McCalpin’s Unofficial Guide to Municipal Bonds
by William "Bill" McCalpin
Bond Ratings
The difference in risk for the bonds is also reflected in the ratings that the national ratings agencies give the City of Richardson.
Note that, technically, it’s not the City receiving the rating, but the particular offering of a bond by the City that receives the rating, although people frequently say “the City’s bond rating”.
Ratings on bonds are based on the rating agency's evaluation of the ability of the municipality to repay the bonds, or, conversely, the risk that the municipality may default.
As noted in the section "Types of Bonds", one consideration that goes into the rating is the collateral - in the case of COs and GOs, the collateral is the City's property tax base, which is considered a very secure asset and leads to higher bond ratings.
Another consideration is the general financial health of the City as well as the financial policies exercised by the City government. That is, the rating agency looks at the level of taxation, the quality of the property tax base, the overall debt level of the City, and so on.
Over the years, the City has implemented a number of financial policies that are viewed favorably by the rating agencies:
- The level of employee staffing in City government has been kept in check - in 2009, the City Manager reported to the City Council that the City had fewer employees on the payroll than it did after the economic crash in 2001 - in other words, the City did not rehire a lot of employees once the economy improved in the 2000s, but kept overall staffing down.
- The City Manager also reported in 2009 to the City Council that the City's goal is to have no more than 37% of the property tax base encumbered by debt, placing a limit on the amount of debt that the City will acquire.
- The City's property tax base is split almost 50-50 between business and residential property taxation, a statistic that is quite unusual for a suburb and shows the diversification of the tax base that helped the City stay on an even keel even as the sales tax revenues declined dramatically in the course of this last decade.
Rating Agencies
Note: On April 23, 2010, Moody's upgraded Richardson's GO bond rating to "Aaa", as part of its world-wide recalibrarion of municipal bond ratings. The data below has been updated where noted.
GOs & COs Revenue Bonds
| |
S&P |
Moody's |
Fitch |
S&P |
Moody's |
Fitch |
| Richardson |
AAA |
Aaa* |
NA |
AA- |
A1 |
NA |
| Allen |
AA+ |
Aa2 |
NA |
AA+ |
A2 |
NA |
| Arlington |
AA+ |
Aa2 |
AA |
AA |
Aa3 |
AA+ |
| Carrollton |
AA |
Aa2 |
AA+ |
AA |
Aa3 |
AA |
| Dallas |
AA+ |
Aa1 |
NA |
AAA |
Aa2 |
NA |
| Fort Worth |
AA+ |
Aa2 |
AA |
AA |
Aa2 |
AA+ |
| Frisco |
AA |
Aa2 |
NA |
NA |
NA |
NA |
| Garland |
AA+ |
NA |
AA+ |
AA |
BA |
AA |
| Grand Prairie |
AA |
Aa3 |
AA |
NA |
Aa3 |
AA |
| Irving |
AAA |
Aaa |
NA |
AA |
Aa2 |
NA |
| McKinney |
AA+ |
Aa2 |
NA |
AA+ |
Aa3 |
NA |
| Mesquite |
AA |
Aa3 |
NA |
AA |
A1 |
NA |
| Plano |
AAA |
Aaa |
AAA |
NA |
NA |
NA |
(from http://www.cor.net/WorkArea/linkit.aspx?LinkIdentifier=id&ItemID=10663 )
* updated by Moody's April 23, 2010.
You will notice from the chart above that the General Obligation bonds (GOs) and Certificates of Obligation (COs) based on property tax revenue often have a higher rating than the “Revenue Bonds” for the same city. Higher ratings translate directly into lower interest rates that the cities have to pay for the bonds.
The City’s credit rating today (April 2010) is “AAA” (Standard and Poor’s) and “Aaa” (Moody’s). The "AAA" rating is the highest rating that S&P awards, and the “Aaa” rating is the highest rating that Moody's awards. In both cases, the ratings for the City’s GOs and COs have consistently improved over time:
City of Richardson GO & CO ratings by S&P
| 1985-1999 |
AA |
| 2000-2007 |
AA+ |
| from 2008 to the present |
AAA |
City of Richardson GO & CO ratings by Moody’s
| 1985-1992 |
Aa1 |
| 1993-1996 |
Aa |
| 1997-2000 |
Aa2 |
| 2001 to 2010 |
Aa1 |
| 2010 to the present |
Aaa |
(Most information in the tables above was derived from “City of Richardson Schedule of Ratings for Municipal Bonds, 1985 through 2009”, handed out at the April 27, 2009 City Council meeting, except as noted)
Note that even if only a GO or CO rating is referred to in a City report, that the rating is generally the same for both, because both are backed by the same asset – the City property tax base.
S&P’s Rating System
“Long-term credit ratings:
S&P rates borrowers on a scale from AAA to D. Intermediate ratings are offered at each level between AA and CCC (i.e., BBB+, BBB and BBB-). For some borrowers, S&P may also offer guidance (termed a "credit watch") as to whether it is likely to be upgraded (positive), downgraded (negative) or uncertain (neutral).
Investment Grade
- AAA : the best quality borrowers, reliable and stable (many of them governments)
- AA : quality borrowers, a bit higher risk than AAA
- A : economic situation can affect finance
- BBB : medium class borrowers, which are satisfactory at the moment
”
From http://en.wikipedia.org/wiki/Standard_%26_Poor%27s
Moody’s Rating System
“Investment grade
| Aaa |
Moody judges obligations rated Aaa to be the highest quality, with the "smallest degree of risk". |
| Aa1, Aa2, Aa3 |
Moody judges obligations rated Aa to be high quality, with "very low credit risk", but "their susceptibility to long-term risks appears somewhat greater" |
| A1, A2, A3 |
Moody judges obligations rated A as "upper-medium grade", subject to "low credit risk", but that have elements "present that suggest a susceptibility to impairment over the long term". |
| Baa1, Baa2, Baa3 |
Moody judges obligations rated Baa to be "moderate credit risk". They are considered medium-grade and as such "protective elements may be lacking or may be characteristically unreliable". |
”
From http://en.wikipedia.org/wiki/Moody%27s
Editorial Note: McCalpin's Unofficial Guide expresses no opinion on the 2010 bond election or any bond propositions – it is purely informational for all residents. All of the information expressed in McCalpin's Unofficial Guides is purely the opinion of the author. The Richardson Echo publishes this as a service but does not endorse nor refute its contents.