As the President and Congressional leaders continue negotiating a deficit reduction plan, at risk is the credit rating the government uses to borrow money to pay our national debt.
For all of the talk over default, credit downgrades and the like; hardly anyone has explained what it really means to you and me. As the Will County Treasurer, I would like to explain what it could mean for your tax money and how we are preparing to protect it.
Why Credit Ratings Matter
The Treasurer’s office receives money from the property tax levy, motor fuel taxes, fees, and other revenue. We invest that money until we need to pay a bill or payroll.
According to state law, we must invest your money with safety as our top priority. In fact, the law tells us what kind of investments we can purchase: bonds issued by the federal government, states, cities, or large corporations. We cannot purchase stocks, stock mutual funds, or commodities such as oil or gold.
State law also says we can only buy high-quality bonds as determined by a credit rating agency such as Standard and Poor’s (S&P), one of the agencies threatening to downgrade the US. As you can see, credit ratings matter to us because we have to be good stewards of your money.
However, if state law restricts us only to the highest quality investments, what happens, then, if the ratings on the investments we currently own change and are lower?
For the past week, I have had conversations with my team about that very question. In order to understand our approach, however, you should know where we invest your tax dollars first.
Where Does the County Invest?
At the end of June, Will County had about $286.2-million in the bank. We currently own about $190- million worth of investments, mostly banks CDs and bonds. Our bonds are a combination of US Treasury Bonds and bonds from federal agencies like the Federal Farm Credit Bank. We also own high-quality corporate bonds as well as bonds issued by the State of Illinois.
Not only is our portfolio conservative, it outperforms the benchmarks we use to grade it.
Our Defense against a Potential Downgrade
For several months now, rating agencies have warned of credit rating downgrades. Standard and Poor’s warned of a 50% chance they would cut the US rating from Triple-A, its highest rating. The S&P later expanded their warning, saying they would “downgrade the debt of Fannie Mae, Freddie Mac *and other agencies+ to correspond with the US…rating.”
Were ratings cut, such a massive downgrade does not require us to sell our “lower quality” bonds immediately. Yes, we could sell them. If we do, however, we believe we would sell them for less money that we paid to purchase them, losing the county hundreds of thousands of dollars.