County sells bonds at lower rate Rating at Moody's declines to AA

June 30, 1993|By John Rivera | John Rivera,Staff Writer

Even though a New York agency lowered Anne Arundel County's bond rating because of the property tax cap passed last year, the county sold $56 million worth of bonds yesterday at a lower interest rate than it received the last time it went to the bond market in May 1992.

The county sold the bonds to the lowest of three bidders, Shearson Lehman Bros., at an interest rate of 4.98 percent. On May 5, 1992, the county sold $16 million worth of bonds to Alex Brown & Sons at a rate of 5.605 percent.

"It's a good county, good credit, and they got a good rate," said Gerard Baker, the Shearson Lehman Bros. broker who completed the sale.

The sluggish economy also helped, he added. "It's just a function of low interest rates," he said.

The lower interest rate means the county pays less to borrow the money for projects such as roads, bridges, sewers and water lines, and doesn't have to raise as much from taxpayers to cover the cost.

On Monday, the county received the bad news that Moody's Investor's Service, one of the largest municipal credit-rating agencies, gave the bonds that were offered yesterday a "AA" rating, down a notch from the "AA1" rating that the county's bonds received previously.

The credit rating from two other agencies, Standard & Poor's Corp. and Fitch's Investor's Service, remained unchanged at AA+, just one notch below the highest AAA rating.

A high credit rating is important to municipalities that sell bonds to pay for construction projects because it generally leads to lower interest rates.

A Moody's analyst said yesterday that his agency did not downgrade the county's rating, but gave it a new rating on what it considered a new type of bond.

Bonds issued before the tax cap are considered general obligation, unlimited tax funds, because the county has an unlimited ability to raise property taxes to cover the bonds. Those earlier bonds will retain the AA1 rating.

But the bonds issued after the tax cap -- which limits the yearly increase in total revenue the county can collect to the rate of inflation or 4.5 percent -- will carry the lower AA rating. Moody's considers these a different type of bond, with a "limited tax" pledge.

This means that "the security on the new debt is not as strong as the security on the old debt," explained Dennis Porcaro, a senior analyst at Moody's.

Despite the drop in its rating, Anne Arundel still compares favorably with most of its neighbors. Baltimore County has the highest AAA rating from Moody's; Howard County has a AA1 rating; Frederick and Harford counties share the AA rating; and Baltimore has a lower A1 rating.

The investors who bid on the county's bonds yesterday said Anne Arundel County's lower rating didn't make any difference in the interest rate it received.

"It just wouldn't affect it. [The rating change] is too incremental. It wasn't really a big move," said Mr. Baker of Shearson Lehman Bros.

Tom Sadler, of Alex Brown & Sons, which came in second in the bidding, agreed that the lower rating did not affect his offer. "I don't think anyone in the bond community feels that the creditworthiness of Anne Arundel County has changed at all," he said.

The three bids ranged from the winning 4.98 percent to a high of 4.99 percent.

County officials are worried nonetheless about the lower bond rating and what it could mean for the county's future financial health, especially because they believe the adverse effects of the tax cap won't be felt for several years.

The rating agencies "have to take the long view," said Budget Officer Steven Welkos. "If they were rating the ability of the county to pay the interest and principal [on its debt] next year, I don't think there would have been any change in the rating."

But, he said, "as the years go on and the rating agencies sense we're in even worse strain because of the tax cap, it could have more of a negative impact on the credit rating."

Robert Schaeffer, president of the Anne Arundel Taxpayers Association and author of the tax cap, said the bond rating is "nothing to worry about" because the county doesn't "spend that much on capital projects."

Last month, the County Council approved a $100 million capital budget for fiscal 1994.

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