Montgomery County Retains AAA Credit Rating
In June, Moody’s described decision to divert money as “credit negative.”
This story was updated at 9:40 p.m. Oct. 19, 2019, to correct a characterization of a Moody’s analysis in June. A headline on the story was corrected at 12:40 p.m. Oct. 21, 2019, for the same reason.
Montgomery County has retained its AAA bond rating from Wall Street credit agencies, despite a warning for diverting money from a health benefit trust fund for retirees.
The county has received an AAA rating from all three major credit rating agencies — Standard & Poor’s (S&P), Fitch Ratings and Moody’s Investors Service — for almost 30 consecutive years, County Council President Nancy Navarro said in a press release.
In June, Moody’s described the county’s decision to divert money from Other Post-Employment Benefits, or OPEB, as a “credit negative.”
“The reduction in prefunding for retiree healthcare … is credit negative because the county will accumulate assets more slowly and thus carry higher unfunded liabilities,” the agency wrote in a statement.
County Executive Marc Elrich proposed diverting money from OPEB — which refers to benefits for former employees, other than pensions — to cover a projected $80 million state tax revenue shortfall in the county’s fiscal 2020 budget. Eight of nine council members voted this year to approve the diversion.
But the decision to cut funding to the trust for the second consecutive year prompted Moody’s to issue what some legislators saw as a warning to Montgomery County.
Council Member Andrew Friedson, the lone opponent to the financial diversion, said the decision could be interpreted as a sign that the county wasn’t sticking to its financial plan.
“We’ve promised to bring down our debt level, increase our reserves to 10% by this year, and contribute to the [benefits] trust,” Friedson, a former policy adviser for the Maryland comptroller, said in a phone interview on Friday. “And with OPEB, we haven’t followed through. They dinged us because we weren’t as dedicated to that part of the plan.”
Ultimately, credit agencies commended the county’s commitment to other financial priorities. Moody’s cited its “manageable debt and pension liabilities,” as well as its “improved and healthy reserve position, supported by various fiscal policies and multi-year planning.”
In an interview on Friday, County Executive Marc Elrich said he is “really happy” over the renewed rating, which lowers the cost of borrowing for the county and recognizes long-term financial stability.
“I think there was a lot of speculation over it, but we obviously didn’t get dinged,” he said. “And we got some pretty positive comments about our financial management as a whole.”
An AAA rating was “great news” for Montgomery County, Friedson agreed. But he also warned that the rating would remain at risk if the county continued to divert money from OPEB, which will require even greater levels of funding as health care costs increase.
Studies have warned that the county’s economy is stagnating, with lower-than-expected job and business growth over the last several years. Given the future challenges, leaders should be prepare to make difficult financial decisions soon, Friedson said. That can mean having difficult conversations about budget cuts or potential tax increases rather than using OPEB funding to cover the gap.
“Kicking the can down the road assumes that future budgets will be better and assumes you have significantly more funding tomorrow,” he said. “And the reason I feel so strongly about OPEB is that we can’t expect budgets to get better in a significant way.”
Other county officials have expressed less concern over OPEB funding. In May, the council’s administrator, Marlene Michaelson, said the trust could be financed through excess contributions to the county’s retirement pension fund, which is almost 100% funded.
Elrich said the decision to draw from OPEB made sense in a year with significantly less revenue than anticipated.
“It was a year where we just weren’t able to fund everything,” he said. “So, we went into OPEB to make up the difference. I think, given the rating, we came out OK.”