Saturday, December 27, 2014

Will Montco's lost AAA bond rating boost costs?

Fitch cuts perfect AAA down to AA+

Will Montco's lost AAA bond rating boost costs?

The Fitch Ratings credit rating agency has cut two Montgomery County (PA) bond ratings to AA+, down a notch from its former top-level AAA rating, as the county prepares to borrow again. Fitch statement here. Neighboring Chester County is still AAA.*

In a report by Fitch analyst Eric Freidman, Fitch blamed the "sizeable decline in the county's general fund balance following several years of large operating deficits," which"reduced reserves to levels no longer consistent with the 'AAA' rating category." 

Montco is still rich, with low unemployment; its retiree pension plan is financially "strong;" and property tax rates remain "well below" other suburban Pennsylvania counties, Freidman added. But Montgomery's past decisions "to hold tax rates constant" as state aid dropped helped force the ratings cut.

The county's funding reserve has fallen to less than 7 percent of the budget, down by half from 2010, leaving the government without the "flexibility" an AAA-rated community needs to show. Fitch wants at least 10 percent.

County commissioners' chairman Josh Shapiro (Democrat), elected in November, told me he blames "inherited" spending under the previous county administration. "We have just begun to turn things around and dig ourselves out of the hole," he said in a statement. "More needs to be done, and we will do it." 

Lower ratings can mean higher borrowing costs, but newly hired county finance director Uri Monson (ex of Philadelphia's state oversight board, PICA) says he's hopeful investors will continue buying the paper at low rates as Montgomery refinances existing debt and borrows for capital projects.

Fitch cut ratings for two bonds: an $11.9 million refinancing bond for the Redevelopment Authority's Norristown parking garage, and an additional $6.2 milllion Redevelopment issue. Shapiro said the decision to seek low fixed rates to replace the adjustable-rate garage bonds "triggered" Fitch's action. He expects savings from the refinancing will more than offset any increase in cost due to the rating cut.

Monson said the county may borrow $60 million or more this fall for capital projects, but said he expects investor demand may be strong enough to price the issue similar to an AAA issue. Typically lower-rated bonds, which are supposed to carry higher risk of default, must pay higher rates to attract investors.

*An earlier version of this item compared Montgomery's new rating to neighboring Bucks County. In fact, Moodys rates Bucks County as AAA, higher than Montgomery, and recently reaffirmed that rating.
Fitch has given Bucks County Industrial Development bonds lower ratings, but does not rate the county as a whole.

Joseph N. DiStefano
About this blog

PhillyDeals posts raw drafts and updates of Joseph N. DiStefano's columns and stories about Philly-area finance, investment, commercial real estate, tech, hiring and public spending, which he's been writing since 1989, mostly for the Philadelphia Inquirer.

DiStefano studied economics, history and a little engineering at Penn, taught writing at St. Joe's, and has written the book Comcasted, more than a thousand columns, and thousands of articles, and raised six children with his wife, who is a saint.

Reach Joseph N. at JoeD@phillynews.com or 215 854 5194.

Joseph N. DiStefano
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