ALEXANDRIA — Northern Virginia led the state’s economy through the Great Recession, thanks to a steady stream of jobs from the federal government, but that relationship now could become its Achilles' heel.

“This is the new reality for Virginia,” Moody’s Managing Director Naomi Richman said Thursday. “What we are seeing now is a structural shift, where now a great source of stability (Northern Virginia’s economy) is becoming a potential vulnerability, because of federal downsizing.”

 

Moody's moved Virginia and all municipalities with a AAA rating — the highest possible rating — to a “negative” outlook in August, after the debate over raising the national debt ceiling pushed the U.S. government to the brink of a sovereign default.

 

While several Virginia counties escaped the negative outlook, which serves to caution investors about a potential future downgrade, Moody’s maintained the warning for the counties of Arlington, Fairfax, Herndon, Loudoun, Prince William and Vienna, as well as the cities of Alexandria and Fairfax.

 

The difference proved to be the close ties between the region and the federal government — ties that gave the area the lowest unemployment rate in Virginia at 4.4 percent, 2 percent lower than the statewide average, according to the Virginia Employment Commission's October 2011 data, the most recent available.

 

“Virginia’s reliance on federal employment and the federal economy as a percentage of its GDP is significantly higher than the national average,” Nick Samuels, Moody’s lead analyst for Virginia, said.

 

Northern Virginia relies on the federal government for 26 percent of its gross regional product, according to a Senate Finance Committee analysis of fiscal 2010 data, the most recent available.

 

Northern Virginia municipal leaders reacted angrily to the news, highlighting the increased costs the governments and their residents will have to bear.

 

“These ratings will increase the cost of borrowing for us all, forcing governments across Northern Virginia to reevaluate and perhaps curtail capital spending,” mayors and municipal leaders said in a statement. “The ripple effect of this situation on our local budgets could threaten basic services."

 

The ratings agency are optimistic about five AAA-rated municipalities and counties outside of the north, despite higher unemployment rates based on the latest data available in October and smaller economies.

 

Moody's upgraded to stable:

Albemarle County with 4.7 percent unemployment;

Chesterfield County with 6.1 percent unemployment;

Hanover County with 5.7 percent;

Henrico County with 6.1 percent;

The city of Charlottesville, 5.7 percent.

 

Virginia Beach was the only non-northern AAA government to receive a negative outlook.

 

Bill Letteri, assistant executive for the Albermarle County Financial and Management Services, said the move will allow his area of 100,000 residents to better compete with the larger areas of the north — Fairfax County has 10 times the population — for investment dollars.

 

“When Moody’s applied the negative rating uniformly, it was not a problem (for northern Virginia,)" he said. “Having the negative outlook removed does allow us to do more in the future, especially major capital improvement projects.”

 

Letteri said he understood what separated his government from those that maintained a negative warning.

 

“Our exposure to the federal budget and employment is low, it makes up just 1.54 percent of our county’s employment,” he said.

 

Matt Mitchell, a senior research fellow at George Mason University's Mercatus Center in Fairfax, said Virginia’s negative outlook puts it in dangerous territory, and could go the way of New York and California, if municipal bond investors get nervous enough. The economics research center promotes free market policies.

 

He advised lawmakers to react to Moody's warning before investors do and brace for a challenging budget season.

 

“In the short term, (the lawmakers) can expect this will make their tough budgets even tougher, if the markets react to this information,” Mitchell said. “But in the long run, they have to do something, because neither the federal nor state government’s budget is … sustainable.”

 

The failure of a congressional “supercommittee” set up to trim $1.2 trillion from the federal budget over 10 years exposed the vulnerability of Virginia's economy, said Mitchell.

 

Because the supercommittee, made up of six Republicans and six Democrats from both houses, failed to reach a compromise, automatic cuts will be triggered in January 2013, with 50 percent from defense spending and 50 percent from domestic spending.

 

Moody's will revisit the ratings in 2012.