Tag Archives: bond rating

Moody’s County Bond Rating: How Reassuring Is It?

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A couple of weeks ago Moody’s Investor Services assigned an A1 rating to Allegheny County bonds. Much glee was expressed by the County Executive at the rating agency’s good opinion.

There is no gainsaying the fact that a high bond rating is a very good thing for the County in terms of its ability to borrow money at the best interest rates. But before County residents get too comfortable they should know the details of the rating that might be somewhat less reassuring.

First of all, the rating comes with a negative outlook based on Moody’s concerns about the challenges facing the County; namely, the very low reserve balance, the low pension funding levels and lack of financial flexibility. Moody’s does credit the stable economic base that is heavily structured toward higher education, health care and government employment. A point the Institute has made for quite some time.

Second, it is instructive to examine Moody’s rationale for the A1 rating. Quote; "The bonds are secured by the county’s general obligation, unlimited property tax pledge." (Bold and italics added by the Allegheny Institute.) Moody’s is saying that because the County can raise property taxes as much as necessary to make bond service payments the agency will give the County a high credit score. Thus, the low reserve balance, the budget balancing by one time funding sources-such as grabbing gaming money headed to the airport, the sale of tax liens, etc.-and the low pension levels and ongoing structural imbalances that might otherwise have caused a rethinking of the bond rating are overridden by the fact the County can raise taxes as much as necessary to make bond payments.

Taxpayers might be more comfortable if the bond rating was due to careful financial management, keeping a strong reserve, not depending on last minute finding of money to close a budget gap and holding prudent debt levels. In other words, the good debt rating should not be used to go borrowing more money other than for refinancing. Taxpayers would also be more comfortable if the County’s budget problems were resolved by spending cuts through outsourcing and privatization. County employees might feel differently about that but it is the taxpayers who must be served. After all, they pay for the government.

The Moody’s unlimited taxing power rationale that underpins its high bond ratings can lead governments to get themselves into trouble by borrowing imprudently and not paying enough attention to controlling spending. High credit ratings have undoubtedly led municipalities to go too far into debt and created financial crises when the economy stumbled and tax revenues began to fall. Slashing core government functions has often been required to leave enough money to pay debts. Raising taxes in an already depressed economy can be counterproductive and actually drive tax base away. Moody’s might want to rethink how it weights the "unlimited" taxing power criterion.

Poor Outlook for City’s Creditworthiness

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"Adoption of a budget that continues to rely on outside approvals, unrealistic revenue assumptions, or unachievable savings will result in a downgrade". That’s what one of the "big three" bond rating agencies said about Pittsburgh’s finances. That was in October of 2003, prior to Act 47, prior to an oversight board, prior to a massive parking tax increase, prior to a tax reform package, prior to a new casino, a new hockey arena, etc. And it was before the recent budgetary machinations of a tuition privilege tax, a soda tax, and higher non-profit contributions to the City.

Just yesterday another of the trio of rating firms downgraded their outlook on the City from "stable" to "negative" (joining another who did so in the fall) in light of the ongoing pension problems, which, unless the rating agencies have not been watching, has been prevalent for a long time. The agency’s report said "The negative outlook reflects our view of the city’s increased financial pressures associated with its pension system and the uncertainty regarding the potential takeover of the city’s pension system by the state". Again, even with a state takeover the sunniest of scenarios that have the City meeting the Act 44 funding threshold leave residents, employees, taxpayers, and bond analysts looking at a pension system that will have about half of the assets it needs to pay the promised liabilities.

The revised Act 47 plan contains a recent long-term look at the ratings Pittsburgh received in the decade of the 2000s: regardless of which one of the "big three" ones looks at, the ratings stayed in the "B" level which implies "average", "good", "speculative", "adequate", or "ongoing uncertainty" depending on what letter or numeral followed the letter grade.

The plan contained quotes from the agencies on their most recent rating at the time (January of 2009) and all three were concerned with the high per capita debt burden of the City, much of which is related to the pension bonds issued in the mid- to late-1990s. Pittsburgh ended up with a temporary bump in pension funded ratio and traded that for an addition to long-term debt. Now it has poorly funded pensions to go along with the debt burden, which is supposed to drop off around 2018 if the City issues no new debt and continues to pay for capital needs out of ongoing revenues and other sources.