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Opinion | What the bond ratings bounce means for you
Every few months, a press release rolls into my inbox proudly announcing the latest credit rating upgrade for a local city, agency or business.
Only a few days before the Standard and Poor’s rating agency downgraded the United States government, S&P had given Snoqualmie a ratings bump—timed for the issuance of a $5 million tax bond for a big street and pipes project. North Bend got a similar bump a few months ago when it issued bonds for its new fire hall.
Today, both Upper Valley cities hold AA- ratings, just two slots lower than that of the vast federal government, AA+. It amazes me that these modest-sized cities command nearly the same credit confidence as the mighty feds.
You can think of a bond rating as a letter grade on the credit-worthiness of a city, company or corporation’s debt. The S&P uses a scale that goes from AAA at the very top (where the federal government used to be) on down to D. Other ratings agencies, such as Moody’s and Fitch, use very similar ratings.
Snoqualmie and North Bend are going up because S&P underwriters like what they see in these cities’ financial policies, reserve funding stashes, and management.
But S&P didn’t like what it saw at the federal level. Part of the reason for the downgrade was concerns over balancing the national debt. Their move sends a signal that treasury bonds are not the safest place for investments. Oddly, given the state of the stock market, low interest rates and dismal savings rates, government bonds still look like a good bet to many investors.
A higher bond rating is more than just a mark of confidence. The better the rating, the lower the potential interest rate on the bonds, or debt, that cities take out for big projects like the fire hall. That’s good, because a half-a-point of interest can mean hundreds of thousands of dollars in property tax savings over the long haul on a big, 20-year bond—money that stays in your pocket. When cities, schools, and of course, citizens, are pinching every tax dollar, you can’t overlook such savings.
Right now, there is much speculation whether the federal downgrade will hurt the economy, the currency, mortgage rates, student loans and companies who need to borrow. Cities and other local governments, are waiting to see how this downgrade effects them, too. North Bend City Administrator Duncan Wilson told me there are two schools of thought on that. One is that cities, who, after all, have their own S&P ratings, will go on doing their business independent of the downgrade. The other theory is that a lowering tide sinks all boats, and that the federal downgrade will affect everybody.
One thing Wilson is sure of is that the sooner the federal government gets its house in order, the better. I can’t agree more. Right now, the U.S. is carrying a $14 trillion national debt, to the tune of $42,000 for every single citizen. Debt is normal, it happens—fire districts, cities, schools, business owners and college students all use loans and bonds to do big things and effect change. But responsible citizens and businesses also pay their bills, and so should our governments, from the feds to the locals. Federal money has always helped the most important Valley projects. National economic foundations remain stable, but if the state’s budget cuts are anything to go by, we could well be entering an era of different expectations in terms of state support.
North Bend’s underwriter believes that small cities won’t be affected by the downgrade. I hope he’s right. The last thing we need is a federal tide swamping the Valley’s financial ship, and make it harder to effect the changes that we need.