Moody's Downgrades DeKalb County, Ga., GOs to Aa3

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BRADENTON, Fla. — For the second year in a row, Moody's Investors Service has downgraded DeKalb County, Ga.'s general obligation rating because of pressured financial operations and the near-term challenge of restoring the general fund balance to levels consistent with a higher rating level.

Moody's dropped the county's GO rating to Aa3 from Aa1 on Friday, affecting $444 million of outstanding GO debt incurred by Georgia's third-largest county. A year ago, DeKalb lost its Aaa rating when Moody's downgraded the credit to Aa1.

Moody's recent downgrade impacts $20 million of outstanding appropriation-backed debt, which dips to A1 from Aa2.

"After recording two years of significant operating deficits in fiscal 2007 and 2008, the county's general fund position declined dramatically, driven by the continued practice of appropriating reserves and the sustained underperformance of revenues," said Moody's analyst Lauren Von Bargen. "The county maintains a reserve target of at least one month's operating costs across all tax-supported funds, which has not been achieved since fiscal 2005."

According to the executive budget recommendation presented to county commissioners last week, DeKalb has seen a loss of $86 million in revenues over the last two years largely because of plummeting real estate values in the wake of the economic downturn and incorporation of a new city.

The county covers the eastern half of the area inside I-285 — the beltway that serves the Atlanta metro area — and part of the city itself.

County officials have spent the last year taking actions to help build reserves and address internal budget issues, said interim finance director Joel Gottlieb. Some 843 employees took early retirement this year, many positions have been abolished, and overtime has been scrutinized, he said.

"We think we have trimmed our operations significantly," Gottlieb said.

The portion of the budget reliant on taxes has been trimmed to a proposed $563 million for fiscal 2011 from $636 million in 2008. A $2.32 million tax increase has been proposed for the coming fiscal year, which begins Jan. 1.

The new budget will require the county to increase its defined pension plan contribution to 17% from 9.5%. Employees will be required to increase their contribution to 8.28% from 4.5%.

Starting Jan. 1, the county sales tax will be charged on food and food-related items, too. The change is expected to bring $8 million to $10 million of new revenue. There are no plans to issue new GO debt.

"We think we have a solid handle on revenues and we're continuing to control our expenses," Gottlieb said. "We're looking at different fees and charges, and other ways to raise revenues and cut expenses."

Von Bargen said future credit reviews will focus on DeKalb's ability to restore structurally balanced operations, manage changes in various revenue streams, and its ability to re-build and maintain reserve and liquidity levels at or above stated targets.

Moody's said the county derives stability from its location and the presence of several large, institutional employers, including Emory University, the Internal Revenue Service, and the U.S. Center for Disease Control. The county has a population of more than 740,000.

Standard & Poor's late Monday placed its AAA rating on DeKalb's GO rating and its AA-plus rating on appropriation-backed debt on watch with negative implications. The agency said the watch "reflects our view of the county's deteriorating finances" and a final rating determination would be made in a few weeks.

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