We've made much of the question of Durham's preservation of its AAA bond rating, a matter that's attracted arguably outsized attention due to the contentious nature of this year's budget debates.
For those playing catch up: In a nutshell, a 4-3 coalition led by Mayor Bill Bell held the line on a 54-cent City property tax valuation, despite warnings from the opposition that doing so would keep Durham's budgeted unrestricted fund balance at 11.1% for the year, instead of the 12% floor that rating agencies have expected as a firm policy. That firm policy, in turn, helps make Durham one of just 20 cities nationwide with AAA bond ratings from all three major agencies.
The proponents of the lower property tax rate, on the other hand, argued that Durham had absorbed just about all the tax increase it could stand this year, given the revaluation's impact on collections, and that Durham has usually outpaced its projected tax collections, anyway -- meaning that an 11.1% budgeted fund balance level would probably translate into 12% or more at year's end.
Besides, the proponents argued, this was just another reason to keep the City Council and not the city manager in the position of making decisions on fairly small contract amounts. That way, according to one elected official who spoke to BCR on the matter, the City Council could keep a close eye on expenses and nip them in the bud mid-year if spending was so high as to imperil the 12% level.
Well, Durham's chance at bat on the AAA bond rating came soon, given the issuance in almost $60 million in general obligation bonds this month. We looked at Fitch's AAA rating advice last week; S&P also weighed in, as has Moody's now.
The City wasted no time in putting out a press release heralding the AAA maintenance, noting as an example Moody's decision to re-rate Durham at the top borrowing level:
Finally, Moody’s Investors Service re-affirmed their ‘AAA’ rating the city's healthy economic position, including a sizeable tax base and diverse local economy supported in part by a stable institutional presence.
Well, we had a chance to read through Moody's research opinion last week, and indeed, the outcomes does at the most general level support the 54-cent proponents' claim that the AAA rating could be maintained even with a lower tax rate.
Yet our reading of the Moody's opinion underscores a more worrisome note: that the agency sees the recent use of unrestricted funds as a "deviat[ion] from the city's recent practice" that "may introduce negative rating pressure" down the road.
As the Durham press release suggests, Moody's does in fact talk about the strength of the RTP region and the presence of universities in "anchoring" the "robust local economy," both very positive factors. The city's tax base valuation is up 80% since 2000, they note, between annexations and two reassessments in the period. The city's unemployment rate is below average, and wealth levels are strong.
At the same time, the population is up 18% since the beginning of the decade, and downtown redevelopment reflects hundreds of millions of dollars in successful reinvestment.
Yet the Moody's report goes beyond the press-release sunshine. Its second analytical section makes that clear with its subhead: "Fiscal 2007 Maintains Trend of Financial Recovery; Maintenance of Healthy Reserves in Line With Policy Is Key to Credit Quality."
Hmmm -- that's ominous. The second sentence of the section leaves no doubt that Moody's is watching: "By City Council adoption, the General Fund is required to maintain undesignated fund balance equivalent to a minimum 12% of the subsequent year's budget appropriations, excluding debt service and transfers to other funds."
In FY 2002 and 2003, Moody's note, the City -- fighting a recession and state budget reductions -- dipped into the general fund balance to fund ongoing operations, an action Moody's notes is "a practice inconsistent with the Aaa rating."
I wonder if Moody's was paying attention to the FY 2008 budget? Looks like they were: the rating agency notes that the decision to designate $4.5 million in end-of-year fund equity this year towards the FY09 budget reduces the balance to 9.5% of FY08 revenues, and 11.1% of FY09 appropriations, which represents a savings level below the 12% floor.
The first point, which has been underexamined in this whole debate, is important: the decision to take money out of this year's fund balance statement and spend it in '09 brings the city over one-sixth below the level set by policy. To say nothing, that is, of next year's projected 0.9% ending deficit.
City officials, Moody's notes, expect that "additional accruals" may be recognized by the time FY08 closes to actually bring the fund balance up to expected levels. But it's clear that the success of this outcome, and especially the FY09 outcome, essentially depends on Durham leaders getting more revenue than they expect -- or spending less than budgeted.
In the latter case of which, of course, the whole debate becomes a shell game. Promise spending on programs to appease vocal members of the community; promise a tax "ceiling" to please influential PACs; then underspend to meet both goals. Clever.
Perhaps a bit too clever for Moody's, which is very clear as to what it thinks about this approach to the budget (emphasis added):
The failure to comply with formal fiscal policies deviates from the city's recent practice and Moody's believes that non-compliance with policy requirements may introduce negative rating pressure. Moving forward, rating reviews will factor the city's willingness and ability to comply with all adopted financial and other policies, as well as to grow reserves in step with budget, thereby maintaining a healthy financial position.
Is Moody's right to criticize this year's decision? Is it wrong? Should it follow the lead Mayor Bell asked when he reminded the community that he'd been an elected official for a quarter-century, had the experience, knew what he was doing with the fund balance?
Who cares? The reality of rating agencies is that reality doesn't matter. The perceptions and opinions of analysts do, as those lead to ratings, and those ratings lead directly to what yield the City has to offer on its financial issues.
In other words, you keep the rating agencies happy or you pay more -- bottom line, no ifs, ands or buts.
Durham made it through in the clear this year. But Moody's language leaves no doubt in this observer's mind that whether or not careful spending by the City manages to bring the actual fund balance back to 12% by years' end, this agency at least wants to see Durham keep its money plan where its written policy's mouth is.
Gee...Why would we be wary of sacrificing our fiscal strengths in the middle of a RECESSION? It's not like it's hard to get financing. Ask anyone trying to build right now.
Posted by: anon | July 22, 2008 at 09:09 AM