November 3, 2009

Maryland state debt high, moderate or low? Take your pick. Rating agencies are split

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By Len Lazarick
Len@MarylandReporter.com

Is the $8.8 billion in debt Maryland owes to bond holders high, moderate or low? Take your pick. One of the three national bond rating agencies agrees with you, yet they all give Maryland their highest, AAA rating.

That split by the bond raters has little effect on the average taxpayer, since the AAA ratings guarantee some of the lowest interest rates available. However it does puzzle the raters a little, and the “high” designation by Moody’s Investors Service causes some concern to state officials.

The Oct. 15 rating by Moody’s Investors Service says, “State debt levels relative to 50-state medians are high.” Moody’s ranks Maryland 12th for debt per capita and 18th for debt as a percentage of personal income.

Fitch Ratings analysis says the state’s debt burdent is moderate, “and its strong debt management remains a credit strength.”

And Standard and Poor ‘s “called the state’s debt “low, at $1,349 per capita and 2.8 percent of personal income.”

“Annual debt service, at 5.6 percent of revenues, is also low in our opinion,” the Standard and Poor’s rating reads.

Asked to explain the split in judgment Maria Coritsidis of Moody’s, who handles Maryland’s rating, said, “That’s interesting.”

“I don’t know if everyone labels state debt in the same way,” Coritsidis said. “We’re also including transportation bonds and GARVEEs.” Those are bonds based on future federal transportation funding used to help pay for the Intercounty Connector.

For Moody’s, she said the calculation is simple.

“We consistently include the same things for all the states,” Coritsidis said, divide it by the population and rank the states. “High” is above the median, and “low” is below.

But the numbers Moody’s comes up with are higher than the ones in the Standard and Poor’s analysis. Moody’s July ranking says Maryland has $1,507 in per capita debt, $158 higher than Standard and Poor’s.  The Moody’s calculation amounts to 3.3 percent of personal income, half a point higher than that of S&P’s.

Richard Marino, the S&P rater, said they simply follow their standard rating ratios, and couldn’t explain it further.

“I have had discussions with Moody’s about that,” Patricia Konrad, who heads the debt management division for the state treasurer, said of the high designation. Konrad acknowledges that as a state, “Maryland is on the higher end.”

“Maryland assumes a lot of responsibility for what is assumed by [local governments] in other states,” Konrad said. “Maryland issues a lot of debt on behalf of the schools throughout the state.”

She said the Department of Budget and Management estimates that about 60 percent of Maryland’s general obligation bonds – about $3.6 billion – go to schools.

In Pennsylvania, for instance, many of the bonds issued for school construction and renovation are issued at the local level, and don’t affect the state debt burden.

Konrad said Maryland looks more closely at debt service compared to the revenues coming in, since that indicates the state’s ability to pay bondholders, and “the revenue is controlled by the state.”

Douglas Offerman, who directed the Fitch analysis that determined Maryland’s debt is moderate, said personal income is an important measure of a state’s ability to pay because the U.S. Census Bureau monitors it for all states.

“Essentially it’s a measure of wealth,” Offerman said. “Maryland is a wealthier state.”

He also noted the state’s property tax, which brings in money designated entirely for paying off bonds.

Regardless of the language assessing the debt level, all three rating agencies praise Maryland’s management of its debt. They also specifically note the advantages of Maryland’s constitutional requirement that bonds be issued for only 15 years, not the 20 or 30 years permitted in other states. This means the debt is paid off faster, with lower overall interest.

“This policy increases debt service [interest and principal payments] as a percentage of revenues, but also quickly replenishes the state’s debt capacity and helps restrain growth in the outstanding balance,” says Moody’s analysis.