Counties Ponder Local Impact of Possible Federal Credit Downgrade

As highlighted in a July 16 Baltimore Sun article Maryland’s economy is particularly susceptible if the federal government fails to reach an agreement concerning the debt ceiling and defaults due to the large number of federal employees in the State.

Census data show that 286,814 federal workers live in Maryland. There are 131,350 federal employees who work in the state, and local companies were responsible for about $60 billion in federal contracts in 2010.

“Maryland is more vulnerable,” said Sen. Benjamin L. Cardin, who has become increasingly vocal in recent days in pushing for a bipartisan agreement to the debt limit.

However, Maryland and its counties could also face their own rating difficulties if the United States loses its AAA bond-rating.  Two of the three top bond rating agencies have indicated they are considering such a downgrade.

So far, Wall Street has not reacted to the uncertainty over [debt ceiling negotiations], despite announcements last week that Moody’s Investor Service and Standard & Poor’s were considering downgrading the nation’s gold-plated credit score.

If one or more of the three top rating agency’s do downgrade the US credit level from AAA (the highest level), then it is likely that the State and some counties could also face credit downgrades.  The concerns of Howard County Executive and MACo President Ken Ulman are summarized in a July 15 post, including the loss of Howard County’s AAA bond rating.

Moody’s in particular has specifically stated that any downgrade of the federal credit rating will also trigger a review of state and local government credit ratings.  Montgomery County is currently undergoing review and if the federal downgrade occurs, other Maryland counties could be reviewed as early as next week.  Moody’s has indicated it will consider four factors when reviewing a county’s credit rating:  (1) economic sensitivity, including the percentage of federal employees in the county’s population; (2) the impact of Medicaid on the county’s budget; (3) the county’s percentage of variable rate debt; and (4) the existence of any operating fund balances sufficient to mitigate the three prior risks.

On July 18, MACo held a conference call with county budget officers, finance directors, and financial advisors to discuss the situation.  Base on the call, MACo will continue to keep counties apprised of the credit rating situation and also raise the issue with the National Association of Counties (NACo).


U.S. Government Press Release

Moody’s Investors Service June 29, 2011

Moody’s Investors Service July 13, 2011

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