S&P’s Absent Rating Threatens DeKalb’s Luxuries as Cash Shrinks
(Corrects amount of bond sale planned for this year in third paragraph.)
DeKalb County’s $10 million Lou Walker Senior Center has a swimming pool, art studio and beauty salon. The Atlanta suburb also has a $17 million performance center and $7 million water park, luxuries some say it can’t afford after a cash shortage brought a five-step downgrade of its credit rating to near junk.
Commissioners of the county, home to about 700,000 people, Emory University and the U.S. Centers for Disease Control and Prevention, refused to boost taxes to offset declining revenue. That will require $34 million of expense cuts, Standard & Poor’s said on March 28, when it lowered DeKalb to BBB from AA-, its fourth-highest grade. Because officials didn’t say how they would stem a dwindling cash balance, S&P then withdrew the rating altogether.
If the bond-rating issues remain unresolved, DeKalb will likely pay higher interest on $150 million of tax-anticipation notes planned for sale this year to meet payroll. Yields on some DeKalb bonds have risen almost 2 percentage points since S&P’s action. Other U.S. cities and states are cutting non-essential services to close budget deficits that opened when the housing- market collapse brought the longest recession since the 1930s.
“DeKalb County insists on spending revenues on things that are far flung from the core mission of county government,” said Mike Jacobs, DeKalb’s Republican state representative. “With the downturn in the housing market, those chickens have come home to roost.”
Burdened With Costs
Decisions made as area home prices came off their 2007 peak are now burdening DeKalb with costs. The performing arts center and water park both opened in 2008, after the economy entered a 17-month recession.
That same year, Dunwoody, a 12-square-mile (31 square kilometer) area of 36,000 people in north DeKalb, incorporated as a separate government. That deprived the county of about 12 percent of its property-tax base and $18 million of annual revenue, according to Natalie Cohen, a senior analyst at Wells Fargo Securities. Dunwoody also took the Perimeter Mall, with its Bloomingdale’s, Macy’s and Nordstrom stores, and $2.6 million in annual sales-tax receipts.
“The county made affirmative decisions to spend money right before the economy tanked,” Jacobs said. “There is just a litany of examples where the county continues to spend well beyond its core mission.”
As recently as January, DeKalb carried S&P’s AAA rating, the highest general-obligation grade. S&P’s action in March, in which it dropped the ranking to two levels above non-investment grade before withdrawing it, spooked investors. Yields on top- rated 10-year tax-exempt debt climbed 0.09 percentage point on March 30, the biggest one-day jump since Jan. 13, a Bloomberg Valuation index shows.
Especially troubling was the county’s lack of disclosure about finances, said Tom Kozlik, a municipal-credit analyst for Janney Montgomery Scott LLC in Philadelphia.
“This S&P action leaves open worries about which issuer or issuers could be the next to suffer a similar action because of the common lack of updated municipal financial disclosure among certain, especially higher-risk, credit profiles,” he wrote to clients on April 8.
DeKalb hasn’t withheld information, said Joel Gottlieb, its finance director. It gave bond raters “everything they have asked for,” he said.
S&P’s concern is over whether commissioners will raise property taxes, said Burrell Ellis, DeKalb’s chief executive officer.
“I think that’s what they are referring to when they say they are getting inconsistent information,” he said.
In late December, with DeKalb’s cash reserves exhausted, Ellis proposed a $34 million property-tax increase in his 2011 budget, which covers the calendar year. The seven-member commission on Feb. 22 rejected the higher taxes, and now must cut spending.
Commissioner Jeff Rader has proposed a $51 million tax increase, which could face a vote by the board later this month. The county has $12.5 million cash in reserve, he said, less than a third of the one month’s operating expenses, or $45 million, it needs.
Higher taxes could restore reserves and leave $18 million for critical needs, for which the chief executive must make a “compelling” case, said Rader.
“We should have a cushion in order to address any unexpected contingencies,” Rader said. “The operating budget is under incredible pressure from declining revenues.”
Simply raising taxes without examining the larger role of county government is “a lazy way of governing,” said Commissioner Lee May, chairman of the budget committee.
“Who are we as a county?” May asked. “What the bond- rating agencies are looking for is a plan, a proactive approach to guide us through this economic turmoil.”
The annual budget of DeKalb, whose population is larger than Wyoming’s, dropped to $529 million this year from $636 million in 2008, mainly because of lower property-tax receipts.
A 2006 voter-approved five-year freeze on growth of assessed valuation of some properties reduced county revenue by $12 million from 2007 through 2009, Moody’s Investors Service said in December.
Moody’s cut its rating that month on $444 million of DeKalb general-obligation bonds two levels to Aa3, it fourth-highest investment grade, from Aa1. It has a negative outlook on the credit, meaning more downgrades may come.
The county has covered past revenue declines with spending cuts including 800 early retirements, grounding the police helicopter and dismissing fire-department recruits.
It wants to borrow $150 million this year with tax- anticipation notes to meet payroll, said Gottlieb, the finance director. It also plans $1.3 billion of sewer bonds over five years, he said, with $500 million this year. Because of the deteriorating credit ratings, taxpayers will pay more in interest costs.
The difference in yield between a 4 percent DeKalb general- obligation bond maturing in December 2021 and an index of top- rated 10-year municipal bonds widened to 2.4 percentage points yesterday from 35 basis points, or hundredths of a percentage point, the day S&P withdrew its rating, according to data compiled by Bloomberg.
DeKalb’s shrinking income isn’t unusual, said May, the budget committee chairman. Property-tax collections by U.S. local governments in the last three months of 2010 fell at the fastest pace since home prices peaked more than four years ago, the Census Bureau said March 30.
“We’re no different from any other government,” said May.
DeKalb’s population increased only 3.9 percent over the last decade, compared with Georgia’s 18.3 percent growth, according to the Census Bureau. The county’s unemployment rate, at 10.5 percent in February, was higher than both the Georgia and national averages.
Joe Arrington, a retiree who’s lived in DeKalb for more than 30 years, said the county can no longer afford all the “quality of life” services it began when real estate was booming.
“We won’t be able to raise taxes high enough to afford the same things we were affording four years ago,” he said. “We’ve got to do whatever it takes to live within our means.”
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