What does an AA 1 bond rating mean?

Two things: A city borrows a lot of money. And. The city pays it all back on time.

Nothing more. Nothing less.

An AA 1 bond rating bears little relationship to a city’s taxes. It bears no relationship to a city’s fiscal responsibility. It says nothing about a city staff’s ability to manage finances. All it means is, no matter how much bonded debt a city carries, the debt gets paid off. The slightly lower interest rate an AA 1 city pays may well be more than offset by how much the city relies on bonding.

Who bears the burden of paying off municipal bonds? If you said “taxpayers,” you get a gold star.

I won’t profess to know a lot about the ins and outs of bonding, but I’m willing to hazard a guess or three.

A city doesn’t get an AA 1 bond rating for borrowing a thousand dollars. Bond brokers won’t touch trifling amounts. And the bond has to be paid off. We all know that. A city that issues a bond for, shall we say, $50,000, and repays the bond when it comes due would likely get an A rating. A city bonding for, and repaying a million dollars would likely get the same. But a city bonding to the hilt would get a better rating as long as it repays the bond. So, if a city issues multi-million dollar bonds every couple of years or so, its bond rating will go up as long as the city gouges taxpayers to repay the bonds.

And instead of paying for sewers, we’re paying for sewers and interest. Why not use the cash reserves in the enterprise funds to pay for, or at least reduce the bonding for infrastructure. Isn’t that what the funds are for? What emergency will eat up the huge reserves in the enterprise fund accounts.

Another guess, bond brokers don’t make distinctions about whether bonds are meaningful to taxpayers. The brokers’ only concern is whether the bond will be repaid. Brokers don’t differentiate between something needed now, and something that may be needed a hundred years from now.

The city’s ability to re-finance bonds at a better rate would be irrelevant if there were no bonds to begin with.

And, when outfits like Moody’s Investor Service issue city bond ratings, they pay no attention to school district bonding. Never mind that the bonds are all paid from the same fund source – taxpayers.

I once heard a Jordan City Council Member (one of only four who showed up at that particular meeting) compliment Jordan’s staff for achieving and maintaining an AA 1 bond rating. I wonder about this? Isn’t it the taxpayers who maintain the bond rating?

The Quote: “Blessed are the young for they shall inherit the national debt.” -Herbert Hoover

Thom Boncher is a retired marketing communications manager, former Jordan City Council member and Jordan resident since 2003.


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