The downgrade was based on several factors, including new standards set by Moody’s. The credit-rating agency’s report listed three challenges for Butler County: its reliance on economically sensitive sales tax and investment income; “narrow ” reserves compared to other entities; and exposure to the under-funded Ohio Public Employees Retirement System (OPERS).
The rating downgrade means it will cost the county more to borrow money for future capital projects. County officials said Wednesday the cost impact would be “minimal.”
County Commissioner Don Dixon said this is the first time Moody’s has ever held local governmental entities responsible for the state’s retirement system. And finance director Tawana Keels said getting penalized for that doesn’t make any sense.
“Moody’s is suggesting that is a liability for Butler County; but Butler County is not responsible for OPERS,” Keels said. “If that factor was removed when the ratings were created, our ratings probably would not have changed. It penalizes a large county that has employees paying into OPERS and the STRS (State Teacher’s Retirement System). That liability is not ours.”
The report states that the county’s payments, set by the state, into OPERS is below actuarial standards, which puts the county at risk.
“The under-funded status of the plans (OPERS and STRS) raises the potential operating risks as the state could increase required contributions from local governments in the future,” the report reads.
General obligation bonds are a financing tool similar to a home mortgage that cities and counties use to finance large capital projects over a multiple year period. Such projects include new roads, neighborhood improvements like sidewalks and curbs, and certain economic development projects.
Bonds are used when a city’s or county’s capital needs exceed the ability to fund these projects on a “pay as you go basis.” They allow governmental entities to pay for projects over a longer period of time.
Governments typically pay the holders of these bonds back through a number of funding sources such as property taxes, sales taxes and fees. A good credit rating lowers the investment risk for lenders and provides cities and counties with a low interest rate.
Moody’s report did credit the county for the efforts it has made to pull itself out of the financial hole it was in for years. It noted the county brought in $4 million more in sales tax last year and passed a structurally balanced budget for this year.
Keels said sales tax projections this year are climbing above the same time last year, with an estimated 5.3 percent increase in January and about 12.8 percent in February. The Moody’s report, however, looks at the past, not the future.
“The rating is based upon past practices in the county,” Keels said. “The current commissioners and finance department did not incur the debt, did not deplete the fund balance; these are things that we are recovering from.”
There are about a dozen factors Moody’s reviews in determining credit rating, including a government’s budget management, demographics and level of wealth. The agency said there are ways to increase credit ratings, which include diversifying operating revenues, improving residents’ standard of living and sustaining growth in the tax base.
Dixon said the county has exceeded its projections for lowering their debt and boosting fund balances already, and he expects the rating to go back up within the next two years. He said the new rating will have little or no negative impact on the county.
“We’re not going to be in the marketplace for any big borrowing,” he said. “Those days of borrow and borrow and build and build are over.”
The county’s port authority will be selling $10 million in bonds as part of a $20 million commitment to help pay for public improvements for the $300 million Steiner + Associates development in Liberty Township soon. Mike Campbell, executive director of the Port Authority, said he has been told the downgraded rating should have a minimal impact — about 3 basis points — on interest rates.
“The effect isn’t going to be that great,” he said. “They are downgrading a lot of communities because of the pensions. There’s a lot of pension money out there.”
In July, the cities of Middletown and Cincinnati had their credit ratings lowered by Moody’s. Pension fund concerns were cited among the causes for both cities.
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