Last Tuesday, New York-based Moody’s became the second bond-rating agency to lower Detroit’s standing in the past two weeks. In one category, Detroit’s credit rating is now hovering two notches above junk bond status, and the ratings agency Standard & Poor’s downgraded the city’s financial outlook from “stable” to “negative.”
It’s so nice they finally noticed.
Detroit Mayor Kwame Kilpatrick responded by saying, in part, that Detroit’s problems aren’t unique. “City’s [sic] and corporations across America have been reduced to junk-bond status due to the adverse impacts of the nation’s economy,” Kilpatrick said in an e-mailed statement.
The same sentence appeared in a statement issued after S&P downgraded the city’s investment grade the week before. Problem is, that’s not precisely true.
It’s correct that cities like Philadelphia and Pittsburgh have the same low “speculative status” rating as us. But there’s 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&P’s 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 didn’t 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, Moody’s upgraded Pittsburgh’s 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 corporation’s investment grade or bond rating determines how easy — and how expensive — it is for it to borrow money. It’s kind of like a personal credit score — the worse it is, the higher your interest.
A rating change doesn’t 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&P’s 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.
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