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County Council, November 13

Preparing for the worst
Credit crisis pressures liquidity as well as the budget
Warwick Jones

The County started taking steps to balance its fiscal 2009 budget some months ago. At that time it was largely higher than expected fuel prices and a decline in fee and permit income that were causing problems. But now the County has been caught up in the world-wide credit squeeze. Cost cutting has become more urgent.

Another 2% across the board cut for Administrator Funds
Council members at last night’s Finance Committee meeting heard a presentation by staff as to new measures being implement. The County has already cut $3 million from its $171 million budget by measures implemented in recent months. But now it is looking to further cost cutting. It first considered an across-the-board 2% cut, leading to another $3.4 million saving in the General Fund. However the move was scrapped as the benefit from cuts would have been negated to a large degree by State Government law that would have similarly cut payments to the County by the State. The across-the-board cut will now apply only to Administrator’s Funds and lead to an estimated $1.6 million reduction in General Fund expenses.

A hiring freeze too
The County will also implement a hiring freeze, a stricter fuel allocation program and “pause” capital projects that are not under construction or development. No estimate was made as to the likely benefit of these other plans but we expect the savings are unlikely to exceed 1% of total costs.

Fiscal 2010 could be very bleak
Will these moves be enough? Probably, but there is so much uncertainly as to the immediate economic outlook, that nobody can be certain. And staff surely must be thinking about the following fiscal year if the economic clouds don’t clear. Fiscal 2009 may be bleak, but fiscal 2010 could be stormier.

Staff noted the concerns about achieving revenue targets in the Fiscal 2009 budget. The County had already suffered a $1.8 million reduction in contributions from the State. Business license fees are down as is interest income on fund balances. To some extent these shortfalls could be offset by a mild increase in EMS revenues and property taxes. However, although property taxes revenues should rise nominally this year, collections may lag – a greater number of people are expected not to pay or defer payments. Staff also noted that the County was now benefiting from much lower fuel prices though this benefit was offset by higher electricity rates.

Credit crisis affects liquidity as well
The credit crisis has not only affected the Fiscal 2009 budget, but created some financing difficulties in relation to past borrowings. In borrowing, municipalities provide some form of insurance or guarantee to the lenders that they will repay borrowings. This is achieved through the creation of a Debt Service Reserve, an insurance policy, or the purchase of a Surety Bond.

From the presentation of staff, municipal borrowing is an arcane world, so much so, that most municipalities are scratching their heads as to the bind they now are in because of the agreements signed in the past . These agreements have caused surprises and will cause major changes in future, staff opined.

Drop in credit ratings of AIG and AMBAC impacts County
In the specific case of the County, there was an insurance contact with AIG, and a Surety Bond with AMBAC that related to past borrowings. Both AIG and AMBAC have fallen into hardship and the former has been the recipient of massive funds from the Federal Government. Because of the fall in the credit ratings of both companies, the County had to make changes to conform to borrowers’ requirements as spelt out in the original agreements. The fall in its rating forced AIG to terminate its insurance contract and give back to the County $6.3 million. Consequently, the County had to arrange some other form of insurance or increase its Debt Service Reserve (DSR). With the fall in Ambac’s rating, the County was forced to transfer funds into a Debt Service Reserve even though the insurance provided by Ambac remains intact.

No impact on costs
None of the changes has cost the County. The County was required to find the funds to plug the holes with alternative forms of “insurance” and all of the outlays will ultimately be retrievable. But at a time when cash is tight, plugging the holes required some fiscal dexterity – shall we say juggling. We won’t attempt to detail the juggling – suffice to say that County has drawn on the General Fund and the Capital Equipment Replacement Fund to provide the $2 million that is required in a DSR to meet the obligations under the borrowing agreements.

Council member Thurmond showed considerable frustration during the staff presentation that the County could find itself in such a predicament. He wondered whether there were alternatives to the moves planned by the County. None were forthcoming.

Credit market for municipalities frozen
And as a sobering thought, staff told Council that the market presently was such that municipalities could not borrow at reasonable rates. Fortunately, the County has no immediate plan to borrow. But in August 2009 it would be looking for $30 to 50 million. We can only hope markets will be working by then. If they aren’t, the County and many others in the US will be in big trouble.