By Adam Pagnucco.
Moody’s has downgraded Prince George’s County from Aaa, its highest rating, to Aa1. The Washington Post has reported that Standard & Poor’s and Fitch are still assigning their highest ratings to Prince George’s. In recent months, Moody’s has downgraded bonds issued by the District of Columbia, the State of Maryland and the United States government.
In considering the new downgrade, let’s examine what Moody’s said about Prince George’s County in its ratings statement. Here are a few excerpts.
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The downgrade reflects fund balance and liquidity levels that are out of line with peers in the Aaa category. Recent reported declines in reserves will be restored as capital projects are reimbursed but will remain materially below the national Aaa median. The county’s strong economy also faces uncertainty from federal employment contraction, presenting risk to its budget and fiscal position in the next year and beyond…
The Aa1 issuer rating reflects the county’s very large and dynamic local economy with a pipeline of ongoing redevelopment projects in progress. The new economic development is helping to offset the potential loss of large projects such as the new FBI headquarters. The county has elevated exposure to the federal government, with around 9% of the workforce classified as federal workers and several large facilities including Joint Base Andrews Naval Air Facility Washington, the Internal Revenue Service (IRS), and the Census Bureau some of which are vulnerable to employment contraction. So far, however, the county has seen minimal data suggesting negative consequences from either job contraction or policy shifts. The county is also home to the University of Maryland’s flagship campus with around 40,000 students. Overall job creation has remained favorable over the past year, and unemployment at 3.5% remains below the nation and modestly above the state’s 3.2% rate. Resident income and wealth levels are above national levels.
The county’s reserves will remain stable at 2024 levels of around 22-24% of revenues through fiscal 2026 due to cost containment measures and increase in revenues. Despite expected stability in operations, reserves will remain below the Aa median of 33%. The proposed 2026 budget is balanced with no use of fund balance. Fiscal 2025 operations should be flat year-over-year due to revenues outperforming and spending coming in under budget. A large tranche of loan proceeds has already been received in 2025 for capital projects and will bring balance sheet cash back to historical levels.
Finally, the issuer rating reflects a moderately above-average leverage profile that is expected to remain stable as the county progresses its formal five-year capital program.
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So this is a mix of concerns about federal government actions (which the county government does not control) and the county’s reserve levels (which it does). The message from Moody’s to Prince George’s is: increase your reserves. That’s easier said than done if a recession is approaching.
What does this say about MoCo? Back in February, Moody’s reaffirmed MoCo’s highest Aaa rating with a stable outlook. (Moody’s had assigned a negative outlook to Prince George’s a year ago.) In its February statement, Moody’s praised MoCo’s “extremely strong governance team (as evidenced by its G-1 ESG score)” and said this about reserves: “Its 2024 reserve position of 28% of revenues is a record high and was generated through conservative budgeting and strong revenue performance… However, included in these projections are plans to bring down reserves to its formal policies of totaling around 10% of revenues (based on county calculations).”
Two things have changed since then. First, there has been the Trump administration’s assault on the federal government, which has contributed strongly to the downgrades of D.C., Maryland and Prince George’s. Second, there was the county council’s decision to divert retiree health care prefunding to operating expenses, something that Moody’s has frowned upon in the past. Will those things sink MoCo’s bond rating? Will Moody’s adopt a negative outlook before changing the bond rating, as it did with Prince George’s? Or will Moody’s hold its nose about retiree health care maneuvers and leave us alone?
We’ll find out soon.