Federal Credit Downgrade Hurts Colorado Localities

State and local governments expected fallout when Standard & Poors downgraded the federal government’s credit rating last year. Governors, county executives and other local leaders worried that the decision would have a ripple effect nationally, not only harming the stock market but leading to credit downgrades for their own governments as well, particularly if they relied heavily on federal money.

So far, those fears have proven unfounded. S&P has not downgraded state and local credit based on its decision about the federal government, even though another ratings agency, Moody’s, previously warned five states that they could suffer repercussions because of deficits and political dysfunction in Washington, D.C. The stock market, meanwhile, has steadily gained, with the Dow Jones Industrial Average this week closing above 13,000 for the first time since May 2008.

One state, however, is feeling direct consequences from the S&P downgrade. Municipalities in Colorado are forgoing roughly $60 million in investment income a year as a result of the decision, because of a one-of-its-kind state law that governs how local taxpayer money is invested.

The law, first reported on by The Denver Post , prevents some 3,700 municipalities in Colorado from investing money in federally-backed securities that are not rated at the top, AAA level. When S&P took its rating of the federal government down a notch, from AAA to AA , it triggered the Colorado law, preventing county treasurers and others from making new investments in securities that they traditionally have relied on — investments that are still broadly seen as safe, despite the S&P downgrade.

The result is that Colorado municipalities now are being forced to make other kinds of investments, including those that bring less of a return for taxpayers. “The county treasurers around Colorado have been really hamstrung as a result of this downgrade,” Walker Stapleton, the state treasurer, tells Stateline .

The irony is that it was county treasurers themselves who first wanted the Colorado law, successfully lobbying  for it six years ago as a way to ensure that local governments would make only the soundest investments for taxpayers. “We didn’t anticipate a general downgrade of the federal government triggering this kind of event,” John Lefebrve, the treasurer of Weld County, Colorado, tells Stateline .

Local officials and many members of the Colorado legislature want to repeal the law. “It’s important to provide our counties with the latitude to make investments in a challenging economic time,” says Stapleton, who is pushing legislation that would allow municipalities to resume their normal investment decisions.

Despite broad support, however, the bill is currently ” languishing ” at the Colorado statehouse, according to the Post , which suggests that unrelated political reasons may be holding it up. In the meantime, as the paper points out, local governments are giving up an estimated ,383 in investment income every day , or about $114 a minute.