Measuring Debt Capacity: The Washington County, Maryland Experience.

• Author: Douglas, Jennifer Ritter

Using a case study of Washington County, Maryland, this article examines the steps necessary for benchmarking and measuring debt capacity.

In November 1999, the Research Center of the Government Finance Officers Association (GFOA) was engaged by Washington County, Maryland, to provide debt affordability consulting services. In particular, the GFOA was asked to analyze and forecast debt capacity and prepare a formal debt policy to guide Washington County's debt issuance and management. This article will focus on the methodology and process used by the GFOA to answer the question, "How much debt can Washington County afford to issue in the future?" The methodology used in this study can easily be adapted to any local government.

Background

Located in northwestern Maryland, Washington County is a community of 128,610 individuals. Although wealth and income levels are below the state average, they are growing, partly due to the increased commerce created by the county's access to three major interstate highways--Interstates 68, 70, and 81. In 1998, the federal government closed the county's only military base, Fort Ritchie, but the county was able to offset the job losses with economic expansion, primarily in the service and trade sectors.

At the time of the study, Washington County had about $140 million in outstanding bonded debt, all of which is secured with a general obligation pledge. Approximately 30 percent of the county's outstanding debt is for water/sewer obligations, which also are secured by the county's general obligation pledge. In 1995, the county consolidated 19 sewer and water sub-districts under county control. The consolidation was the result of mismanagement, from the now abolished Washington County Sanitary District, that had put the financial health of those districts in peril. The county raised rates 23 percent in 1997 in an effort to make these enterprise operations self-supporting, but the county still contributes approximately $2.5 million annually to the fund. Subsequent rate increases are planned to eventually eliminate the general fund subsidy.

Although Washington County's outstanding debt is rated a respectable Al by Moody's and A+ by Standard & Poor's, county officials were concerned with debt levels, particularly the water/sewer obligations. As a result, the Board of County Commissioners sought outside reassurance that their expected borrowing plans would not adversely affect the county's fiscal position. They wanted to know how much debt they could afford to issue in the future while still protecting their credit and preventing the need to raise taxes.

Review of Debt Burden

In its efforts to measure Washington County's debt capacity, GFOA used the following methods.

Peer Group Formulation. To determine Washington County's debt burden, GFOA established a peer group for comparison. Peer groups are jurisdictions that share particular characteristics. A peer group may be established simply on the basis of population or geographic region. Alternatively, it may be useful to establish peer groups on the basis of similarity of experience. Careful thought in the design of peer groups is important if the conclusions of the study are to be generalized.

For the peer group, a sample of counties was developed based primarily on size and income indicators, such as per capita income and property values. The sample of municipalities was further qualified to those having comparable characteristics to Washington County, such as similar population growth in the last decade and access to major interstate highways.

Ultimately, 17 counties across the nation were identified for comparative analysis. From those counties, GFOA formulated two peer groups for the debt affordability study. The first peer group consisted only of Maryland counties. The larger peer group included the Maryland counties, but also consisted of 12 counties outside of Maryland.

Collection of Financial Information. After formulating the peer group, financial and debt information was solicited from each county in the peer group. Data collection is the process of gathering, entering, and validating information that can be used in the study.

Because a standard database of information on debt indicators across jurisdictions was unavailable, original data collection efforts were necessary. Although rating agencies collect their own information, it is ordinarily reported in aggregate form (i.e., for cities in the range of 300,000 to 550,000 in population). Comprehensive Annual Financial...