Maryland GO Bonds: Liquidity Stress Under AAA Rating
How legislative budget actions revealed deteriorating reserve coverage two months before market recognition.
The Bond at Risk
Maryland State & Local Facilities Loan, Second Series (CUSIP: 574193QU5) carries a AAA rating, but February 2025 committee sessions revealed structural pressures that would prompt Moody's to shift the outlook to negative within days.
The core issue: Dedicated property-tax receipts that historically covered 85-90% of GO debt service are projected to cover only 78% in FY-2026 and 70% by FY-2030, forcing the state to lean on one-time fixes and reserve draws.
What Committee Sessions Revealed
While the AAA rating suggested financial strength, &Evergreen tracked a pattern of liquidity stress emerging across Maryland's Budget & Taxation and Capital Budget committees throughout February 2025.
February 11: $419M Rainy Day Fund Drawdown
Legislature authorized reduction to approximately 4% of revenues—below Moody's prudent levels—just as debt service timing pressure increases.
Constricts traditional backstops for intra-year cashflow imbalances.
February 11: $145M Bond Premium Diversion
Bond premiums redirected to capital projects instead of Annuity Bond Fund liquidity support, removing a key tool for bolstering debt service coverage.
February 4: Treasurer Requests Rainy Day Access
First-time request for statutory authority to tap Revenue Stabilization Fund if market rates drive debt service above budget—signaling recognized liquidity stress.
“Moody's changed Maryland's Outlook from stable to negative, citing projected structural budget deficits and anticipated reductions in general fund reserves.”
— DLS Analyst, February 10, 2025
Identified Trend: Erosion of Dedicated-Property-Tax Coverage
Trend Velocity: Accelerating (February 2 - March 25, 2025)
The Annuity Bond Fund's (ABF) once “self-supporting” structure is weakening. Dedicated property-tax receipts that historically covered 85-90% of GO debt service are now projected to cover only 78% in FY-2026 and 70% by FY-2030. Five signals within one budget cycle show an accelerating shift from dedicated-tax funding toward ad-hoc liquidity sources, pushing the ABF's effective DSCR toward ~1.0x on a pay-go basis.
Five Supporting Signals
DLS projects property-tax coverage decline to 78% (FY-2026) and 70% (FY-2030) vs. 85-90% historical
Treasurer requests authority to tap Rainy-Day Fund for ABF shortfalls
Suspension of $75-80 million in supplemental pension payments frees General Fund cash for potential ABF gaps
Budget relies on $145 million of one-time bond-premium proceeds for FY-2026 ABF support
Legislature rejects two-sale reform, leaving coverage exposed to rate shocks that could add $20-25 million annual debt service
Credit Impact
As up to 30% of annual debt service migrates to General Fund or Rainy-Day-Fund support, liquidity cushions thin and debt-affordability headroom tightens. Greater dependence on legislative appropriations heightens payment-timing risk, echoing the trigger Moody's cited in its negative outlook and potentially pressuring the state's borrowing costs and future GO capacity.
Compounding the pressure: The single large sale strategy—after rejecting the two-sale reform—could add $20-25 million annually in debt service if MMD moves 40-50 basis points, further straining an already compressed coverage structure.
The Intelligence Edge
Traditional bond analysis relying on published ratings would have missed the structural deterioration. &Evergreen identified five legislative signals within one budget cycle showing an accelerating shift from dedicated-tax funding toward ad-hoc liquidity sources—each signal documented with specific dates, amounts, and committee sources.
The result: Investment teams using &Evergreen recognized the liquidity compression and heightened payment-timing risk weeks before Moody's formalized the negative outlook—critical intelligence for portfolio positioning in AAA-rated GO debt.
Confidence: Medium — Five consistent, quantified signals document the shift, but limited historical reserve data and single-cycle observations preclude a high-confidence rating.
Key Risk Signals
Property tax coverage declining to 70% by FY-2030
$419M Rainy Day Fund drawdown authorized
$145M bond premium diverted from ABF
First-time Rainy Day access request for debt service
Single-sale strategy adds $20-25M rate risk
Moody's outlook: Stable to Negative
Bond Details
Type: General Obligation
Issuer: State of Maryland
CUSIP: 574193QU5
Rating: AAA (Negative Outlook)
Coverage Metrics
FY-2026: 78% property tax coverage
FY-2030 Proj: 70% coverage (vs 85-90% hist.)
Reserve Level: ~4% of revenues (post-draw)
ABF DSCR: Trending toward 1.0x
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