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Bond-rate agency praises Baltimore

Sun Staff

A prominent Wall Street bond rating agency improved its opinion of Baltimore's financial outlook yesterday, just a year after raising concerns about what it considered a risky gamble by the city to engineer a $42 million bailout of the public school system.

The action by Fitch Ratings - one of the big three municipal bond rating agencies - appears to vindicate the city leaders who rejected state education aid last year in favor of raiding their reserves to help the school system avoid insolvency.

"The city's more active participation in the management of its school system may prove to be of long-term benefit to the city if it succeeds in instilling tighter fiscal discipline and improving academic achievement, both of which appear to be occurring," states the Fitch Ratings report released yesterday.

The company maintained its A-plus rating for Baltimore's bonds and improved its long-term outlook from "negative" to "stable."

The rating and outlook applied to both the $32.28 million in bonds being issued by the city June 9 and the city's $548 million in outstanding bonds.

"What a difference one year and a lot of hard work makes," First Deputy Mayor Michael Enright said. "Fitch's confirmation goes a long way to saying that there is real progress being made in the school system."

City Councilman Keiffer J. Mitchell Jr., who engineered the $42 million bailout in March 2004, said Fitch's revised opinion was a relief.

After a lengthy series of late-night negotiations, city leaders abruptly rejected Gov. Robert L. Ehrlich Jr.'s plan to deliver state financial relief because they wanted to avoid more state control over local schools.

An Ehrlich spokesman declined to comment yesterday.

Deficit and shortfall

At the time of the crisis, the Baltimore City Public School System had a $58 million deficit and a separate $58 million cash-flow shortfall.

The system would have been insolvent and unable to meet its payroll by the end of that month without emergency loans.

"I had business people call me last year saying this was one of the dumbest things, to sink money into a school system that had been proven to be inadequate and failing," Mitchell said.

Prediction of doom

One of those voices of caution was the school system's former financial adviser, Robert R. Neall.

As the city devised its package, Neall wrote to Ehrlich, Senate President Thomas V. Mike Miller and House Speaker Michael E. Busch predicting that the city's deal was doomed to fail and that the state would eventually have to provide aid.

Neall said yesterday that he still believes O'Malley and the council acted improperly.

"My personal philosophy is not to gamble with other people's money," said Neall, a former state senator and Anne Arundel County executive. "Everybody admitted that it was sort of high-stakes brinksmanship on [the] part of the mayor."

Neall said Fitch's negative outlook last year proved that the move was risky. But he said he is pleased that the school system was able to pay back $34 million of the loan last summer.

"I'm very happy that all of this had a satisfactory ending because I'm a Maryland citizen and I care very much about the city of Baltimore," he said.

So, too, is the local business community. Donald C. Fry, president of the Greater Baltimore Committee, said Fitch's new rating was a testament to O'Malley's willingness to use private-sector techniques to improve government agencies.

He also praised schools chief Bonnie S. Copeland for her openness to the O'Malley administration's recommendations for a school system that is governed by a board appointed jointly by O'Malley and Ehrlich - likely rivals in next year's governor's race.

"It's a further showing that the city is truly on the rebound," Fry said.

Shortly after the bailout, O'Malley and his top staff began meeting weekly with Copeland or her top staff members to review management operations. The city increased its funding for capital programs and eventually took over responsibilities for facility maintenance.

In addition, O'Malley orchestrated a volunteer campaign last summer that made repairs and improvements at about 150 of the more than 180 schools.

Difficult decisions

Enright said that the school system still has a long way to go but that Copeland's administration deserves credit for imposing such difficult decisions as layoffs and program cuts.

A schools system spokeswoman could not be reached for comment yesterday.

The Fitch Ratings report said Copeland's administration appears poised to "repay the remaining portion of the loan by the end of fiscal 2006 while eliminating the $58 million accumulated deficit."

The report also praised efforts to reduce its property tax rate and maintaining healthy reserves of $95 million at the end of fiscal year 2004 last June.

The report noted other positive developments: population stabilization, transformation of high-rise public housing into townhouses and single-family homes, and an improved financial outlook buttressed by a tax package passed last year and a hot real estate market.

"Baltimore's financial management is excellent," the report concluded.

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