As Debt-Service Payments Grow, County Council Looks To Limit New Capital Bonds
County executive says sterling bond rating could be at risk
Members of the Montgomery County Council
via Montgomery County website
Montgomery County is looking to lower its spending guidelines to reduce its growing debt-service payments, which this year are estimated to cost $394 million on $3.5 billion in bonded debt.
The debt service that Montgomery County is paying is growing at a rate that could affect the county’s AAA bond rating, according to County Executive Ike Leggett.
The County Council sets spending affordability guidelines every two years to determine what bonds the county can financially withstand to pay for long-term capital projects, such as school construction.
The current guidelines enable the county to issue $340 million in bonds per year.
In a memo to the council on Tuesday, Leggett wrote that that figure is too high.
He recommended the council lower the spending guidelines to $315 million in bonds issued in fiscal 2019, which begins in July, then $300 million for fiscal years 2020 through 2024. By doing so, the council could reduce debt service spending by $53.9 million over the six-year period, according to Leggett.
He acknowledged that lowering the guidelines will lead to difficult decisions about which future capital projects would be funded.
“However, we need to ensure that we have the means to provide funding for school teacher salaries, police and fire fighters, safety net services, library hours, and parks operations into the future in good times and bad,” Leggett wrote.
On Thursday, the council’s three-member Government Operations Committee approved a smaller decrease, which will be recommended to the full council when it votes on setting the guidelines at its meeting on Tuesday.
The proposal calls for lowering the spending guidelines to $330 million in fiscal 2019, then $320 million in fiscal 2020, then $310 million in fiscal 2021, then $300 million from fiscal 2022 to 2024. Within the committee, Council members Nancy Navarro and Sidney Katz were in favor and Council member Hans Riemer was against. Riemer said he supports a slower pace for cuts to the guidelines.
The full council can override the spending limits if at least seven of the nine members are in favor.
The county plans its capital budget on a six-year timeline.
“This proposal allows us to keep commitments to projects already programmed,” Navarro said in an interview with Bethesda Beat Friday. She added that it will ensure that school construction projects and other projects with allocated capital funding allocated can proceed.
Navarro said that under Leggett’s larger cuts to the guidelines, significant projects might have to be stopped.
“I felt it would have been quite disruptive,” she said.
The county is in this situation now because of large raises in the spending affordability guidelines that date to the capital budget schedule of 2004 to 2010, when the guidelines were raised more than 27 percent.
Leggett wrote in his memo that annual tax-supported debt service costs have increased 79 percent since 2007.
The rise in debt limits during the six-year capital budget schedules dating back to 1988. Via Montgomery County Council agenda documents.
If the council were to maintain the $340 million-per-year guidelines, debt-service payments would increase by about $85 million by 2024, to $479 million per year. That would be about 12 percent of the county’s $4.1 billion in expected revenues in fiscal 2024.
Navarro pointed out that this is money the county doesn’t get to spend on county needs—instead, it goes to the banks that provide the bonds.
“Debt service could be the third largest department in the county,” Navarro said. “We must be very aware the more we grow our debt service, the less we’ll have for other things such as public safety, libraries, parks and other services.”
The county’s Board of Education, however, is urging the council to instead raise the spending affordability guidelines.
In a memo from board President Michael Durso sent to the council Sept. 21, the board asked the council to raise the guidelines by 10 percent, to $374 million per year, or increase the school system’s share of the capital budget.
The memo warns that if the council does not do so, “it will be impossible to fund the full range of urgently needed capital projects.”
Council staff calculated that doing so would increase annual debt service payments by about $105 million from fiscal years 2018 to 2024.
Riemer, who is proposing reducing spending guidelines by $10 million every two years over the next six years, said Friday it’s important that the council find a sustainable approach to the growing debt.
He said the challenge will be doing so without hurting future school construction plans.
He said one reason the County Council felt it needed to raise taxes in 2016 was because the county continued to add significant debt. By reducing the amount of bonds issued each year, the county whittle down its debt-service payments, Riemer said.
“We need to set a precedent for future councils to have a downward trajectory of debt, to send a signal that we’re making a clear course correction,” he said. “But we need to be realistic in how much we can take out of the capital budget at once.”
Navarro said reducing debt-service payments can help stave off future tax increases.
“We have to be mindful what it is we can afford,” she said.