State and Counties Remain Vulnerable to Federal Credit Rating Downgrade

Maryland counties continue to wait the debt ceiling drama plays out at the federal level.  As previously reported on Conduit Street, both the State and some counties could see their own credit rating reduced if the major bond rating agencies downgrade the United States’ credit rating, as both Moody’s Investor Service and Standard & Poor’s have threatened.  Moody’s in particular has stated that a downgrade of the US credit rating will result in a ratings review of Maryland and some of its counties.  Such a downgrade would make it more expensive to borrow money through bond issues.  Additionally, a State downgrade would likely reduce the amount of State funding going to local governments.

As reported in a July 20 Baltimore Sun article, Maryland postponed a scheduled July 22 bond sale because of concerns over the federal debt ceiling debate.

Maryland will delay borrowing more than $700 million to give investors time to digest the debate over raising the federal debt ceiling, state Treasurer Nancy K. Kopp said Wednesday.

The move, which will push back the first day of the state bond sale from Friday to Monday, comes a day after Moody’s Investors Service said it would review “for possible downgrade” the credit ratings of Maryland and four other states.

Kopp stressed that the decision to delay the sale did not come in response to concern from the bond market or changes in interest rates based on the Moody’s report.

“It seemed to be a good idea to give it the weekend to clear things out,” Kopp said, suggesting that the extra time would give potential buyers a chance to review the state’s AAA credit score and also read the report from Moody’s. “In the end, we don’t think it should make much difference.”

On July 25, Maryland sold $71 million in tax exempt general obligation (GO) bonds.  The next bond issuance is scheduled for July 27 and involves $390 million in tax exempt GO bonds through competitive sale.

Even if the rating agencies do not enact a credit downgrade.  Maryland remains highly vulnerable to federal downsizing.  A July 26 article discusses a report commissioned by Blueprint Maryland, which highlights Maryland’s high dependence on federal jobs:

Maryland’s economy would suffer disproportionately from the likely downsizing of the federal government in coming years, perhaps losing 150,000 jobs if the 22% reduction in spending recommended by the president’s budget commission were implemented, a new report says.

The report commissioned by business group Blueprint Maryland and done by Anirban Basu’s Sage Policy Group paints a bleak picture of state economy that “has come to rely heavily upon the federal government as a source of economic vitality.”  …

Some key findings of the report:

  • Maryland’s federal employment as a percentage of total jobs is third highest in the nation. It is larger than even Virginia, and only surpassed by D.C. and Hawaii. The federal share was much higher in the early 1990s, when a defense downsizing sent federal employment down.
  • Federal employment is on the rise, while private sector hiring is slumping. Civilian federal government makes up 7.6% of the Maryland economy, the highest for all the states except for D.C.
  • High federal employment, particularly in professional fields, raises the educational level of the state, increasing the number of people with college and advanced degrees, a fact often touted by economic development officials. A cutback would likely produce outmigration of the highly educated, reducing public school achievement.
The vulnerability was mirrored in a Department of Legislative Services (DLS) presentation to the Senate Budget and Taxation Committee on July 26.  DLS concluded that even if the United States does not default and there is no federal credit downgrade, Maryland’s credit rating could still be challenged if there are significant federal deficit reductions.
MACo has been holding discussions with county budget officers, finance officers, and financial advisors and will continue to monitor the situation.  If a federal rating downgrade occurs, any State and county downgrades would likely happen 5 to 10 days after the federal downgrade.

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