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Cities Decrease Agency Ratings, While Increasing Debt
A U.S. city will rely on municipal debt — such as bonds — to fund everything from infrastructure repairs to school construction. And, while U.S. cities and counties are experiencing an increase in debt, they are using fewer ratings to assess the risks of the bonds they sell. According to the Wall Street Journal and Municipal Market Analytics, approximately 25% of the dollar value of all municipal debt issued in 2018 carried a single grade from only one of the major ratings firms: S&P Global, Moody’s Corp. and Fitch Ratings.
Municipal officers and advisers say fewer ratings can help reduce expenses and save time in the borrowing process; bond issuers pay rating firms to issue reports. This is, however, a problem for smaller investors, as they aren’t getting the full picture about the health of a municipality.
Adding to this issue: It’s common for the three ratings firms to disagree about the fiscal health of municipalities
they are asked to grade, especially when the issue focuses on pension liabilities. For instance, while Moody’s and Fitch rely on their own calculations to determine pension liabilities and their impact on cities, S&P relies on government-provided projections. The end result can be a ratings divergence, and more confusion.
For example, in March 2018, Moody’s rated Calhoun County, in southern Michigan, noting that its pension liability was $86 million, or more than twice the figure released by the U.S. government. As a result, in November 2019, the county turned to S&P to grade a new offering of $8 million; the end result was that S&P awarded the bonds a double-A grade, a notch higher than the Moody’s grade earlier in the year.
“S&P is more favorable to Michigan credits than Moody’s has been in the past,” Bobby Bendzinski, president of county financial advisor Bendzinski & Co. told the Wall Street Journal.
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