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City bond rating standard change for worse.

Central, small and rural cities' credit ratings may suffer because of subjective standards being applied by the two big municipal credit rating agencies.

The Wall Street Journal last week reported that Moody's Investors Service Inc. and Standard & Poor's Corp., the two big municipal credit rating agencies, have instituted more subjective standards that include a city's quality of life.

The change to a more subjective, quality of life standard could help growing suburban jurisdictions, but hurt central cities and rural towns.

The focus on quality of life and long-term viability of a city - or its future - raises a redlining question for all cities and towns with poor or declining populations. These municipalities, mostly central cities and rural small towns, are most in jeopardy under the revised standards.

In a period of economic hard times, a good credit rating is especially important. Cities and towns have been forced to borrow more often by selling municipal bonds to finance the cost of transportation improvements, compliance with federal environmental mandates and building new schools. The better the rating, the less it costs a city or town to borrow.

The Journal reported that S&P now examines such factors as the quality of a city's schools, "social justice," health programs, "harmony" and other socio-economic conditions when assessing a city's ability to pay off it bond obligations. Moody's is looking at the quality of city leadership and the steps a city is taking to make its community "livable."

Traditionally, municipal credit agencies looked at a city or town's books. Balancing a municipal budget was enough to help maintain a rating for the city or town's tax-exempt bonds. While a city's fiscal status is still important to both Moody's and S&P's bond ratings, quality-of-life measures are becoming more important.

The rating agencies have added a focus on how to achieve new agendas at a time of changing demographics and new realities. Noting more and more tax limitations and greater and greater unfunded federal and state mandates, the agencies are looking at cities' longer term situations and sharply reduced fiscal flexibility.

In the past year, rating agencies have moved much more swiftly to downgrade cities in financial trouble. Downgradings are at their highest level since the depression.

The record levels of downgrading are due, in part, to high levels of unemployment, eroding tax bases, and collapse in real estate values in many cities.

Last July, Detroit Mayor Coleman Young charged that one the nation's major municipal credit rating agencies used these new and inconsistent standards to downgrade his city's bond rating. The downgrading significantly impacts Detroit's cost of capital borrowing - forcing either local tax increases or reductions in city services.

In challenging the change, Young said: "This new criteria is based more on generalizations involving Moody's view of where Detroit's economy might be headed in future years, rather than on an evaluation of this administration's proven record of tough fiscal management and our current fiscal situation."

Young hinted that racial discrimination played a role in the downgrading of his city, which has a predominantly black population.

Jeffrey Rizzo, an analyst for Moody's, says that in the 1990s, "the face of local government is being changed, perhaps permanently, by a convergence of economic, social and intergovernmental patterns and pressures."

In response to those changes, he writes that his rating agency is changing how it will rate cities and towns as well: "In analyzing credit today, Moody's must focus increasingly on a city's ability to manage for the future."
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Author:Shafroth, Frank
Publication:Nation's Cities Weekly
Date:Nov 2, 1992
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