By Adam Pagnucco.
As first reported by Maryland Matters, Moody’s Investors Service, Inc. has downgraded Maryland’s general obligation bond ratings from Aaa, its highest rating, to Aa1. In two separate ratings statements, the agency downgraded a host of other bonds issued by the state as well.
You can read the statements at the links below. You may need to create an account with Moody’s to view them.
Moody’s Ratings downgrades Maryland’s issuer and GO ratings to Aa1; outlook revised to stable
Here are a few excerpts from the statements that provide rationales for the downgrades.
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The downgrade was driven by economic and financial underperformance compared to Aaa-rated states, which is expected to continue given the state’s heightened vulnerability to shifting federal policies and employment, and its elevated fixed costs…
Maryland’s Aa1 issuer rating reflects the state’s wealthy and diverse economy and proactive financial management practices including a well-established tax revenue forecasting process and strong capacity to impose midyear spending cuts. The state recently addressed a trend of overspending in various programs through a combination of tax increases and restraints on expenditures. These actions closed a budget gap although the need for further corrective steps may arise directly from federal funding cuts or the economic consequences of federal layoffs and other policy shifts, to which Maryland has a very high degree of exposure. The state’s financial reserves remain strong by its historical standards, although lower than those of Aaa-rated states…
The Aa1 rating on the Consolidated Transportation Bonds is linked to the state’s credit and supported by strong coverage of maximum annual debt service (MADS) equal to 6.7 times. The state has taken repeated steps to sustain and increase Transportation Trust Fund revenue, which includes pledged taxes on motor fuels, motor vehicle titles and short-term vehicle rental sales and a portion of the state’s corporate income tax receipts. For taxes on motor fuel (the largest source), the effects of stagnant fuel consumption should be offset by annual inflation indexing of the tax. The state enacted various revenue increases in both 2024 (including a transportation network company fee and an electric vehicle surcharge) and 2025 (a new tire fee, increased titling fees and allocation of increased capital gains tax revenue).
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My take: Moody’s dislikes Maryland’s “elevated fixed costs” – an apparent reference to the state’s Blueprint program for public schools – but seems more worried by cuts to federal government spending and employment. This is similar to the reason why Moody’s downgraded the District of Columbia’s bond ratings. Moody’s has expressed concern about Maryland’s federal vulnerability before so no one in state government is going to be surprised by this. The question now is who will be next?
I have previously expressed skepticism that MoCo’s head will be next on the chopping block. BUT. That was before the county council decided to raid OPEB to fund MCPS. Back in 2019, the county raided OPEB and Moody’s wrote this in response:
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On April 30, Montgomery County, MD (Aaa stable) lowered its contribution toward prefunding employee retiree healthcare benefits in order maintain progress toward its fiscal 2020 reserve target, the second consecutive year it has done so. The reduction in prefunding for retiree healthcare, also known as other post-employment benefits (OPEBs), is credit negative because the county will accumulate assets more slowly and thus carry higher unfunded liabilities. At the same time, the county’s past build-up of OPEB assets has provided it with budget flexibility to lower contributions in favor of hitting reserve targets. This flexibility would not be available if the county had no OPEB assets and was instead paying for these benefits directly from its budget, an approach called “pay-as-you-go” funding.
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What will Moody’s think of this new draw on OPEB juxtaposed with the federal weakness that caused it to downgrade D.C. and Maryland?
MoCo should be careful. So should the rest of the Washington region.