Briefing: What's In A Bond Rating
The Central Massachusetts cities of Fitchburg and Worcester received positive news recently when Standard & Poor's issued favorable ratings on their general obligation bonds based on strong fiscal management and economic factors.
Earlier this month, Worcester received a rating of AA- from Standard & Poors (S&P), a high rating and up one spot from last year, as well as a stable outlook. And in September, Standard & Poor's (S&P) upgraded Fitchburg's rating on general obligation bonds from “A-” to “A+,” which S&P classifies as an upper-medium grade. Fitchburg's outlook is stable as well.
Why are these upgrades significant?
When a city has a high bond rating on its debt, it pays lower interest when it borrows money, which supports the city's overall financial health. But it also sends a signal to expanding companies that it's a good place to do business, said Richard Sarasin, auditor for the city of Fitchburg. That way, businesses are assured that adequate infrastructure and municipal services will be available should they choose to open doors in a particular city.
How does a city improve its rating?
Improving a bond rating is not easy, and if a city has a history of poor ratings, officials sometimes need to take dramatic measures to get back on track. This was the case in Fitchburg, which had a bond rating of BBB- when Mayor Lisa Wong took office in 2008. Through conservative spending and by increasing the city stabilization and free cash reserves, Wong was able to take Fitchburg off the path to receivership, a measure that allows the state to step in to manage a city's finances. One way Wong cut spending was by negotiating new contracts with unions, getting union leaders to agree to contracts with no salary increases for two years.
What other city factors influence economic prospects?
According to Sarasin, rating factors are just one piece of the puzzle in influencing economic expansion. Fitchburg, for example, is currently considering whether to hire a new economic development director to act as a liaison to businesses. And in cities everywhere, real estate tax-rate equity between businesses and homeowners, proximity to a qualified workforce, low utility rates and strong school systems are crucial in competing for new business.
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