Johnson's final budget raises concerns for ratings agency

By Jonathan Mummolo
Washington Post Staff Writer
Monday, May 3, 2010

While touting his proposed budget this year, Prince George's County Executive Jack B. Johnson has said that the county is faring pretty well financially and that it is maintaining a relatively flat spending plan compared with last year, despite the economic downturn and the massive cutbacks some other localities are being forced to make.

But an independent Wall Street ratings company and others say a tactic the county has used to avoid more drastic cuts could hurt its standing in the long run and hand Johnson's successor large budget holes. Term limits keep Johnson (D) from running for reelection again, and his term ends in December.

In recent years, the county has increasingly relied on millions of dollars from the independent Maryland-National Capital Park and Planning Commission to help balance its operating budget. Much of those millions represents "one-time" money used to fund ongoing expenses, which can lead to budget gaps if the commission cannot continue to provide the same assistance and the money cannot be found elsewhere, some critics say.

Some also fault officials for using funds raised through taxes intended for park and planning services for other purposes.

The accounting practice was spotlighted recently because of a state bill awaiting the signature of Gov. Martin O'Malley (D) that would give residents a break on taxes paid to the commission and that would cost the agency millions in revenue next year, thereby limiting its ability to help fund the county budget, some have argued.

An analyst at Fitch Ratings said that the county's reliance on the commission's money is not "prudent" budget planning and that if the practice continues, the county's bond rating -- a signifier of creditworthiness -- could be lowered. The county has had high bond ratings during Johnson's tenure, and a downgrade could force it to pay more in interest on borrowed money.

"There could be negative implications for the bond rating should the county continue to supplement its budget with one-time revenues, for example, revenues from the park and planning commission," said Barbara Rosenberg, a director at Fitch who analyzes the county's finances. "From our point of view, it's not a prudent financial practice to use one-time resources to pay ongoing expenses."

Rating 'not in jeopardy'

It's the same logic Johnson has cited for not dipping into the county's reserves to fund operating expenses: The money might not be there next year, and Wall Street frowns upon it. But Johnson rejected the notion that using commission funds in that way could prompt a rating downgrade. He said it would not lead to budget gaps, either, because he expects county tax revenue to pick up enough in the coming year to make up the difference.

"Our bond rating is not in jeopardy at all, period," Johnson said. "Fitch and no one has ever talked to us about any of these practices. . . . Revenues will make up for it . . . I know it. . . . We've sat down and we've analyzed it. The county and the economy has turned around a little bit."

Johnson's spokesman, John Erzen, said revenue projections for the coming year are still being worked on, but he pointed to recent revenue increases from such sources as property and real estate taxes as signs of fiscal improvement. In the past year, county revenue dropped overall about $7 million, or 0.3 percent.

Johnson's proposed $2.59 billion operating budget -- crafted to close a projected $85 million shortfall -- includes more than $60 million from the commission. The bulk of that, about $45 million, is one-time money: $30 million from the second and final installment of commission transfers authorized by the General Assembly last year, and $15.4 million from the sale of surplus county land to the commission. The remainder comes from sources that will repeat to varying degrees, Erzen said, such as permitting fees and lease payments the commission pays to the county annually.

Prince George's has been given a AAA bond rating -- the highest -- by Standard & Poor's and Fitch, and Moody's Investors Service rates the county as Aa1. Fitch adjusted the county's rating from AA+ to AAA on Friday because of a change in the company's rating methods. The "recalibration" was applied to numerous local governments and "should not be interpreted as an improvement" in credit quality, Fitch said in a news release. Moody's is set to announce recalibrations Monday, an analyst there said.

A fiscal 'Band-Aid'

In a statement, County Council Chairman Thomas E. Dernoga (D-Laurel), in his last year on the council because of term limits, called the use of one-time funds "a Band-Aid" that "will not solve the overall problem from arising in the next budget cycle."

The council approves the county's and the commission's budgets in Prince George's, but Dernoga stopped short of committing to forgoing the commission's money this year.

"We still need a plan on how to absorb the loss of Park and Planning revenue in the future," he said.

Some of those vying to replace Johnson -- people who could be left holding the bag if revenue does not increase as he predicts -- also decried the strategy.

"I am concerned about it. . . . You don't want to balance the budget on one-time expenditures like the selling of land," said Rushern L. Baker III (D), a former state delegate running for county executive.

"The short term budget fixes could give the perception of good fiscal stewardship," said an e-mail from Del. Gerron S. Levi (D-Prince George's), who voted last year in the General Assembly for the transfer of commission funds and is also running for the county's top post. "But the real long term fiscal health of the county could be worse off for it."

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