Actually the sector review titled “The Ranks of ‘AAA’ Municipalities Swell Despite Hard Times” said: “The number of U.S. municipalities with ‘AAA’ ratings has more than doubled since early 2008, to 169.”
Nine of those municipalities achieving the rating agency’s highest marks were in California. You can read the complete results here.
“The large increase reflects ongoing modifications to Standard & Poor’s criteria and our view of the economic, financial, and managerial strength of these municipalities,” said Standard & Poor’s credit analyst Karl Jacob.
Meanwhile the state of California, which some might compare to the grasshopper fiddling away the bounty of the summer, leaving it begging from the local agencies when the lean winter sets in, has been downgraded by the rating agencies. During the budget crisis, California fell to the lowest level of any state. It currently ranks an A in Standard & Poor’s book, Baa on Moody’s Investment Service and BBB in Fitch Ratings.
Standard & Poor’s credit analyst Gabriel Petek said in a statement: “The negative outlook reflects our view of the state’s reliance on non-recurring fiscal adjustments as well as its present and future reliance on a leveling of economic and revenue declines to solve what was a large projected deficit for fiscal 2010.”
Like individuals whose credit rating is monitored by the big three reporting agencies that make up the FICO score, companies and government agencies are monitored by three main bond credit agencies: Moody’s, Standard & Poor’s and Fitch. Instead of numbers, their ratings are AAA to D for default status. Anything below a triple BBB is known as a “junk bond” and almost impossible to sell.
Credit agencies assess the creditworthiness of a general obligation bond based on the perceived ability to repay the note. A higher credit rating indicates less risk, which can lead to more demand for the note and a lower interest rate. For a revenue bond based on a defined income stream, the likelihood of that revenue being realized plays a dominant role in determining the ranking.
“A positive rating is important because it impacts the cost of capital for everything from parks and wastewater treatment facilities to police and fire stations,” said Paul Navazio, assistant city manager for the city of Davis and president of the Fiscal Officers Department for the League of California Cities.
Bond ratings can also play a role in state and local government cash flow as many cities and counties sell short-term tax revenue anticipation notes at the beginning of the fiscal year until property tax revenues arrive. “Revenue uncertainty can put that at risk,” Navazio said.
Debt sale is an art and the timing can make a big difference as the more bonds are on the market at any given time, the higher the price tag associated with it. A percentage or two difference in interest rate on a multi-million dollar loan can mean tens of thousands of dollars in annual debt service.
More bad news for underperforming agencies: “The option of buying bond insurance to improve the interest rate is no longer available,” Navazio said. The insurers were one of the quiet casualties of the financial collapse last year.
City solvency and the local economic climate can also be considered when Redevelopment Agencies go to market with a bond to finance projected tax increment revenues. “Agencies depending on growth for increment financing are getting hit right now,” Navazio said.
Even for cities that don’t participate in debt financing, bond ratings and translate into positive public relations. “A good rating is a badge of honor,” Navazio said.
Despite the challenges, many cities are seeing the current economy as an opportunity. “One could argue that there has never been a better time to do capital projects,” Navazio said.
Interest rates are at an historic low. Tax-exempt municipal bonds can go for four percent to six percent, way below the double-digits investors were charging even the best rated municipalities five years ago — and may be charging five years from now.
The difficult economic climate for contractors means projects are coming in way under budget. Add to the competitive bidding the billions in federal American Recovery and Reinvestment Act dollars to jump start everything from roadwork to energy retrofits and many cities are testing the construction waters.
“It is the best of worlds and the worst of worlds for capital projects,” Navazio said.
JT Long can be reached at firstname.lastname@example.org