Municipal Credit Ratings Sustain Super-Downgrades

This post was originally published on the Public Notice: Bankrupting America Blog.

Surprise, confusion and frustration pervade reactions to nearly 200 super-downgrades of municipal credit ratings that occurred over the past year.

The Wall Street Journal details reactions by city officials who witnessed ratings drop, and in the 196 cases of super-downgrades, by more than three notches.

Gary Fields, Finance Director for Manassas Park, VA, expected a downgrade “but maybe a notch. Maybe two notches.” He was stunned to see ratings agency Standard and Poor drop the city five-notches from AA- to BBB, far larger than the US Credit rating’s fall to AA+ from AAA.

For downgraded cities, borrowing costs tied to the sale of municipal bonds may increase, which would further strain already tight budgets during this period of economic hardship.

But Shai Francis, Finance Director for St. Lucie County, FL, expressed disbelief for their “mind-boggling” downgrade as a result of “buy[ing] the most secure investment out there – US debt.”

Following the initial shock, some municipalities and counties decided to abandon S&P. Steve Ongle, interim Treasurer for Los Angeles, said the city had “really lost faith” in the agency’s judgment following their downgrade from AAA to AA. With that loss, the city opted not to enlist the agency to rate its $7 billion investment portfolio in the future.

While the downgrades are shocking for most communities, they underscore the uncertainty entangling every aspect of our economy. Washington should learn lessons from the super-downgrades and falling confidence in our municipalities’ ability to repay from California to Florida.  Washington must implement long-term strategies that cut spending and repay our trillions of dollars of debt.