WASHINGTON — Montgomery County, Md., officials are to meet today with analysts from the three major rating agencies to discuss recent budget cuts they made in an effort to secure the county’s ratings.
The meeting comes as the county expects in June or July to issue $325 million of general obligation bonds, its annual debt issuance, according to Jennifer Barrett, Montgomery’s debt manager.
It also comes after the County Council on Thursday approved a $4.3 billion budget for fiscal 2011 that included a $202.7 million, or 4.5%, cut — the county’s first overall budget cut since it was chartered in 1968.
The county’s action stems from Moody’s Investors Service putting its general obligation rating of Aaa on watch for a possible downgrade in April, citing “extremely narrow” reserve levels. Tax revenue declines in fiscal 2009 and 2010 amid the recession caused the county’s reserve ratio to slip significantly, triggering the Moody’s action.
Standard & Poor’s and Fitch Ratings reaffirmed their AAA ratings for the county with stable outlooks.
But officials “were shocked” by Moody’s action, said Tim Firestine, Montgomery County’s chief administrative officer. The proposed budget would have achieved a 5% reserve ratio, below the county’s historical 6% ratio of unreserved general funds and reserve stabilization funds to the annual budget.
But the action by Moody’s compelled County Council members to scrap the budget proposal and make greater sacrifices. The county could face potentially higher borrowing costs if Moody’s downgrades its rating.
The fiscal 2011 budget, which raises taxes and furloughs some labor union employees in an election year, is expected to achieve the 6% reserve ratio, and will demonstrate to the rating agencies that elected leaders will do “whatever it takes stay fiscally balanced and retain the triple-A” rating, Firestine said.
The budget raises phone and energy taxes and adds a fee for ambulance transportation. The energy tax has an effective date in fiscal 2010 to support current-year reserve levels. The tax and fee increases are expected to generate an additional $150 million. The county also lowered its revenue estimate for income taxes by $168 million for fiscal 2010 and 2011.
In addition, it is analyzing increasing its reserve ratio to 10% over the next five to 10 year period. It’s “on the table,” Firestine said, adding the county’s financial adviser, Public Financial Management Inc., said 10% “seems accurate.”
The fiscal 2011 budget does not include higher property taxes. In 1990, voters approved an amendment to the county’s charter that limits property tax revenues to the prior year’s total, plus inflation and revenue derived from new construction. But the County Council can override the tax cap with unanimous approval, and has overridden the cap four times this decade. The council’s willingness to override the charter tax limit in the past “has been a positive credit factor,” Moody’s analysts said.
Property taxes were raised in fiscal 2008 and Firestine said the county has more flexibility with the energy tax increases, which have a smaller impact on residential taxpayers.