scalcione, a spokesperson for Jersey City Mayor Steven Fulop, said the city's financial statement will be submitted to S&P within the 30-day window. "The State recently gave municipalities additional time to file budgets and financial statements due to the widespread delays" in reporting caused by the pandemic, she said in an emailed statement. "The city is engaging with additional accounting and financial services to reinforce management and reporting."
That widespread breadth of missing financial statements is unusual, Tiffany Tribbitt, senior director and analytical manager at S&P, said in an interview. "It's unique this year, the range of issuers we've seen impacted by this — we've been seeing across a lot of states and a lot of ratings."
S&P said it relies on "timely disclosure" that is crucial to their credit analysis and the lack of information is viewed poorly. And with the persistent staffing issues, the analysts expect the number of delayed disclosures to increase in the near-term.
Ferris, Texas, is one of the cities that S&P put on negative credit watch this week. Chief Financial Officer Bobby LaBorde said that when he took the job three years ago, Ferris was five years behind in its disclosure mainly because there isn't much oversight over keeping localities accountable.
Ferris officials are "playing catch up," LaBorde said in a telephone interview, and aim to be in full compliance by the next fiscal year.
— With assistance from Elise Young
