Update: Federal Debt Crisis Might Touch Local Governments - but as of Thursday, not the city of Sammamish

Editor's note: On Sunday, July 31, President Obama and Congressional leaders announced an agreement to avert a default on federal debt.

As federal lawmakers try and reach an agreement on the $14.3 trillion debt ceiling crisis before the Aug. 2 deadline, it looks like the issue could touch local governments if an impasse remains.

Moody's Investors Services announced Thursday that it is placing 177 municipal issurers - or local governments, agencies or districts - that have "indirect" ties to the U.S. government on a list to review for a potential rating downgrade.

King County government could face a possible credit downgrade, if the federal government defaults on its debt, Budget Director Dwight Dively said in a statement.

"The statement (Thursday) by Moody’s is entirely a reflection on the federal government, not King County," he said.

Other Seattle-area governments that could come under closer scrutiny by Moody's include the , and the University of Washington, Moody's reported.

In a statement, Moody's said an economic reliance on high "federal activity" contributed to placing a government on the potential review list.  

Issaquah School District Chief Financial Officer Jake Kuper explained that the cost to its taxpayers could be very real in the future, if the downgrade actually occurs.

"A potential downgrade of our debt rating could cost our taxpayers millions of dollars over the coming decades," he said in a statement issued Friday. 

"We will be working directly with our rating agencies (S&P and Moody’s) to determine if our bond rating will be lowered going forward, or if we can maintain our excellent rating given the stability of our District finances and local tax base."

Dively noted, in his statement, that there are 162 municipalities - including King County - that have a Aaa credit rating from Moody's. "The notice singles out entities with Aaa credit scores," he said.

Even if Moody’s begins the process to downgrade municipal governments and school districts, it would most likely be done after a review with local officials, Lake Washington School District Deputy Superintendent Janene Fogard said Friday.

"It would still be a process of Moody’s looking at each individual entity," she said. "I think it’s a little bit of wait and see."

As of Thursday, the city of Sammamish had not been contacted by Moody's about such possible action, Deputy City Manager Lyman Howard said in an email.

The city, he said, works with Standard & Poor's for its annual financial review and each time new bonds are issued. The city maintains a rating of Aaa from that agency, he said.

That is the highest level that a government can receive from credit-rating agencies, such as Standard & Poor's and Moody's. Governments that receive that rating are thought to have very little risk of defaulting on money owed.

Dollars that are borrowed with this rating typically can be done so at more attractive rates. 

"Generally, we don’t receive very much federal money for our operations," Howard said in his email.

Some local governments receive federal dollars through the Community Development Block Grant program. "We don’t qualify for that funding source given our demographics," Howard said.

If a federal default occurs and interest rates increase, current debt payments by the city of Sammamish would not be affected, he added.

But should the city take on new debt - and presuming that there's a federal default and interest rates rise - the city could feel the impact.

"We would in all likelihood pay higher interest rates," Howard said in his email. "On the other side of the ledger, higher interest rates would allow us to make more money on our investment portfolio."

As of July 14, the city had $8,041,667 in balances that are owed.

Of that amount, $2,175,000 will be paid off in December 2012, Howard said earlier this month. That money was borrowed in 2002 to help develop Lower Sammamish Commons park.

The remaining amount, or $5,866,667, comes from a loan in 2001 from the Public Works Trust Fund to improve 228th Avenue. This money was borrowed at an interest rate of 0.5 percent, Howard said.

The city, he added, has a debt capacity of $210 million.

"I continue to believe that Sammamish is on solid financial footing, and would remain there, even if the federal government fails to increase the debt ceiling," Howard said Thursday.

If Moody’s actually lowers the Aaa status for the Lake Washington School District, it could affect the interest rate at which money is borrowed, Fogard said.

But if a downgrade occurs, she added, there is an option for the district to buy insurance for when it actually issues debt, typically in the form of a bond.

That means that while the overall credit rating is lower, the insurance can help a specific bond measure be more financially appealing to district taxpayers.    

The cost, though, for that insurance depends on what type of debt a government is issuing, its credit and interest rates at that time, she added.

Dively, the King County budget director, was confident in his statement on Thursday - should Moody's conduct a federal debt crisis review.

"King County would fare well in a thoughtful review of our budget, as our general fund is stable and not dependent on federal funding," he said.

"We enjoy the highest-possible credit rating from all three major credit ratings agencies, and we believe they would likely be sustained in a review."

Editor's note: The New York Times has a chart showing federal debt over the years. Moody's news release can be read, in full, online. This story was updated to include statements from the Issaquah School District and Lake Washington School District.