Howard County and Moody's

Tuesday February 19, 2013

Moody’s has announced Howard County may lose its coveted and well-deserved AAA bond rating. The AAA rating is important to the County because it reduces the borrowing costs for funding and gives Howard County substantial lee-way in determining fiscal priorities. It helps pay for Howard County’s general awesomeness.

The problem here is Moody’s, as usual, has failed to perform a basic evaluation or due diligence in evaluating Howard County. Like the other major credit ratings agencies, the process for evaluation is a black box, wherein the rater does not explain how a conclusion is reached. Nevertheless, hints are dropped. And the Municipal Bond Association lays out that four key metrics are used to evaluating the health of a municipal government (these may look familiar if you’ve seen my work with the Columbia Association). Avoiding a lot of equations, they essentially involve measuring the the debt compared to total land valuation, the population, personal income, and revenues.

Let’s start with the first. The county land valuation experienced a minor (less than 5%) decline during 2011, but by Moody’s own estimate, this is a non-problem since the phased-in assessment increases insure a steady growth in the tax base going forward.

The second, linking debt to population is rather outdated and difficult to asses year over year since it is measured in nominal dollars. It doesn’t matter, since Moody’s press releases do not suggest they use it. (Fitch does, but they haven’t said anything foolish yet.)

The third, debt over personal income, is most important. With Howard County’s population sitting on the third highest per capita income in the United States, the county’s debt is relatively low compared to other jurisdictions. Also, the county’s incredibly low unemployment, 4.7% (December 2012), has decreased over the prior year, lending further strength to the personal income of Howard County.

The fourth measure, debt service over revenues, is a bit harder to work with. Debt service includes all long run debt, including pension liabilities and lease payments. Nevertheless, despite a massive shift in pension liabilities onto county governments, Howard County is still stronger than other counties. Moody’s notes that Howard County faced a structural deficit in fiscal 2011, however, at $2.2M, that was less than a third of one percent of the county budget, and was corrected through short-term savings.

While the federal government is a substantial contributor to local employment, that is true across a broader swath of the United States than most would admit. The risks of the federal government substantially curtailing local spending, especially when much of the spending that Howard County benefits from is Defense-oriented, are low. While I have not done a stress test on county finances, I am reasonably convinced Moody’s negative outlook for one of the few jurisdictions where everything is looking up, is misguided and bad business.