By Miranda S. Spivack
Washington Post Staff Writer
Thursday, November 6, 2008

Montgomery County plans to go to Wall Street today to sell about $65 million in short-term commercial paper as part of a routine effort to borrow money for capital projects, and Jennifer Barrett is optimistic that investors will actually want to buy.

Barrett might be the most anxiety-prone person in Montgomery's government these days. As the county's finance chief, she is responsible for watching over millions of dollars in debt and investments, funds the county relies on to help pay for its $4 billion budget.

Until a few weeks ago, like her counterparts in many state and local governments, Barrett was tossing and turning at night as the markets convulsed. But recently she has been sleeping a bit better.

"After a scare, there is a flight to quality," said Barrett, president-elect of the Maryland Government Finance Officers Association, who has an MBA from Hood College in Frederick. "Investors want something very secure." Montgomery's Triple-A bond rating, the highest available, was unscathed by the market meltdown, Barrett notes, bolstering her belief that the county will hold on to its credentials as a safe haven for jittery investors.

That's the view despite a momentary jolt a few weeks ago, when banks were doing almost no lending and the county was unable to find a "liquidity provider," a bank willing to put up cash as a backstop to allow the county to eventually market up to $80 million in bonds for state transportation projects. The county got no bids from the banks. Barrett will rethink that deal by spring, and may opt for a different type of offering with a fixed rate that doesn't need a backstopping bank.

Timothy Firestine, the county's top administrator, who preceded Barrett as finance chief, said that episode caused a lot of gray hair among top county officials.

"We have never seen anything like this, and are very concerned with the layers of disruption to our market and the likelihood of a long recovery period," he told the House Ways and Means Committee during a hearing last week on the meltdown's impact on local governments.

Barrett and Firestine believe that Montgomery is in an enviable position. Unlike some governments, such as California's, which borrow regularly to make payroll, Montgomery uses its liquid assets to cut checks for its approximately 10,000 county employees and doesn't borrow to pay their salaries. The county also as a matter of policy holds 6 percent of its $4 billion budget as cash reserves.

Josephine Gilbert, a member of Barrett's staff who manages the cash investments daily, also has been able to continue her practice of beating market indices, such as Standard & Poor's, even as the markets became more volatile in recent weeks. "We don't keep it under a mattress," Barrett said.

Still, the market machinations caused local officials to open their eyes wider, especially when Bear Stearns and Lehman Brothers recently went bust. Montgomery, like many local governments across the country, had been using both companies to help market its bonds.

"One thing we have learned is how intertwined and complex the financial world is," said Barrett, who regularly consults with her staff about when to hold back and when to try to get into the market. The complex decision-making requires frequent discussions with dealers, liquidity banks and custodian banks, which all play a role in the county's finances.

Barrett and her staff also have had to react to investor "puts," or immediate demands for their money.

"We have had some nervous investors. Some were saying, 'Thank you, I'd like my money back,' " Barrett said. Her staff would then turn to liquidity providers to make good on the deal so the county would not have to put up its own cash. In one instance, a backstop bank had to come up with about $20 million to make good on some "puts" when the overnight interest rate was up to 9 percent. The next day it was down to 5 percent. The county actually saved money on that deal, Barrett said, because the backstopper, not the county, had to front the money.

Montgomery has benefited from some other lucky timing. Barrett's staff issued $250 million in long-term bonds in July, an annual offering that allows the county to borrow money to pay itself back for money already spent. Another short-term deal for $150 million went out in September, before things went awry on Wall Street.

"We were just a week ahead of the problems at Lehman," Barrett said.

Maryland local governments also have the benefit of recent cash infusions from property taxes paid in September. The next payments are due by year's end, which will provide more cash to counties and municipalities.

Come spring, Montgomery will be looking for investors for as much as $500 million in bonds for transportation, smart growth, technology modernization and possibly housing.

Barrett is hopeful that the markets will have settled by then and investors will be looking for less risk and more stability. That should put government offerings at the top of the heap.

"We believe it will be an attractive investment," she said.