- The Washington Times - Tuesday, March 9, 2004

BALTIMORE (AP) — Baltimore Mayor Martin O’Malley’s decision to use $42 million from a rainy-day fund instead of a state loan to cover a school budget deficit prompted a ratings agency to put the city’s debt on a credit-watch list yesterday.

After Mr. O’Malley’s decision was announced late Monday, Baltimore lawmakers said it was good news because it will avoid a state takeover of the school system. Fitch Ratings, however, issued a statement yesterday saying the move raises “concern that the city could become a regular lender to the schools, diminishing the positive credit effect of the city’s rainy-day fund and other reserves.”

Fitch said it was placing the city’s A+ rating on its approximately $564 million in outstanding debt on Rating Watch Negative, which indicates the reasonable probability the rating will be lowered after review. Fitch said the review should be completed in a few weeks.

“Even if the city can be repaid promptly this year, regular and perhaps unpredictable cash-flow lending to a school district may not be consistent with the city’s current A+ rating level, given the city’s economic characteristics, other budgetary challenges, and tight financial operations,” the Fitch statement said.

Mr. O’Malley’s decision came as legislative leaders prepared Monday to introduce a bill submitted by Gov. Robert L. Ehrlich Jr. that would have provided a $42 million state loan in return for creating a new authority to run city schools. Senate President Thomas V. Mike Miller Jr., Prince George’s Democrat, said he pulled the bill from the agenda after talking to Mr. O’Malley on Monday evening.

The budget was $75 million in the red by the end of January, but cost-cutting measures already implemented are expected to reduce the deficit to $58 million by the end of the fiscal year June 30.

The governor’s bill would have created a Baltimore City School System Authority to run city schools until Dec. 31, 2005.

Announcing the decision, the mayor issued a statement saying, “After a weekend of reflection, I’ve decided we can best solve the city’s financial problems by taking more responsibility, not less.”

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