The credit crisis hitting the rest of the country is not leaving Baltimore City unscathed ? and may be hurting your county. We?ve already heard about the steep rise in foreclosures and the expected $20 million to $30 million shortfall from recordation and transfer taxes the city anticipates this year.
We also know the city faces ever increasing obligations for retiree benefits with stocks down. What we have not yet heard is how the liquidity crisis is also forcing the city to pay $10,000 each week in interest payments for securities that used to earn the city money. And that amount could grow.
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The city holds $333.75 million in auction-rate securities. The securities are long-term bonds whose interest rates reset in auctions from daily to 35-day intervals. Municipalities, hospitals and large nonprofits have liked the bonds because they allow them to hold long-term debt while earning short-term interest rates ? until now. We have not yet contacted surrounding counties, but this issue could likely cause fiscal headaches throughout the state.
Some groups saw their interest rates spike to 20 percent from 4 percent overnight last week because no one was willing to buy their debt ? whose interest rates are in large part contingent on the credit rating of the companies that insure the securities. Those insurers have been hit hard by the subprime mortgage crisis and are scrambling to find investors to bolster their reserves. Two are discussing whether to split themselves into separate companies ? with one side at each firm to insure the safer municipal market and another to insure the rest of the market where they have huge debt obligations.
If that happens it could mean good news for the city and any other local institutions with the securities. (Johns Hopkins University and the University of Maryland Medical System did not return calls about whether they hold those debt instruments by press time. The state of Maryland does not have any auction-rate securities, according to Howard Friedlander in the Treasurer?s Office.)
But that is far from certain. And six of the city?s nine bond issues are scheduled to go to auction this week. If the auction fails ? meaning no one purchases the city?s bonds ? the city?s interest rates will rise along with its interest payments. Stanley Milesky, chief of the Bureau of Treasury Management for Baltimore, said the city is in a better position than other places because its interest rates are capped at 14 percent.
But that is hardly a solace when the city used to make money off of these investments in recent years. Milesky declined to say how much. And who is to say other credit issues are not lurking around the corner?
What?s clear is that the new budget under consideration must lower spending to compensate for the host of shortfalls it faces.
If City Council members were smart, they would use this challenge as a clarion call to lower property tax rates. For reasons we?ve noted multiple times, doing so is the only way to lure and keep people in the city, expand the tax base, and forge a long-term path to growth and financial stability. That is important not just for the Baltimore treasury, but for all Marylanders ? whose taxes help to pay for services the city could not afford on its own.
