By Adam Pagnucco.
Regular readers know I often criticize County Executive Marc Elrich’s performance in office. (No, I am not going to follow that statement with dozens of hyperlinks to back it up.) But I will give him credit for this: during his tenure as executive, the county has done a good job of limiting the growth in the county’s general obligation debt. Now he wants to undo this good work in his new capital budget. Why?
First, a bit of background. The largest revenue source for the county’s Capital Improvements Program (CIP), which is its capital budget, is proceeds from general obligation (GO) bonds. These bonds are backed by the full faith and credit of the county. Since the 1970s, the county’s GO bonds have been rated AAA by all three major Wall Street credit agencies. As a result, the county enjoys low interest rates on its debt, a boon to taxpayers.
Bond proceeds are not free money. They are paid off by debt service, which is included in the operating budget and competes with other operating spending (like schools and public safety). In the FY26 approved operating budget, the county’s debt service amount ($473 million) exceeded its combined funding for technology, state’s attorney, sheriff, libraries, recreation, housing, environmental protection, transportation, consumer protection, emergency management and economic development. In other words, debt service is BIG. But let’s remember: the county’s capital budget is also big and currently totals about a billion dollars a year.
The Great Recession was a seminal event in county history and I often revisit it. So it is with the capital budget and debt service. That recession devastated the county’s operating budget, a story I retold in recounting former County Executive Ike Leggett’s herculean efforts to deal with it. But the recession also provided an opportunity: historically low interest rates. Leggett and the county council of that time exploited that opportunity by dramatically expanding GO bond issuances, thereby pumping up the county’s capital budget. But over time, the ramped up borrowing pushed up debt service. So in his third and last term, Leggett dialed back the growth in GO bonds. Elrich and the last two councils have continued that policy to the benefit of taxpayers.
Let’s look at that history with two charts.
First, the chart below shows the volume of GO bonds contained in every capital budget going back to the FY05-10 budget.
Look at that big ramp up during the Great Recession followed by a slow and steady decline. That’s the graphic depiction of the story I related above. Also note the huge spike in Elrich’s newest recommended capital budget, a topic we will return to below.
Now let’s look at the county’s debt service spending since FY04.
Debt service soared during and after the Great Recession, but its growth has tapered off since. Here is the average annual growth in debt service during the last five terms of our county executives.
Leggett Term 1: 4.3%
Leggett Term 2: 7.4%
Leggett Term 3: 5.4%
Elrich Term 1: 1.7%
Elrich Term 2: 1.5%
Note: Elrich’s second term includes his first three operating budgets. His fourth is due this coming March 15.
See the slower growth in debt service? Yes, I can hear the county council members saying, “Hey we did that too!” Sure, guys let’s spread the love – while it lasts. The result of slower growth in debt service is more money available to hire and pay teachers, cops, firefighters, social workers and all the other folks who provide county services.
But now let’s go back to that first chart, the one showing GO bonds in capital budgets. Look at that huge spike in Elrich’s recommended FY27-32 capital budget. He wants to issue $2.4 billion of GO bonds over the next six years. That would be the highest amount ever in any MoCo capital budget.
Why does he want to do that? He is pretty open about the reasons in his budget brief: he wants to spend more money. Three areas account for most of the extra capital spending: MCPS (which would get a 22% increase over the last capital budget, although not everything it wants), transportation (a 25% increase) and public safety (a 19% increase). Elrich doesn’t have the money to pay for this from natural revenue growth, so he wants to borrow more.
In a recent post, I noted that rent control has damaged impact tax receipts, which was once a major source of revenue for the capital budget. Elrich, a huge rent control supporter, will never admit this. But to be fair, that one factor alone doesn’t explain why Elrich wants to borrow so much more. The biggest single factor is that he wants an 11% increase over the prior capital budget, and he wants it at a time when county revenues have tanked. In the short term, more borrowing is the only way to accomplish this.
Let’s revisit the lessons of the Great Recession. More borrowing is followed by more debt service. And debt service is a mandatory expenditure in the county budget. So soaring debt service will squeeze spending on schools, public safety and everything else, eventually leading to pressure for tax hikes.
The county council should consider that as it evaluates Elrich’s capital budget.