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.