Washington municipalities could lose top credit ratings

July 28, 2011

Suburban governments across the Washington area could lose their sterling credit ratings if the federal government is downgraded, the Moody’s rating agency said Thursday.

That could make it more expensive for counties such as Montgomery, Fairfax and Prince George’s to borrow money for roads, schools, hospitals and other projects.

Moody’s announcement that it is considering a downgrade of 177 municipal bond issuers nationwide that have top-notch credit was another sign that the showdown over the federal debt ceiling could have far-reaching effects on the economy.

The Washington area is particularly vulnerable because it has a high concentration of federal employees and government contractors.

The capital region faces a double-edged sword. If the federal government loses its AAA credit rating, local jurisdictions could suffer a domino effect. But if Congress and President Obama bolster the federal credit rating by cutting government spending, that, too, could damage the local economy and tax base.

Leaders across the region expressed anger at the predicament.

“What they are doing in Washington will kill us,” said Prince George’s County Executive Rushern L. Baker III (D).

“Why idiots in Washington can’t come to a compromise and fix this is appalling,” said Prince William County Board Chairman Corey A. Stewart (R). If politicians in Washington can’t solve the problem, “Prince William and other localities will pay the price for the federal government’s ineptitude,” Stewart said.

Alexandria Mayor William D. Euille (D) called on congressional leaders to stop acting “in such a childish manner.”

Any potential downgrade would be of primary concern for localities that are planning to finance public-works projects. Prince George’s is expecting to issue about $99 million in bonds by the end of August or in early September. Of that, the biggest chunk is for road work, about $28 million. The bonds also will finance a new public safety communications system, libraries and stormwater management projects, said Office of Management and Budget Director Thomas Himler.

Montgomery is planning to issue more than $550 million in bonds next week for projects such as schools and to refinance debt, and the jolt of uncertainty has left county officials frustrated with Washington – and Moody’s.

If the market turns treacherous, the county could decide to “pull our sale and wait a week and see what the federal government does,” said Timothy L. Firestine, Montgomery’s chief administrative officer.

Virginia, with its extraordinary ties to the federal government, had 15 municipal authorities on the list, the highest of any state. Maryland had eight. The District is beyond the scope of the Moody’s review because it does not have a top-notch credit rating.

The Virginia municipalities under review include Alexandria, Arlington County, Fairfax County, Fairfax City, the Fairfax County Water Authority, Herndon, Loudoun County, Prince William County and Vienna.

The Maryland list includes Baltimore County, Bowie, Harford County, Howard County, Montgomery County, Prince George’s County, Rockville and the Washington Suburban Sanitary District.

If the federal rating is downgraded, Moody’s will assess whether the jurisdictions under review deserve better credit than the U.S. government does. Moody’s officials said they would examine each jurisdiction individually, a process that could take months.

The move by Moody’s came nine days after the ratings agency put Maryland, Virginia and three other states on a credit watch, warning it would review and might downgrade each within a week following a federal downgrade.

The July 19 warning forced Maryland officials to delay a planned refinancing of $200 million in debt this week. But the state did go forward with a scheduled sale of new debt Wednesday — the first by any state amid the urgent negotiations to raise the federal debt ceiling — to fund school construction, public safety and other capital projects.

The warning appeared to have little effect on investors; Maryland sold $418 million in bonds at a near record-low interest rate of 3.07 percent.

Prince George’s County earlier this year finally received a AAA rating from Fitch, another of the three major ratings agencies, and new County Executive Baker hoped that would set the stage for a proposed $50 million economic development fund that would rely on a combination of loans, grants and bonds. Lowering the county’s AAA rating would cost the county money it can ill afford in its $2.7 billion budget, Baker said.

“I’m pretty disgusted that Fairfax County would end up on this list, given the fact we have been scrupulously well-managed, and we have handled our debt so carefully,” Fairfax Board of Supervisors Chairman Sharon S. Bulova (D) said late Thursday. She said the county has maintained the highest credit rating for 36 years.

Any downgrade of Fairfax County’s credit rating would cause the county to reevaluate and perhaps postpone capital spending on local roads, schools and libraries, Bulova said.

Officials also noted that as recently as July 6, Moody’s had praised Fairfax County’s shrewd handling of its finances.

Prince William plans to sell “several hundred million” in bonds over the next five years for park, road and school projects, although no sales are planned in the next few months, Stewart said.

Moody’s put Montgomery on a watch list for possible downgrade last year, in part because of shrinking county reserves. The county made a series of painful financial fixes and was taken off the watch list.

Now it’s back.

“We did everything to put the county on solid footing, and now this will completely undermine all this effort” if the review turns to a downgrade, said Montgomery County Council member Nancy Navarro (D-East County).

Staff writers Jennifer Buske, Aaron C. Davis, Caitlin Gibson, Christy Goodman, Fredrick Kunkle, Michael Laris and Miranda S. Spivack contributed to this report.

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