BY CLAIRE PANAK TOMBES
On Aug. 29, Moody’s Investor Service, an international credit rating agency, announced the withdrawal of the City of Hyattsville’s Aa2 bond rating, resulting in potentially higher costs to taxpayers if the rating is not restored before the city issues additional debt.
The rating, which is a measure of how likely the city is to repay its general obligation debt, was withdrawn for “insufficient or otherwise inadequate information to support the maintenance of the rating,” according to Moody’s website. Moody’s had previously announced the city’s bond rating was under review on July 20, and said that the city had 30 days to provide the necessary information.
Two days prior to Moody’s first notice, the Hyattsville City Council approved the issuance of $11 million in bond anticipation notes (BANs) for the new police building at 3505 Hamilton Street. BANs are a form of short-term debt, and the ordinance says the BANs may be paid off “from the proceeds of the bonds in anticipation of which the BANs are issued,” but also pledges the city’s “unlimited taxing power” to pay off the debt “if the City is unable to issue the Bonds in sufficient time.”
City Treasurer Ron Brooks wrote in an email to the Hyattsville Life & Times (HL&T) that Moody’s had requested the fiscal year 2020 audit report, which is currently incomplete due to pandemic-related staffing issues at the city and its outside auditors. Brooks said that the city plans to complete the report within the next two months and provide it to Moody’s. He further shared that “the City will be refinancing various debt issues in about a year from now and will seek to have the [bond] rating restored at that time.”
When the city issues unlimited general obligation debt, it is promising to pay the debt out of the city’s ad valorem, or property, tax revenue and, if that revenue is insufficient, to raise taxes in order to pay the debt, according to city policy and an explanation of municipal bonds from Charles Schwab.
While municipalities can issue unrated bonds, a recent paper from two University of Maryland professors on unrated municipal bonds found that municipalities incurred increased costs due to higher interest rates on unrated bonds than they otherwise would have had if the bonds had been rated.
An Aa2 bond rating is the third-highest credit rating in Moody’s ranking of long-term debt. The city’s debt management policy says, “For any publicly offered long-term general obligation debt, the City will strive to achieve an underlying rating in the ‘A–’ range,” which the prior Aa2 rating fulfilled.
Brooks told the HL&T that the loss of the rating “does not affect the City at this time, because the rates for the City’s last bond issue in 2019 are locked in.” He also noted that in his time with the city, Hyattsville has never missed a bond payment to its investors.
The city charter limits general obligation debt to 2% of the city’s assessable property tax base, which was estimated at $2.6 billion in the city’s most recent budget book. Brooks confirmed that the city currently has approximately $25.9 million in outstanding general obligation debt, including the $11 million approved in July, and is at 50% of the total amount of debt allowed under the charter. The city has an additional $13.4 million in special obligation debt related to the University Town Center project, which is paid for through a dedicated tax on the University Town Center properties.