Failed Merger Threat to County Credit Rating

As they prepare for their annual meeting with Wall Street bond-rating executives, Ventura County officials said this week they are worried the county’s top credit rating could suffer from the fallout of its failed mental-health merger.

A group of county officials will try to persuade agents at two major bond-rating firms that the county is financially sound, despite five audits underway in the Behavioral Health Department and the Ventura County Medical Center.

A poor credit rating would make it more expensive for the county to borrow money for major construction projects or other purposes, officials said.

“Absolutely we’re concerned about losing rating points,” Treasurer-Tax Collector Harold S. Pittman said. “We know it’s an issue. And it’s a big-ticket item, so we’re bringing people who can answer all of their questions.”

Economist Mark Schniepp, director of UC Santa Barbara’s Economic Forecast Project, said there is a good chance the county’s bond ratings would be lowered because of its financial troubles. The county could lose up to $15 million alone in federal health-care funding for violating Medicare and Medi-Cal billing rules as a result of the botched merger.

“Their financial standing is more nebulous now because of the apparent violations,” Schniepp said. “This will make things a little bit more uneasy for them when they are rated.”

Traveling to New York next week will be Pittman, Chief Administrative Officer Lin Koester, Auditor-Controller Thomas O. Mahon, County Counsel James McBride, Supervisor Kathy Long and Chairwoman Susan Lacey.

Each spring county officials meet with representatives of Standard & Poor’s Corp. and Moody’s Investors Service to discuss the county’s bond ratings. The trips are taken before July, when the county borrows up to $110 million to carry it until it collects tax receipts in December and April.

A low rating costs the county money because it bumps up the interest rates when notes and bonds are sold. High bond and note ratings, conversely, mean lower interest rates.

An excellent bond rating, for instance, combined with good market conditions, could save the county as much as $18 million over the 12 1/2-year life of the bonds.

In the past, the county’s conservative investment approach and ability to maintain strong financial reserves despite state budget cutbacks have earned it a bond rating between A+ and A-. Last year, it received an A-.

A loss of confidence in the county’s financial status could not only prompt a lower note rating, but could also bump the county’s current bond rating from an A- to a B. That would make it more expensive for the county to borrow money for long-term public projects.

Over the next few years, for instance, the county plans to borrow nearly $30 million for two large capital improvement projects, said Terry Dryer, a county administrative officer.

The county plans to sell up to $23 million in bond-like certificates within three years to build a new juvenile justice center, and another $4.5 million within four years for a new county service building in the Santa Clara Valley.

Like Pittman, Mahon, the county’s auditor-controller, said he is worried about the long-term financial impact on the county’s credit rating.

“Yes, we are concerned and to say anything differently would be false,” Mahon said. “But we’re going to fight hard to retain our high rating.”

Mahon said the county has not tried to hide the disastrous outcome of its attempt last year to merge its mental health and social services departments into one superagency. After the federal government warned that the reorganization violated its billing rules, the county rescinded the merger in December, about nine months after it was established.

Since then, the U.S. Health Care Financing Administration and the state Department of Mental Health have launched audits into the Behavioral Health Department’s billing and financial practices to determine whether Ventura County has followed requirements.

If the reviews determine improper practices, the county stands to lose millions of dollars in state and federal funding. Officials said the Wall Street executives are aware of the county’s situation.

“The uncertainty comes from the fact that the state and federal government is looking into our mental-health system,” Mahon said. “They are aware of this. They read the newspapers too.”

Supervisor Long was confident next week’s trip to New York would be successful.

“Our position is going to be that we’ve been very involved in the audits,” Long said. “And we’ve been very forthright and very honest about what’s going on. We will emphasize that there have been no allegations of fraud against the county. It’s an issue of [billing] procedures.”

She emphasized the importance of an excellent bond rating.

“Every [rating] point makes a difference in the market,” Long said. “Our goal is to keep our rating as high as it’s always been.”