Ratings Agency Scrutinizes Municipal Debt | Moody's move puts local communities on notice
Ratings agencies say they are closely watching the credit-worthiness of cities and towns across Massachusetts and other states after a recent historic downgrade of the U.S. government’s credit rating.
Moody’s Investors Service recently assigned a negative outlook to a dozen top-rated Massachusetts communities, including the Central Massachusetts towns of Acton and Wayland. And it might not stop there.
A Moody’s spokesman said in an email to the Worcester Business Journal that the agency is reviewing “non-Aaa communities” and expects to issue a report soon. Aaa is Moody’s highest rating level.
A negative outlook is not a downgrade, and it is not clear if the 12 communities will see any shift in interest rates on future borrowing as a result. Nor is it clear if the ongoing review of other Massachusetts communities will result in changed outlooks or ratings.
What is clear is that any change in borrowing rates for local towns could slow down construction on public projects and impact the local economy.
Ripple Effect
The scrutiny follows a historic move by another ratings agency, Standard & Poor’s, which downgraded the U.S. credit rating for the first time ever, citing the last-minute actions of Congress to reach a debt ceiling deal.
Geoffrey Beckwith, executive director of the Massachusetts Municipal Association, said such scrutiny of municipal credit by ratings agencies like Moody’s is undeserved. And he said that the warning shot from Moody’s, if it leads to higher borrowing costs, could have implications for local economic development.
Municipalities issue bonds to investors that are paid back, with interest, over a time span of anywhere from one year to several decades. Investors do not pay federal taxes on their interest earnings from municipal bonds.
Bonds are the primary method cities and towns use to construct new schools, roads and sewer and water infrastructure.
“All of those things are related, really, to economic development,” Beckwith said.
Though a rating downgrade could impact property tax bills in some cases or have the potential to affect infrastructure decisions, most businesses are generally somewhat removed from municipal credit ratings, according to Bonnie Biocchi, executive director of the MetroWest Chamber of Commerce, who counts Wayland among its member towns.
She said business people are eyeing the recent fluctuations in the stock market and are generally concerned about the Standard & Poor’s downgrade of the U.S. credit rating. But locally, businesses are more concerned with things like permitting and other regulations if they are looking to move to a particular town.
“The health of a community’s bond rating, they probably look at that, but I’d say it’s not a critical factor in their decision making,” Biocchi said.
Downgrade Dilemma
While local politicians may face more immediate ramifications from a ratings downgrade than local businesses, the rating is an indicator of a community’s financial soundness.
“It really is an important source of local pride,” said Stephen Eide, a senior research associate with the Worcester Regional Research Bureau who has studied the municipal bond market. “You can’t underestimate that.”
Ratings are one of the few things a typical investor looks at before investing in so-called “muni” bonds, he added.
Sarah Fletcher, executive director of the Middlesex West Chamber of Commerce in Acton, said that the event in the wake of the national debt ceiling debate has the business community feeling a bit uncertain.
“It makes you question how stable our economy is,” Fletcher said.
Fletcher said businesses looking to locate to a particular community analyze what it has to offer, and infrastructure is a big part of it. Bonds pay for that infrastructure.
“You’ve got to have good schools and a healthy business environment and a quality of life that makes the whole package presentable,” she said.
Singled Out
Moody’s recent scrutiny of Acton, Wayland and 10 other eastern Massachusetts communities has bred some confusion among local officials.
The communities could all be described as affluent. Residents are wealthier than average, unemployment rates are lower than average and operating budgets are less reliant on federal aid than other communities.
Steven Ledoux, Acton’s town administrator, called the negative outlook assigned to his community “a knee-jerk reaction” by Moody’s to recent events in Congress. Acton is relatively insulated from the larger economic issues, Ledoux said, noting that Standard & Poor’s upgraded the town’s rating just after the economy crashed in 2008.
“It was because of how we handled the cut in local aid and how we managed that whole situation,” he said.
Acton officials are hoping the matter blows over. The town is not planning to seek Town Meeting approval to issue another bond for about a year.
Ledoux said existing bonds will not be impacted because they have interest rates that are locked in.
Eide, of the research bureau, finds it odd that Moody’s issued negative outlooks for wealthier communities in the state and also ventured that the move was based more on politics than financial conditions.
Top-rated communities may not be the only ones that face potential action from the ratings agencies. Moody’s is reviewing non-Aaa communities, which includes A1-rated Worcester.
But Mariann C. Hier, Worcester’s treasurer and collector, has not seen any indication that the city could be impacted.
“Based on past discussions with the ratings agencies, nothing really here within the city has changed,” Hier said. “We expect to do our fall borrowings.”
Hier acknowledged that the recent scrutiny of towns’ credit ratings being directly related to actions on the federal level is “new territory.”
The research bureau wrote in a January report that more than 70 percent of communities in the state have a higher credit rating than Worcester’s, but noted that the city has demonstrated stability and a record of access to the bond markets.
Eide, the report’s principal author, said a municipality can improve its internal controls and finances as much as possible, but myriad external factors, from the performance of the stock market to the whims of Congress, exert great influence on the municipal bond market and cannot be controlled locally.
“What’s going on with macro-economic trends in the market will always be more important,” he said.
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