State Actions Could Trigger Downgrade in Counties’ Credit Rating

In its “Weekly Credit Outlook: US Public Finance Edition,” Moody’s Investor Service reports that the funding reductions in the “doomsday” budget and the new Maintenance of Effort (MOE) requirements could contribute to a downgrade in credit ratings for local governments since they would have much more difficulty balancing their budgets.  The report summarizes the “doomsday” cuts and some of the new MOE requirements, in particular the change that would allow the state to withhold income tax revenues should a county not meet its MOE funding level. From the report (beginning on page 8):

The cuts, on average, are only 1.7% of county’s budgets, but new state legislation approved by the governor on April 10 restricting local governments’ ability to reduce their education spending exacerbates the financial effect. The legislation prescribes new maintenance of effort (MOE) requirements that force local governments to provide funding for K-12 education at equal or higher levels than the local per-pupil funding provided in the prior year. If a local government does not meet its MOE requirement, the state now has the right to withhold income tax revenues, which would then be forwarded directly to local school boards.  In rare circumstances, local governments can qualify for an MOE waiver, or be permitted to raise property tax levies above locally imposed limits for educational funding.

Prior to the passage of this legislation, if a local government did not meet the MOE requirement, the state could fine the local school board. This provided the local governments with additional financial flexibility if they chose not to meet the MOE, as only the educational portion of their budget would be penalized.

MACo raised concerns with this new state authority known as the “Assurance” provisions in its oral and written comments to the General Assembly on MOE.  From MACo’s letter:

Counties are also gravely concerned that these revenues will be deemed dramatically less secure by bond rating agencies once they are opened to state redirection. The federal budget and debt situation has already placed many counties on credit watch because of their reliance on federal dollars.  Losing control over both revenues and expenditures will surely further affect the bond ratings of every county.

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