'Negative outlook' cast on Baltimore Moody's description due to tax base loss, middle-class flight

Credit rating unaffected

Inability to expand budget reserve, add jobs also are concerns

March 24, 1998|By Kevin L. McQuaid | Kevin L. McQuaid,SUN STAFF

Confronted with a steady decline in the city's tax base and population of middle-class residents, one of the nation's top municipal bond-rating agencies is casting a "negative outlook" on Baltimore's economic future.

While Moody's Investors Service Inc.'s description -- part of an annual review scheduled to be released Friday -- will not affect the city's credit rating, the firm's characterization represents a symbolic blow, as well as concern over Baltimore' fiscal underpinnings.

Moody's is so concerned about the city's financial foundation, in fact, that it even considered placing Baltimore under a "credit watch" for the first time in its history. The ratings company is likely to defer any decision on the city's credit designation until next year, however.

"We do have a negative outlook for the city's general obligation bond rating," said John Moore, a Moody's assistant vice president. "We're looking at a number of economic indicators, and we see that things are changing. There's been moderation in the tax base, a steady stream of population losses, and unemployment levels remain relatively high."

Moody's, together with Standard & Poor's Corp. the largest firms that evaluate the creditworthiness of government bonds and securities, also raises red flags over Baltimore's inability to generate increases in its property tax revenue base, expand its budgetary reserve fund and be a center for new jobs.

Over the past several years, Moody's contends, the city has become more and more reliant on the state for help with its budget.

Moody's report on the city's economic status comes as the city tries to maintain its image as a vital urban area in the midst of a renaissance, with new developments such as the $151 million expansion of the Baltimore Convention Center; improved public housing; and business retention and attraction.

But even city officials acknowledge that residents' migration to the suburbs, a loss in total tax dollars collected, the city's slow crawl out of an early 1990s recession and shifts in the city's job base have taken a toll.

"The primary reasons for the negative outlook are all things we know about and are working hard to turn around," said Clint Coleman, a spokesman for Mayor Kurt L. Schmoke. "But we're very concerned and we're going to redouble our efforts to change the conditions that have led them to be less optimistic about our future."

Most notably, Baltimore's population dipped to roughly 675,000 in the latest census count, the lowest level in decades, while a budget of $2.4 billion has been strained in maintaining essential services. Moody's also considers the city's $8 million reserve fund to be inadequate.

Ultimately, if the city fails to improve, Moody's could downgrade Baltimore's A1 general obligation bond rating, Moore warned.

A lower bond rating would cost the city hundreds of thousands of dollars in increased interest expense when issuing new debt, and possibly cause bond buyers to steer toward safer investments. In its 1999 fiscal year, for instance, the city plans to sell roughly $25 million in bonds.

In Moody's credit rankings, an A rating is the third best rating category, behind Aaa and Aa, and bonds possessing an A rating have "many favorable investment attributes." An A1 rated bond is considered a slightly better investment than an A bond, and an A2 rating is slightly worse than A.

By contrast, bonds ranked lower than Baa are considered less than investment-grade, and are also known as "junk" bonds.

By comparison, Moody's rates Baltimore County's debt as Aaa, while Philadelphia carries a Baa rating; Detroit a Baa2 rating; and Cleveland an A2 rating.

Moody's began issuing detailed reports along with its credit ratings about two years ago, in response to investor desire and competition.

The city's report is expected to be about 10 pages.

City officials hope to soften the views of Moody's analysts next month, when the two sides meet in New York to review the report.

"We're hopeful the meeting will lead to improvement in the negative outlook," Coleman said.

Specifically, Coleman said the city will show Moody's that both income tax and property tax revenue are rising, the number of new businesses moving to the city is increasing and population declines are slowing. He added that officials believe Baltimore is finally coming out of the recession, after lagging both the state and the nation.

Pub Date: 3/24/98

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