Last Tuesday, New York-based Moodys became the second bond-rating agency to lower Detroits standing in the past two weeks. In one category, Detroits credit rating is now hovering two notches above junk bond status, and the ratings agency Standard & Poors downgraded the citys financial outlook from stable to negative.
Its so nice they finally noticed.
Detroit Mayor Kwame Kilpatrick responded by saying, in part, that Detroits problems arent unique. Citys [sic] and corporations across America have been reduced to junk-bond status due to the adverse impacts of the nations economy, Kilpatrick said in an e-mailed statement.
The same sentence appeared in a statement issued after S&P downgraded the citys investment grade the week before. Problem is, thats not precisely true.
Its correct that cities like Philadelphia and Pittsburgh have the same low speculative status rating as us. But theres no nationwide rash of cities slipping into junk, er, speculative status.
Even in the worst of recessions like the one in the early 90s, you only get a small amount of ratings downgrades, says Karl Jacob, a director in S&Ps state and local government group. We really skipped a recession in the late 90s, so a lot of cities went into the [current economic] slowdown in relatively good financial position. So when the slowdown hit, it didnt result in a lot of ratings downgrades.
New Orleans, Jacob says, has recently been downgraded for what we hope are obvious reasons but other cities are holding firm. In fact, Moodys upgraded Pittsburghs bond rating last spring, and cities like Atlanta and Cleveland are maintaining stable financial outlooks.
Most cities are still investment-grade status, not junk-bond status, Jacob says.
A city or corporations investment grade or bond rating determines how easy and how expensive it is for it to borrow money. Its kind of like a personal credit score the worse it is, the higher your interest.
A rating change doesnt affect bonds the city has already sold, but a downgrade could spell bad news for Detroit. Kilpatrick has sold millions of dollars in bonds to balance the budget over the past few years. And, according to information submitted in S&Ps report, the city plans to sell millions more next spring.
With investment ratings sinking, borrowing money for short-term budget fixes is getting more expensive by the second.Send comments to [email protected]