MCEA: No Need for Furloughs

MCEA has followed up its joint letter with the other school unions with a new one laying out its position: furloughs are not necessary. Here is the union’s case.

MCEA points to disagreements over the size of the county’s reserve, or “rainy day fund,” as the reason for furloughs. Historically, the county has set aside 6% of its general fund as a reserve in order to pay for unforeseen expenses or make up for revenue shortfalls. In FY 2010, the county reduced its reserve percentage to 5% and the County Executive originally proposed keeping it at 5% for FY 2011 and boosting it back to 6% in FY 2012. But then the credit ratings agencies issued warnings about the county’s AAA bond rating, and the Executive modified his proposal to set the reserve at 6% in FY 2011. The County Council seems likely to concur. The accelerated restoration of the reserve necessitates more cuts, thus creating a need for furloughs.

The union uses the actual text of the credit rating agencies’ statements to argue that none of them are explicitly calling for a 6% reserve in FY 2011. MCEA calls for setting the reserve at 5.6% in FY 2011 and 6% in FY 2012 and claims that such a phased-in restoration would mitigate the need for furloughs.

This raises a number of questions.

1. Would a 5.6% reserve be adequate to deal with potential revenue writedowns over the next few months?

2. Would the credit ratings agencies truly approve of such a plan?

3. Furloughs are a short-term maneuver. How can the county structure its budget so that they are not proposed every year? Prince George’s County is preparing for its third consecutive year of furloughs. Do we want to wind up like them?

4. Given the raging tension between the County Council and MCPS, is anyone in Rockville in a mood to negotiate with MCEA?

Following is MCEA’s new letter.

#####

May 11, 2010

Nancy Floreen, President
Montgomery County Council
100 Maryland Avenue
Rockville MD 20850

RE: Montgomery County’s Credit Rating

Dear Ms. Floreen,

During this spring’s budget discussions there has been a great deal of talk about the ratings given to Montgomery County’ debt by the credit rating agencies on Wall Street. However we believe that a careful reading of the most recent assessments by the credit rating agencies does not paint as dire a picture as many seem to be asserting.

As you know, the Council approved a 5% reserve for the current FY10 year. The County Executive initially proposed maintaining the reserve at 5% for FY11 and increasing it to 6% in FY12. Subsequently, the Council expressed its desire to achieve a 6% reserve level in FY11 and the County Executive modified his proposed budget to reflect that more rapid restoration of the reserve fund.

In order to achieve a 6% reserve in FY11, the proposed budget diverts $36.6 million away from the operating budget. Were the Council to accept the Executive’s initial proposal for a 5% reserve in FY11 – it would not be necessary to furlough county employees or impose additional cut in the school system budget.

This is a stark choice. County and school system employees are already sacrificing hundreds of millions of dollars in scheduled pay increases. Furloughs go beyond this pay freeze and actually reduce salaries – something that Montgomery County has never done. Taking such a drastic step in order to please the credit rating agencies on Wall Street should not be done lightly; and should not be done based on an over-estimation of the threat of a reduction in the county’ credit ratings.

MCEA has proposed increasing the county’s reserve fund from 5% in FY10, to 5.6% in FY11, and then to 6% in FY12 – in lieu of rapid return to a 6% reserve level in FY 11. Doing so would save the $15 million called for in savings from furloughs in the County Executive’s original budget and eliminate the need for furloughs.

Therefore, it is critical to have a thorough understanding of what the credit rating agencies are saying – and what they are not. A careful reading of the three most recent credit agency reports indicates that none of the three agencies specifically calls for a return to a 6% reserve in FY11.

1. Standard & Poor’s

On March 31, 2010 Standard & Poor’s affirmed its “AAA” long-term rating of Montgomery County’s General Obligation Debt, with a “stable” outlook. Most noteworthy is that Standard & Poor’ explicitly states that the reserve will be at 5% in FY11 and 6% in FY12. They go on to say that their rating reflects the County’s:

• “diversified, resilient and broad-based economy

• Very strong income levels, coupled with a strong employment base and relatively low unemployment

• Historically stable and diverse property tax base

• Strong and well-embedded financial management practices that have aided management in pro-actively addressing continued budget stresses and revenue shortfalls

• Commitment to restoring budget balance, as indicated by the significant expenditure reduction program implemented in the past few years

• Well-managed capital improvement program, coupled with clearly defined debt affordability parameters.”

They go on to say that the County’s “long-term strength should allow the county to weather a fairly significant weakening of its financial condition since fiscal year 2008.”

Therefore Standard & Poor’s does not expect, nor demand, a 6% reserve in FY11, and phasing in a restoration of a 6% reserve should not put the county’s credit rating at risk.

2. Moody’s

Moody’s does place Montgomery County on a “watch list” in its April 5, 2010 report. However there is nothing in the Moody’s report that indicates a requirement that the County return to a 6% reserve in FY11. What Moody’s does say is that “future rating reviews will factor:

• Management’s ability to mitigate the projected current year operating deficit…

• Steps taken in the 2011 budget to restore structurally balanced operations

• Development of a plan to restore financial flexibility to levels in keeping with the current rating category.”

This wording is significant. The County has taken a wide range of steps to mitigate the FY10 operating deficit. Moody’s expectation for FY11 is for a balanced operating budget. That will be achieved. Moody’s assessment relative to the reserve level is simply that a plan be developed to restore the reserve to the policy level of 6%. There is a clear distinction between their expectation for a balanced budget in FY11 and “development of a plan” on the reserve that does not have a rigid time frame. Later on they reference a “sustained” variance from the 6% as problematic. They do not state that failure to restore a 6% reserve in FY11 would be a problem.

There is another, more significant assessment in the Moody’s report that has been ignored in these discussions. Moody’s states,

“The council’s historical ability and willingness to override the charter tax limit when necessary has been a positive credit factor. However the constraints of the charter tax limit may challenge the General Fund to stabilize and replenish available reserves to the 6% target in the near term”…. “the sustained narrowing of financial flexibility away from historical levels may introduce negative pressure on the county’s credit profile.”

This point should not be overlooked or minimized. Moody’s is identifying the county’s charter tax cap as a primary threat to the county’ credit rating. It is disappointing that in all the discussion about the risks to the County’s credit rating, there has been a deafening silence about Moody’s pointed concern about the impact of the county’s tax cap on our credit rating. If the Council is indeed concerned about preserving our credit ratings, one would hope they would provide leadership to address the threat posed by the charter tax cap.

3. Fitch

The Fitch March 25, 2010 rating of Montgomery County’s General Obligation debt was AAA with a “Stable Outlook”. The Fitch report explicitly states that the reserve fund will be at 5% in FY11 and 6% in FY12. Fitch goes on to describe Montgomery County’s situation as follows:

“While reserves have declined, Montgomery County retains considerable flexibility to reverse a structural imbalance due in part to weakened revenues during the current recession. The rating encompasses the county’s stated expectation that it will restore reserves to policy level in FY12.”

In other words, Fitch explicitly says the reserves just need to be restored to 6% in FY12 – not in FY11.

Conclusion

We appreciate the need to protect the County’ credit ratings. However it is clear that none of the three credit rating agencies have said that it is necessary to immediately restore a 6% reserve in FY11 in order to do so. Quite the contrary, two of the three rating agencies maintained Montgomery County’s AAA General Obligation Bond ratings with the explicit understanding that the reserve fund would be only 5% in FY11; and the third only cautions about a “sustained” variance from the historical 6% level as posing a problem.

No one wants to put the County’s credit ratings at risk. However we hope that no one wants to furlough county employees, or make even deeper cuts in the school budget, if such drastic cutbacks are unnecessary. We urge the Council to approve a steady, multi-year restoration of the reserve fund to 5.6% in FY11 and then 6% in FY12) in order to avoid employee furloughs and deeper cuts to the school budget.

Sincerely,

Doug Prouty
MCEA President

cc: County Council
Board of Education
County Executive
Merle Cuttitta, President, SEIU Local 500
Rebecca Newman, President, MCAAP