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Moody’s Gives Stern Warning To Annapolis

| March 13, 2011, 05:10 PM | 12 Comments

UPDATE: Updated information in [red]

As was expected, Annapolis City took a hit when [two of] the three Bond Rating Agencies downgraded the ratings. This move will certainly have a negative effect the city’s cost to obtain financing through the bond market.  The administration, including Mayor Cohen, City Manager Mallinoff, and Finance Director Miller have all put forth reassurances that the city is on the right track. However, Moody’s Investors Service has a different opinion.

In a March 4, 2011 opinion, Moody’s offers their rationale behind the downgraded ratings:

The bonds are secured by the city’s unlimited ad valorem tax pledge. Approximately $6 million of bond proceeds will provide new money financing for various capital projects. The remaining $32 million will be used to refund all or a portion of the city’s Series 1998, 2002, 2005, 2007 and 2009 Public Improvements Bonds. The refunding will extend overall maturity by 11 years and will provide approximately $17.8 million of cash flow savings through 2018, with the majority of savings taken during fiscal 2011, 2012, and 2013. The downgrade to Aa3 rating from Aa1 rating reflects the city’s rapid financial deterioration and weakened liquidity position driven by insufficient budget adjustments to offset revenue shortfalls throughout multiple funds and growing expenditures. Moody’s anticipates the city will be challenged to grow reserves and return to its formally strong liquidity position over the near-term. The rating is balanced against a manageable debt position and a sizeable and diverse tax base.

The negative outlook reflects Moody’s expectation that the city will continue to face difficulties in the implementation of budget adjustments, including revenue enhancements, that will result in a stabilization of the city’s declining financial position. In addition, the liquidity position may continue to face pressure over the near-term as the city attempts to return to structural balance and surplus operations.

The full document continues to detail both the positives and the negatives of the city financial situation. They do feel that the recent shakeup in the Finance Department is a good thing, but are not convinced that it will be as effective as projected.

This is exactly what many of us have been saying while the Mayor has claimed he has a “balanced budget”  that is “right sized”.

Moody’s analysis provides probably the best independent review we will get of our financial situation– and they have found serious current budget problems–not to mention that now all of our $86 million in bonds are downgraded an incredible two notches, affecting our cost of future borrowing.

–Trudy McFall, former candidate for Mayor

As the Mayor is preparing to make his State of the City address on Monday (7:30pm, Monday, March 14, 2011 at City Hall), this opinion surely should factor in the budget negotiations. The Mayor and the Council have been known to lock horns and we expect nothing less this budget season.

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About the Author - John Frenaye

John is the publisher and editor of Eye On Annapolis. As a resident and business owner in Anne Arundel County for nearly 25 years, he realized that there was something missing in terms of community news–and Eye On Annapolis was born in late spring 2009.

John’s background is in the travel industry as a business owner, industry speaker, and travel writer. In terms of blogging and social media, he cut his teeth with MSNBC.com.

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Comments (12)

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  1. Bob McWilliams says:

    Moyer consistently lambasted anyone who challenged the City’s financial condition. She said their bond rating was “proof” of her excellent financial management. As we can now see, that was pretty much like saying, “I can’t be out of money, I still have more checks left”.

  2. Let’s put this news into context.

    Yes, Moody’s evaluation of the City’s finances echoes the concerns raised by the other two ratings agencies, Standard and Poor’s and Fitch Ratings. Of the three agencies, yes, Moody’s took the most negative view on the City’s financial outlook. But the verdict on the City’s finances should not be rendered based on this perspective alone. Like in judging figure skating or diving, one’s standing is determined based on the average score.

    So how did all three ratings agencies grade us? As reported, Moody’s dropped the City to Aa3 – that agency’s fourth-highest rating. Fitch Rating dropped Annapolis’ rating from its highest mark (AAA) to its second-highest mark (AA+). Meanwhile, S&P maintained the City’s rating of AA, that agency’s third-highest mark.

    Mayor Cohen fully expected the City’s ratings to be downgraded because of the lack of reserves (http://bit.ly/dWPcd4). But, to be clear, these updated ratings remain at the premium level and, taken collectively, reflect not only the City’s relative financial strength but also the confidence in the City’s financial plan going ahead. Among the important steps taken: 1) The Mayor and City Council cut the FY11 budget by 13 percent; 2) last month, the Mayor and City Council passed a $36 million bond restructuring that will free up $17.8 million in cash over the next seven years to replenish the reserves and address pension and post-employee-retirement obligations.

    From S&P: “Management has taken the steps necessary to increase general fund reserves back to strong levels per the city’s policy despite operational and budgetary challenges that the city continues to face.”

    In regard to Ms. McFall’s comments, I would point readers to the press release I issued Friday on the City’s sale of $35,820,000 in bonds. Here are the highlights: The bonds sold more quickly – and at a lower interest — than expected. Here’s the link: http://bit.ly/dP6ma9

    Phill McGowan
    Public Information Officer
    City of Annapolis

  3. Bob McWilliams says:


    I appreciate your effort to put a happy face on things, but a downgrade is a downgrade, and there is a clear economic expense to that. We’re glad the $35,820,000 sold quickly, but how much lower would the interest rate have been without the downgrade, and how much will that now cost the Annapolis taxpayer over the life of a $36 million loan.

    I’m glad that steps are being taken, I think, to fix this mess, but don’t try to suggest the mess doesn’t exist. I know it’s all the rage these days to have our government say, “it could have been worse”, but that’s all getting a bit tiresome.

  4. Bill Kardash says:


    The Moody’s downgrade – two levels – is very troubling. But in reading their full-report, it seems they don’t have the true picture: for instance, they refer to “86 layoffs” (in 2010). As we both know, only 33 employees were let go … the balance of the 86 positions were “vacant”. I wonder if this was explained to the rating agencies? It appears the City wasn’t entirely forthcoming with Moody’s (all the rating agencies?) because about a dozen of the “33 eliminated positions” were brought back on the City’s payroll as a union concession shortly after lay-offs. And, of course, there have been other new hires since … I wonder what the true comparison of number of employees is between 2010 and 2011.

    Also, I notice a reference in the Moody’s report to “the City reports several large projects are in the review process that would increase the assessable base”. With all due respect, this is meaningless … until they are built and added to the tax rolls. That could be several years away. This could only have come from Mike Mallinoff who has touted this since last year. What is certain is the City has to learn to live within its CURRENT means.

  5. To address a few points:

    Bob, Regarding the bond downgrade and how that affects interest rates, the issue is not as cut and dried as it may seem. Yes, a bond rating has an impact on interest rates. The reputation of a municipality also factors into the equation as well as other considerations. (I would certainly love to have some financial professionals offer their perspective on this issue.) The bottom line is this, as I noted in the press release last week: The “all-in” interest rate of 4.19 that the City secured “compares favorably to high-quality credit sold at the same time.” In other words, the interest rate the City of Annapolis received was competitive with what the best municipalities from around the country received around the same period.

    Bill, Moody’s reference to 86 “layoffs” is, indeed, incorrect. Thirty-three people were laid off and dozens of additional positions were defunded. In the City’s presentation to the three ratings agencies in New York, we said: “$1 million saved in FY 2010 and $4 million in FY 2011 by not funding a total of 86 positions.” That statement is consistent with the City’s release announcing the layoffs and other reductions in March 2010 (http://bit.ly/glr3HP).

    Regarding the number of City employees, in FY 2009, the City funded 592 full-time positions; in FY 2010, that number was 594; in FY 2011, it is 537. (I pulled these numbers from the FY 2011 budget document, Page 83.)

    Lastly, while while four months in the current fiscal year remain, the City is demonstrating that it is living within its means. Through 67 percent of the budget year, the City has spent 62 percent of its budget (Manager’s Monthly Memo, March 2011: http://bit.ly/gpennW).

  6. Bob McWilliams says:


    You told me 16 “people” were dismissed and two were rehired. Why the difference with what you’re saying now?

  7. Bob McWilliams says:

    Also, how do you determine that people who were never hired represent a savings? Perhaps if you planned to hire thousands, you might save millions.

    With all due respect, those of us in the private sector don’t count savings as the elimination of what we “might” do.

    We’d appreciate it if our City would adhere to the same sense of logic.

  8. Bob McWilliams says:

    Also, are you trying to tell the public that the downgrade of our bond rating has no impact on the City’s cost to borrow money?

    Are you acting as the City’s Public Information Officer or as Political Infomation Officer?

    Exactly who do you work for; Annapolitans or “politically”, the Mayor? According to the organizational chart, you work for the people of Annapolis.

    It’s a question as to whether certain people employeed by the City represent the citizens or are acting in a political/partisan manner.

  9. Bill Kardash says:

    Thanks for the comparison numbers. Because Annapolis has many “contractors/consultants” who fill full and part-time positions, would you please provide these counts too, for 2010 and 2011. I recall the Mayor saying last night that the City will “convert” employees from “consultant” status to civil service because they are functioning in the same capacity .. some “for years”.

  10. Bob McWilliams says:

    As I’ve asked, what is the dollar differential between the “people” the city has hired, versus the “persons” they have let go?

    Also, what are the benefit costs for the people I have asked you about?

    With our new quarter of million dollar accounting program and our new Director of Finance, that shouldn’t be difficult.

    It should be especially easy for Phill McGowan, since I would hope you know your own “total” compensation.

    And, I’m still waiting for the costs of the market house renovations as well as the breakdown on the $700,000 plus on the 27 parking spaces at th Visitor’s Center.

  11. In an attempt to answer some of your questions:

    Bob, on Feb. 25, I responded to your e-mail inquiry stating: “I keep hearing that the Mayor had let go 33 City employees. Is that number correct, and how many of those positions were vacant. Of those who were let go, how many have been hired back, and why?”

    I initially responded by providing you with the first three paragraphs of a release I sent out on March 5, 2010. It is below:

    “Annapolis, Md. (03-05-10) – Mayor Joshua J. Cohen has announced that a first round of layoffs commenced today to address an unprecedented budget crisis. Thirty-three personnel will be laid off by Monday. The mayor’s proposed fiscal year 2011 budget will not include funding for 14 additional positions. In addition, the funding for 38 vacant positions has been recaptured by the City and applied toward the FY 2010 deficit.

    “In total, the mayor proposes not to fund 85 positions to solve the structural budget deficit. These cuts will save the City an estimated $1 million in FY 2010, which ends June 30, and $4 million in FY 2011.

    “Of the 33 personnel being laid off, 17 are contract workers and 16 are civil service employees. Mayor Cohen will specify the affected positions and departments in his FY 2011 budget address to the City Council on Monday night. The mayor briefed the City Council on proposed layoffs earlier this week in a closed session.”

    Regarding your question on vacant positions – “Also, how do you determine that people who were never hired represent a savings?” – here was my response to you on that point on Feb. 28:

    “I disagree with the notion that eliminating vacant positions are, as you say, ‘artificial reductions, or worse yet, no reduction as nothing more than a decrease in the planned increase.’ As the Mayor has said throughout the past year, the previous administration tapped the revenue from vacant positions to address cost overruns. By taking those positions off the books, the Mayor has chopped year-over-year spending going forward and further put the onus on the administration to live within its financial means. Through seven months of the fiscal year, the City has spent just 46 percent of its annual budget.”

    I agree with you, Bob: If the funding for those vacant positions was never spent, cutting the underlying positions would be meaningless. But the salaries for those vacant positions were programmed into the budget each year, and the money from those salaries was spent – it was transferred to fill cost overruns. Eliminating those positions effectively eliminated spending.

    Separately, I am not saying that the downgrade of the City’s credit rating had no impact on the interest rate the City secured. I am not in a position to say that. Here’s what I know in talking to our financial experts: When you compare Annapolis’ current set of ratings against other municipalities from across the country, we compare favorably. We still have the second-highest rating from Fitch (AA+) and the third-highest from S&P (AA). And on the day the City went to the bond market, the “all-in” interest rate the City received was competitive with what the best municipalities from around the country received around the same period. As I said, the rating is not the only influencing factor in determining which interest rate a municipality secures on the market. One factor I did not spell out yesterday concerns the frequency with which a municipality goes to the market. Annapolis has not gone to the market as often as others, so there has been more demand for the City’s bond. That was certainly the case last week.

    Bob, in reading between the lines on your questions, no one is trying to diminish the concerns going ahead about why the City’s ratings were downgraded. The Mayor and City Council understand the challenges of rebuilding our reserves and addressing our long-term liabilities, and they have taken steps to tackle them. Everyone knows there is more work to do. I invite you to watch the Mayor’s budget address on Monday (http://bit.ly/fOC3J0), where he cites Moody’s analysis and lays out the challenges ahead (the reference to Moody’s is at about the 1:10:00 mark).

    Bill, according to the Mayor’s budget presentation (Page 4), has 537 full-time positions and 68 contractual and temporary employees – a total of 605 (http://bit.ly/f9lrSH). I don’t have numbers immediately for FY 2010. Regarding the conversion of some employees, legislation is forthcoming.

  12. Bill Kardash says:

    Thanks again for the information. Regarding “contractual employees”: can you clarify the various numbers of contractors and consultants. Are these terms inter-changeable? Or are there x number of consultants and y number of contractors? I understand, too, the City also uses the term “vendor” for certain employees. (I’m not referring to various third-party suppliers (printing, office supplies, etc). What I am seeking to identify is the total number of employee-like positions that handle day-to-day responsibilities for the City (FT and PT).

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