Like clockwork, an August press release by Montgomery County, MD government crowed “Montgomery County has maintained its “Triple-A” bond rating for 2022 from the three major Wall Street bond rating agencies.”
But there is a glaring difference from the last time Montgomery County politicians put out such a positive spin on local government debts.
Interest rates are rising across the board as the nation’s Federal Reserve Central Bank seeks to tamp down multi-decade high inflation via short-term interest rate increases and other financial maneuvers. Pared with global uncertainties, investors remain skittish and are demanding higher real rates for new debt or refinanced notes. Real rates are still negative (real rates being the difference between a nominal/quoted interest rate and the actual rate of inflation) but getting closer to ‘0’. Municipal bond interest rates are no exception to this as investors seek safety and less risk to principal.
Per a June, 2022 Bloomberg.com article by Martin Braun: “The market posted a record loss for the first six months of the year, with 10-year and 30-year AAA municipal bond yields rising about 170 basis points. Munis could finish the year down 6.25% to 7.25%, according to Barclays Plc and Charles Schwab strategists.”
In simple terms, all of this means that near-term debt is going to be more expensive (over time) for Montgomery County to issue. From the Wall Street Journal in April: “Benchmark yields on triple-A, 10-year, tax-exempt general-obligation muni bonds were 2.34% on Friday, compared with 1.03% a year earlier, according to Refinitiv Municipal Market Data. For investors in the top tax bracket, that equates to a taxable yield of around 4%, according to data from Nuveen Asset Management.”
It will also mean that if Montgomery County needs to refinance any debt (and it no doubt will), it’ll pay more in ‘debt service’, again, over time. “Definitely it’s been a damper on refinancing,” said RBC Capital Markets municipal syndicate desk managing director Glenn McGowan, who works with state and local governments selling bonds. More can-kicking will occur by Montgomery County politicians but the can is growing bigger and debt service costs threaten to squeeze other key spending priorities in the present. In fact, Montgomery County politicians were warned about this very scenario by County Executive Ike Leggett in 2017.
Fitch, one of the ‘vaunted’ Wall Street Ratings agencies the Montgomery County press release refers to, noted in its recent August 2022 “Rating Action Commentary” that: “Fitch expects spending to grow in line with to marginally above revenues absent policy actions. The county has the proven ability to reduce spending during an economic downturn. Carrying costs represent a moderate 12% of total governmental spending.”
Translation into plain English: Montgomery County government is spending slightly more money above its revenues (taxes) and therefore needs to issue yet more debts, but the debt service it has already incurred is ‘only’ 12% of its massive annual budget ($5.5 billion and headed higher). Somehow Fitch thinks Montgomery County will ‘reduce spending’ during a recession, but this remains to be seen. Many economists believe the United States is in a recession now, typically defined as negative GDP growth over two consecutive quarters.
And, Fitch expects Montgomery County to raise yet more taxes to make up the difference if it needs to. And who can fault them for thinking that? “Over the last 16 years, the county has levied five property tax hikes, two energy tax hikes, an income tax hike and a recordation tax hike. Raising taxes should be a last resort, but in our county, raising taxes is sometimes a first and only resort.” wrote Charles K Nulsen III in March, 2018. But the tax base is stagnant in Montgomery County, as IRS individual filing data shows. More AGI (adjusted gross income) left Montgomery County then arrived over the past decade-plus.
Here is the real reason Fitch won’t knock down the “Triple-A” rating of the County. Montgomery County is next to the seemingly perpetual money-and-debt-machine that is Washington, DC and the federal government.
That government itself is ‘only’ $31 trillion in debt and counting. Ho-hum.
Montgomery County keeps kicking the can and isn’t in an immediate crisis, but the interest rate on shiny new purchases keeps going higher and higher. A true return to frugality would be better now.
Greg
Your Roving Correspondent in Olney, MD