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

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.

Private Sector Foolishness in Pittsburgh

According to Mayor Ravenstahl there is unanimous agreement in his group of government, university and business leaders that Pittsburgh needs a new source of revenue to bail out its ailing financial problems. We can think of two gigantic problems with the Mayor’s assessment of the situation.

First, there is absolutely no evidence that a new source of revenue will solve Pittsburgh’s long standing tendency to spend or commit to spending all the money it gets its hands on and then some. Over the past two decades the Legislature has provided numerous additional sources of recurring revenue to the City as well enormous amounts of money to large building projects in the City.

And what has the City done to correct its well documented extravagant spending? Not very much. It is still far out of line in its spending, employment and legacy costs compared to other U.S cities. So why would we think a new revenue source would solve the problem? The City needs first to demonstrate its willingness to make the spending cuts necessary to put its house in order. Lower cost government can redound positively to the City with a lot of benefits; lower taxes, a friendlier climate for business and new residents and happier taxpayers.

Raising taxes in the current economic environment is nothing less than preposterous.

The second gigantic problem? Who are the business leaders on the Mayor’s panel who endorse a new revenue source and why are they doing it? No doubt these are the same folks who thought a new tax to fund stadiums was a good idea and that wasting $500 million on a PAT tunnel under the Allegheny River was a good use of taxpayer dollars. If these businesses are so keen to help Pittsburgh with new revenue, why do they not each volunteer a four or five million dollars per year to the City? If it is so important to find new revenue, they should take the lead and make a commitment. That they won’t ante up reveals a fair amount of hypocrisy. Those who want others to pay more should lead the way and donate voluntarily or recommend tax increases on themselves.

That won’t happen because their colleagues in the business world would go ballistic. And no doubt many shareholders in their own companies would as well.

Finally, it is worth noting that the Mayor’s request for $4 million from the tax-exempt institutions received no commitment from the university presidents in attendance at the meeting. Of course being great public spirited citizens they want to help the City by going to Harrisburg and lobbying for more taxes.

We can only hope the Legislature will give this delegation short shrift, exactly what it deserves.

Pittsburgh’s Spending Dilemma

The Pittsburgh Public Works Department claims it does not have enough manpower and equipment to deal with the snow problem and cannot hire more people because of spending constraints. This in a city that was looking to tax college tuition in order to make payments on massively underfunded pensions and that has enormous bond debt obligations and that has no problem finding money to make very generous longevity pay for public safety employees.

One of the City’s primary responsibilities is to maintain streets and make it possible for people to get around to work, doctors and shopping. Yet because of spendthrift, poor management policies for years it now finds that it cannot do what the citizens need. Maybe the citizens should long ago have demanded a bit more responsibility in fiscal matters.

One wonders if they are beginning to get it.

Pittsburgh Enrollment Decline Forecast to Continue

education

An independent consultant hired by Pittsburgh Public Schools to study facility usage recommended closing 16 buildings and reconfiguring another 19 of the District’s 70 facilities. The recommendations are based on a projected further 4,500 drop in enrollment by school year 2018-2019.  

 

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