How bonds work
Governments float bonds to raise large amounts of money for projects they otherwise couldn’t afford – much as people take out car loans or mortgages. Fulton County has gone into debt to make improvements to its jail and build new libraries, and each year it takes out a bridge loan to pay for countywide services until property taxes come due.
While individuals go through credit checks, governments turn to credit rating agencies – Standard & Poor’s, Moody’s, Fitch Ratings and Kroll Bond Ratings – to assign ratings based on their fiscal health. Investors demand higher interest rates if they expect a higher risk of default. The higher the rating, the lower the interest rate and the lower the cost to taxpayers to repay the bonds.
Ratings downgrades can increase a municipal government’s cost of refinancing or issuing debt by millions of dollars a year. Prices for previously-issued bonds can also drop, hurting bondholders and anyone whose retirement plan has money invested in the bonds.
The immediate impact of Fitch’s one-notch downgrade of Fulton County is likely to be limited. Fulton remains near the high end of Fitch’s ratings range of AAA to BBB.
The political battle over Fulton County’s governance could have an unintended consequence: higher borrowing costs in the future due to a downgrade of the county’s credit rating.
Fitch Ratings cut Fulton’s credit rating in part because of concern about House Bill 604 – awaiting Gov. Nathan Deal’s signature – which would prohibit the County Commission from raising taxes for two years and require a supermajority of commissioners to raise taxes after that.
The agency also cited concerns about a proposal to double the county’s property tax homestead exemption, which is on hold in the Senate until next year.
Both measures were part of a flurry of bills in the Legislature that Republican sponsors contended are needed to reform Fulton's inefficient county government. Fulton officials bitterly oppose the bills.
Fitch, which issued the downgrade Friday, said the tax-related legislation highlights “an uncomfortable degree of discord and absence of cooperation between and among various levels of elected officials and (county) management, and generally diminish the fiscal tools available” to balance the budget.
A Fitch executive said a veto of HB 604 alone would not change the agency’s decision.
The credit downgrade could mean Fulton will pay higher interest rates when it borrows money in the future.
Fulton Finance Director Patrick O’Connor said that likely will affect the second phase of a $275 million bond issue voters approved in 2008 to build eight new libraries and renovate and consolidate others. The county already has borrowed $167 million for the first phase and expects to borrow the rest in 12 to 18 months.
O’Connor said higher interest rates could boost the cost of library projects by millions — enough for the county to consider postponing or scrapping the second phase of library construction.
House Majority Whip Edward Lindsey, R-Atlanta, said Fulton’s credit problems are its own fault. He said the county has refused to downsize as cities incorporated and Fulton’s service area diminished.
“The county must begin to reduce the area in which it operates,” Lindsey said. “If they do that, I’m confident that the bond rating agencies will respond favorably.”
Democrats cited the credit downgrade as evidence that Republicans who support the tax proposals are trying to undermine Fulton County. Commission Chairman John Eaves urged Deal to veto HB 604.
“Unfortunately, the taxpayers of Fulton County must now pay the price for this discord and unreasonable desire to weaken our county,” Eaves said.
Deal must decide by May 7 whether to sign the bills. His intervention in DeKalb County’s school crisis aside, he’s long said he was uncomfortable with the state interfering with local matters.
Deal told The Atlanta Journal-Constitution that he’ll consider the ratings downgrade as he decides whether to sign the legislation.
“I will certainly take that into account,” he said. “I understand this is something they would look at since it reduces the revenue flow that a county might have for its bonds.”
South Fulton County Commissioner Bill Edwards, a Democrat, blamed the lesser credit rating on Republican interference. HB 604 limits the commission’s ability to raise the tax rate, even though it hasn’t done so since 1991.
“We’ve managed well, we’ve tightened our belts,” Edwards said. “It’s very important to understand, you can’t take away home rule. It’s not fair. That’s like Obama coming down here and saying, ‘I’m gonna do this and this and this. Forget ya’ll.’”
State Rep. Wendell Willard, R-Sandy Springs, said Fulton officials are using the credit downgrade to deflect the main issue.
“I hope (county commissioners) recognize that good management of money is going to be more important than what Fitch has to say about it,” he said.
Fitch reviewed Fulton’s fiscal health as the county prepares to borrow $200 million to tide it over until property tax revenue arrives in the fall — a routine move. The agency gave that short-term debt it’s top rating. But it downgraded existing long-term county debts from AA+ to AA or — in one case — from AA to AA-.
O’Connor said those are still good ratings. But he said Fitch is “sending a message to the county.”
Fitch Ratings Senior Director Mike Rinaldi attributed the downgrade to compounding financial instabilities and diminishing reserve funds. Fitch revised the county’s outlook from “stable” to “negative” in June.
Fitch noted that Fulton’s has cut 12 percent of its workforce and nearly $100 million from its general fund budget since 2008. But it has still relied heavily on reserves to to cover costs, including $30.8 million in 2012.
The agency is also wary of a $54 million budget shortfall – which the county plans to plug with reserve monies, Rinaldi said. At the end of 2011, Fulton had $128.6 million in reserves. At the end of this year, the county is expected to have about $48 million.
“Vetoing 604, in and of itself, will not impact the county’s credit rating in a positive manner,” Rinaldi said. “It is a combination of factors influencing the county’s credit profile.”
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