News Analysis: County Gets Warning on Bond Rating
Wall Street credit rating service flags county's shift of retirement benefit funds. Are serious budget consequences ahead?
Moody’s Investors Service, one of the nation’s three main bond ratings agencies, has sent out an “issuer comment” describing the county’s repeated diversions from its retiree health care fund as a “credit negative.”
The unusual statement is unlike anything the county has seen in years and could have serious consequences for the budget.
Moody’s statement leads with this paragraph:
On April 30, Montgomery County, MD (Aaa stable) lowered its contribution toward prefunding employee retiree healthcare benefits in order maintain progress toward its fiscal 2020 reserve target, the second consecutive year it has done so. The reduction in prefunding for retiree healthcare, also known as other post-employment benefits (OPEBs), is credit negative because the county will accumulate assets more slowly and thus carry higher unfunded liabilities. At the same time, the county’s past build-up of OPEB assets has provided it with budget flexibility to lower contributions in favor of hitting reserve targets. This flexibility would not be available if the county had no OPEB assets and was instead paying for these benefits directly from its budget, an approach called “pay-as-you-go” funding.
Moody’s is referring to two actions the county took with regards to its retiree health care fund, also known as OPEB.
The first incident happened in May 2018, when then-County Executive Ike Leggett proposed a $62 million reduction in the county’s OPEB contribution to eliminate part of a budget shortfall. The County Council unanimously approved it. The second incident happened this year, when County Executive Marc Elrich proposed reducing the county’s OPEB contribution by $90 million to fund his recommended budget. The County Council voted to approve this second diversion with only Council member Andrew Friedson voting no. Additionally, the county has made smaller withdrawals from OPEB assets to pay current year claims since fiscal 2016.
OPEB is not intended to be a slush fund.
Under rulings from the Governmental Accounting Standards Board, state and local governments that have future retiree health care liabilities are supposed to prefund them in the same way that they prefund pension benefits – through a segregated fund. Moody’s notes that the county government had $492 million in OPEB fund assets as of a year ago, but it also estimated that the county had $2.1 billion in net OPEB liability. (These figures exclude other county agencies like MCPS, Park and Planning and Montgomery College; if they are included, the net OPEB liability soars to $3.9 billion.)
In recent years, Montgomery County has been tapping into its OPEB fund to finance its operating budget.
Without draining OPEB, Elrich would have struggled to afford his new labor contracts and other increases in program spending this year. The council was unhappy about his use of OPEB money, but unable to find another $90 million to make up for it, they grudgingly went along with it.
Back in 2010, the county was placed on negative watch by the credit agencies and nearly lost its AAA bond rating. Steadily increasing its OPEB prefunding was one tool the county used to stave off the crisis and remain a AAA jurisdiction. Afterwards, the credit agencies left the county alone – until now. Moody’s praises the county for having an OPEB fund at all, noting that other jurisdictions without them have less flexibility to meet reserve targets. But this statement – the first negative statement about the county’s bond rating in years – is a warning. Moody’s is telling the county, “We are watching you. Stop messing with OPEB.”
Failure to heed this warning places the bond rating at risk. We shall see how our elected leaders respond – both now and in next year’s budget.
Adam Pagnucco is a writer, researcher and consultant who is a former chief of staff at the County Council. He has worked in the labor movement and has had clients in labor, business and politics.