As news stories go, municipal bonds and city credit ratings are a snooze. Most readers don’t own bonds (or don’t know they own bonds in their retirement and investment portfolios), don’t understand the bond markets or the three big bond rating agencies, and think an A-rated bond must be great because it sure is a good grade in school.
Here is the Rivard Report’s Easy-to-Digest Weekend Guide to Understanding San Antonio’s Credit Rating. It’s what you need to know, in simple language. The only homework is clicking on this link that explains bond ratings. It’s a five-minute read at most. You’ll quickly understand why this is a good news story in a world with too much bad news.
The City of San Antonio just received notice that for the fifth time in five years it has been rated AAA or “Triple A” by all three of the major bond rating agencies that evaluate and rate tens of thousands of municipal bonds that fund everything from the nation’s airports to sewage treatment plants. Triple A is the highest possible rating. That puts us in the company of the other major Texas cities, right? Wrong.
San Antonio is the only Texas city of more than one million people with a AAA rating from all three agencies. Austin, with a population of about 850,000, also enjoys a Triple A rating. San Antonio is the only top ten U.S. city with a AAA rating. Even the state of Texas has a credit rating one step lower, at AA+. The United States government was downgraded to AA- by Standard & Poor’s, one of the big three, in 2011 because of the national debt.
“Among the ten largest cities in the U.S., San Antonio is the only municipality with ‘AAA’ ratings from all three major ratings services,” said City Manager Sheryl Sculley. “Superior bond ratings result in lower borrowing costs and decreased interest expense. These ratings also reflect our commitment to proactively manage the City’s finances for the long term with updates to our financial policies and addressing legacy benefits.”
The ratings issued by the big three — Standard & Poor’s (S&P), Moody’s and Fitch — guide investors on measuring risk versus return on investment. They guide lenders on setting interest rates. The higher the bond rating, the lower the risk. The lower the risk, the lower the interest rate charged to the borrower. Simply put, San Antonio can borrow money for capital projects, like fixing roads and sewers and parks, and repay it at the lowest possible interest rate thanks to its Triple A rating.
Remember the 2012 city bond election? Voters were asked to approve five different bond initiatives that allowed city leaders to borrow $596 million to spend on public improvement projects without raising property taxes. The measures passed by margins ranging from 62-72 percent. Those are big numbers, but they also reflect that a third of voters voted no. Most voted no, I’d say, because they don’t trust local government or don’t understand the bond markets and the role they play in keeping San Antonio an attractive, highly functioning urban environment, that is, a great place to live and work.
The city’s tax collections, in turn, allow it to pay back the debt it incurs borrowing that $596 million through the sale of municipal bonds. Cities fund major public improvements by borrowing the money and paying it back over time, thus avoiding tax hikes to pay for major projects. Bond brokers find it easy to sell San Antonio municipal bonds to institutional and individual investors because of the city’s excellent credit record and reputation for fiscal management.
When some Rivard Report readers smack me for being too much in the corner of City Manager Sheryl Sculley and her team, well, this is what puts me there. Their management performance saves you and me million of dollars in interest payments over time. The money saved can be put to better uses. I’d rather have the great credit rating and take hits from readers than the alternative.
“The City’s strong bond rating is a great benefit for our community and a reflection of the excellent financial stewardship of our financial resources,” said Mayor Ivy R. Taylor. “Strong financial management coupled with our diverse local economy, rich history and culture make San Antonio a truly unique big city in America.”
I know some readers will ask how that $596 million is being spent. It doesn’t matter what part of the city you live or work in, the money is being spent on you. The bulk of the money, $337.44 million, is going to streets, bridges, and sidewalks. $128.03 million is going to sewers and flood controls. $87.15 million is dedicated to parks, recreation, and open spaces. $29.03 million goes to museums, libraries, and cultural arts facilities. $14.35 million was reserved for public safety facilities. The next time you hear someone complain the City doesn’t pay attention to potholes and the basics, suggest they look at the bond spending. Most of it goes to basics. You can read more about the 2012 bond program by clicking here.
Former Mayor Julián Castro led City Council in a May budget retreat with senior city staff. Goals were set and Council members learned more about what the City would have to do to protect the Triple A credit ratings, and what could lead to a downgrading of our credit worthiness. The City was told by bond agency underwriters that it was at risk of such a downgrade. Council members agreed to strengthen the City’s financial reserve fund, the amount of money it keeps on hand as a sort of municipal Rainy Day Fund, and it agreed to get control of public safety spending.
The later challenge has been the subject of a lot of Rivard Report articles of late. Unfortunately, police union officials have chosen to interpret the City’s insistence on cost controls as somehow disparaging the work of the San Antonio police force. That’s flat wrong. Our city has a well-managed police force that performs at a higher level than their counterparts in other cities. But the costs for health care and pensions built into their contract cannot be sustained.
The soaring cost of health care is not the union’s fault. It isn’t the fault of City Council or the City Manager. It’s a national problem. But San Antonio police have a richer benefits program than police in any other Texas city and the costs eat up a higher percentage of the City’s general budget than any other Texas city. That imbalance has to be corrected for San Antonio to stay on course for greater future prosperity.
Reducing our public safety spending would allow City County to reallocate dollars toward areas where we are underinvested as a city. Everyone has their list, but mine starts with broken, dangerous sidewalks in the inner city, and includes libraries, the arts, and parks.
Affirmation of San Antonio’s Triple A credit rating by all three major agencies is such a good news story, and a more interesting and important one than most readers might judge. The value of that coveted AAA rating can’t be overstated, and that’s why it’s so important we do what is needed to understand it and protect it.
*Featured/top photo: Hemisfair Park during Fiesta. The 2012-2017 bond program invested $87.15 million towards parks, recreation, and open space, including $15 million for Hemisfair. Photo submitted by Mitze Moore.