Rockville's Bond Rating is on Moody's Watch List

Rockville is taking a wait-and-see approach after a bond rating agency said it is monitoring the city’s top credit rating, a sign that municipal governments are not immune from fallout from the recent federal debt debate. 

“Like everyone else we’re waiting and watching to see what happens,” said Gavin Cohen, the city’s finance director. “Our fundamentals are financially sound.”

Moody’s, one of the country’s three major bond rating agencies, placed Rockville and more than 300 other state and local government entities on a watch list late last month.

A week ago, Moody’s confirmed the city’s triple-A bond rating but assigned the city and the other state and local government entities a negative outlook based on their indirect link to the U.S. government.

The rating, which is analogous to an individual’s credit rating, is an assessment of the government’s ability to repay its debt to bond holders, with a triple-A rating being the most secure.

Governments with lower ratings pay higher interest rates to investors, making the money borrowed for roads and buildings more costly to taxpayers.

For Rockville, a downgraded rating could make it more costly to finance water and sewer upgrades and to defease debt on the parking garages at Rockville Town Square as part of the city’s move to turn management of the garages over to Federal Realty Investment Trust, Cohen said.

“There will be a practical cost to us of a downgrade and of the interest cost going up,” he said.

A downgrade would not affect projects that are already underway such as , the Senior Center fitness and exercise facility addition and expansion of the public works and parks maintenance complex on Gude Drive, Cohen said.

On Friday, in the wake of the debt ceiling debate in Congress, Standard & Poor’s—another bond rating agency—downgraded the U.S.’s top bond rating for the first time in history.

With Congressional action removing the risk that the U.S. will default on its debt in the near future, Moody’s chose to confirm the country’s top rating, but gave it a negative outlook.

Maryland was one of five states, along with New Mexico, South Carolina, Tennessee and Virginia, to also have its triple-A rating confirmed by Moody’s.

Also having their triple-A rating confirmed along with Rockville are Baltimore, Harford, Howard, Montgomery and Prince George’s counties; the City of Bowie and the Washington Suburban Sanitary District.

At a City Council meeting on July 18, council members asked what the then-ongoing debt ceiling debate in Congress could mean for Rockville.

With financial analysts uncertain how the debt debate would shake out, Cohen said at the time that it was unclear what the consequences could be.

James Cumbie, the city’s bond counsel, told the council that he hoped the markets would not be so volatile when the city holds its sales on the garage and water and sewer bonds in early fall.

The State of Maryland delayed selling $200 million in bonds on July 27 as Congress debated the debt ceiling, “because the sale involves a debt refinancing that requires the purchase of U.S. securities to repay old Maryland bonds,” the Baltimore Business Journal reported.

Rockville is unlikely to take the same tack, at least with the garage bonds, Cohen said.

The agreement to lease the parking garages will go before the City Council on Monday. Under the agreement, the city must sell bonds sufficient enough to cover the debt on the garages within 90 days of the lease agreement, Cohen said.

“Our ability to defer that part may be limited,” he said.

Any downgrade would not be because of a change in the city’s fiscal standing, Cohen said.

The Moody’s analysis considers whether borrowers have direct links to the federal government. Such is the case with Maryland, but not with Rockville, Cohen said.

“I’d make the strong argument that we’re not reliant directly on the federal government, therefore our rating should not be impacted,” he said.

But Cohen said he is watching to see whether the federal government downgrade will have a trickle-down effect.

“What I’m waiting to see is if they automatically downgrade to everyone if they downgrade the state,” he said.

A Moody’s report issued Wednesday noted that, unlike the federal government, municipalities do not typically use debt to cover their operating costs.

Most municipal governments are insulated from market volatility, but could face higher costs to borrow, the report said.

Municipal governments could weather a period when it becomes tougher to borrow by issuing bonds at less favorable rates, tapping budget reserves or securing bank loans, Timothy Blake, Moody's managing director and the author of the report, said in a news release. But such tactics are unlikely because most government revenues have not recovered to pre-recession levels, he said.

"Most municipal issuers are somewhat weaker than they were prior to the last major market disruption," Blake said. "This is why some may face significant stress if hostile market conditions emerge."

Bryan P. Sears contributed to this report.