By Adam Pagnucco.
Moody’s Ratings has downgraded the District of Columbia’s bond rating from Aaa (its highest level) to Aa1. The move should inspire fear in state and local government officials across the Washington region.
First, the downgrade is not a criticism of D.C. Mayor Muriel Bowser or the D.C. City Council. Here is the credit agency’s rationale for the downgrade:
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This action concludes our review for possible downgrade initiated on March 7, 2025 because of the mounting negative pressure that cuts to federal spending, workforce and real estate are having on the District’s economy and finances.
The downgrade reflects substantial cuts to the federal workforce estimated to decline by 40,000 workers or 21% over the next four years, which will erode the stability that the institutional presence of the federal government has historically had on the District’s economy. Economic growth in the nation’s capital will lag the region and the US because of the outsized impact of federal workforce cuts.
The negative outlook reflects the increased likelihood of further federal spending and workforce cuts and the District’s declining commercial real estate market as well as the high degree of uncertainty regarding federal government policy changes, notably reductions to the federal share of Medicaid funding.
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It’s noteworthy that the downgrade affected not only D.C.’s general obligation bonds but also many of its revenue bonds. D.C., Montgomery County and many other jurisdictions have multiple bond issues, many of which are backed by specific revenue streams, so a downgrade of one issue does not necessarily affect others. But this time Moody’s went after a bunch of them.
When Moody’s discusses pressures from “federal spending, workforce and real estate,” it could be referring to any Washington area jurisdiction. D.C. has the most exposure to those things, especially downtown real estate, which was hit hard by the pandemic. But all of us are vulnerable to deterioration in those factors.
On March 10, Moody’s issued a report on the State of Maryland citing many of the same factors that it later cited to downgrade D.C. That report prompted a warning by Senate President Bill Ferguson of a “Maryland recession.” The report made this specific mention of Montgomery County.
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As indicated in Exhibit 3, exposure to federal government layoffs is concentrated in jurisdictions closest to the federal district, including Prince George’s County (Aaa negative), Charles County (Aaa stable) and St. Mary’s County (Aa1). Montgomery County (Aaa stable) is adjacent to the capital district and also has a very large number of federal facilities, including the headquarters of NOAA, the NIH, and the US Department of Energy, in addition to containing offices for a range of departments and agencies such as the Social Security Administration and Department of Commerce. Charles and St. Mary’s counties’ economies are driven by two large navy bases, while Prince George’s is home to Joint Base Andrews Naval Air Facility. Counties in the state generate the overwhelming majority of their operating revenue from property and income taxes. Federal contraction will squeeze both revenue streams, potentially pressuring county budgets.
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After reading the state report, I emailed its authors at Moody’s requesting comment specifically on Montgomery County. They did not respond.
So the truth is, anyone could be next up for a downgrade. Us. The State of Maryland. Any of our neighbors. A downgrade could cause any of us to pay higher interest on our bonds. It could also cause the other ratings agencies (Fitch and Standard and Poor’s) to downgrade us too, leading to even higher interest rates. And the political and symbolic implications would be significant, especially in MoCo, which has had a AAA bond rating from all three major credit agencies since the 1970s. What executive or council wants to be the first to lose the bond rating?
How vulnerable is MoCo? That’s hard to say but I suspect we won’t be the next one to fall after D.C. Yes, we have had a non-competitive economy for a long time and, as Moody’s has noted, we are quite vulnerable to federal cutbacks. But we also have some assets that credit agencies like. For example, we have surpassed our reserve target of 10% of revenues for several years in a row, our pension fund usually has a 90%+ funding ratio, and our elected officials rarely hesitate to raise taxes. Bond agencies like tax hikes because they ensure that defaults are avoided.
So what should MoCo’s leaders do about this? It’s striking in my conversations with county government sources that so many of them expect a midyear savings plan in the fall. We had many of those in the years during and after the Great Recession. The usual format is for the county executive to send a memo to the council describing anticipated revenue and/or expenditure problems and recommending a list of cuts. The council debates them, refusing some and perhaps adding others, and ultimately adopts a series of trims. That would be a culture change for this particular council, which has been accustomed to spending from reserves far more often than their pre-pandemic predecessors.
If county leaders expect to trim spending in the fall, it would be very foolish to add lots of spending in the spring. If less is added, there will be less to cut. The county executive’s recommended budget calls for a 7.4% all-agency spending increase of $525 million. In a prior post, I explained how the council could easily do without the executive’s property tax hike and gigantic fee hike, still fund MCPS’s budget and have an overall budget increase exceeding inflation.
Democratic Howard County Executive Calvin Ball took a much tougher approach by applying an absolute spending cut. MoCo politicians react to spending cuts like they react to cockroaches in the bathtub, but at minimum, they could settle for a 3-4% overall spending increase rather than the executive’s 7.4%. As for the executive’s recommended income tax increase, the council must beware of the ongoing out-migration of taxpayers, especially high-earning ones, that I have documented in my Maryland Wealth Drain series. Raising taxes now would not only make it harder to raise taxes later, when problems could become more severe, it would also trade short-term relief for long-term economic headaches. MoCo has done enough of that.
Of course, the council could just ignore Moody’s, Trump and the extraordinary income tax hit just perpetrated by the state. If they do that and just keep up their spending, then MoCo’s bond rating could indeed be the next to fall.