Making Sense of This "Bond Rating Downgrade" Business in Dallas
Cheer up, Dallas. What do bond rating agencies know about credit anyway? Seriously, what do they know?
I was sitting in the gallery at a City Council session last week where they were talking about the city’s deteriorating credit rating, and I felt kind of like Widda Shoots, like a little old white-haired, black-dressed, sensibly shod lady on her cane-bottomed chair with her Social Security check folded up inside a worn black purse gripped tight in both knobby fists, grinding my dentures and trying to figure out who the hell I was supposed to listen to.
On the one side of the room were these real good-looking young fellas in swell suits — Mayor Mike Rawlings, City Manager A.C. Gonzalez, City Attorney Warren Ernst and City Councilman Lee Kleinman. They were very sharp looking. They looked like the top brass from the Riverboat Queen — captain, chief purser, maitre d’, croupier and dance master — and they were telling me not to worry about any old credit rating nonsense.
Both Standard and Poor's and Moody’s recently knocked the city’s credit rating down a notch, citing both a multi-billion-dollar unfunded balance in the police and fire pension fund and something in the neighborhood of a billion dollars' worth of rotting streets and other infrastructure that will have to be fixed at some point.
But the riverboat guys were telling Old Widda Shoots not to bother her poor old snowy head about those old rating agencies. A.C. Gonzalez, the city manager, told the City Council at last week’s briefing that Dallas went out after those credit rating downgrades and was able to borrow $225 million.
“It was a very successful bond sale,” Gonzalez said, “and that was based not only on the market that we have that we’re working in but also the good reputation that Dallas enjoys.”
So the Widda was thinking to herself: “Hmm. Credit rating went down. Borrowed a bunch more money anyway. And the riverboat man is telling me this because…?”
But then Kleinman stepped in with the next bit of good news from the big boat. He said we were able to borrow the money at an even lower interest rate than what we had anticipated before the rating agencies slapped us, so maybe that means those old rating agencies aren’t so smart after all.
“We achieved a lower cost of interest despite these bond ratings,” Kleinman said. “There seems to be a disconnect between what the market believes and what the rating agencies believe.”
And here everybody always told me these big rating agencies were from New York and all. You mean they’re stupid? It’s all about nuthin’? This would be such a relief. Plus, I could swear those handsome rascals were winking at me sort of naughty. Didn’t know I could still blush.
Well, then the captain spoke, Mayor Rawlings. Such a fine, fine figure of a man.
“It seems like the ratings grades are a little bit different from the ways the markets are acting,” Rawlings told the briefing room. “I will say one of the reasons for the Great Recession was their making some big mistakes, the rating agencies, so from a historical standpoint I think it’s good to realize that.”
Oh, my gosh, he was absolutely right. I remembered all that now. It was a huge scandal. But, wait. Wasn’t that all sort of the other way around? Back in the George W. years, weren’t the rating agencies all hiding the bad news from investors and that’s why they got in trouble? Aren’t they kind of telling us the truth about the bad news now?
Oh, and why did I have to go and think of bad news, because now I had to look over on the other side of the room, and there they sat, the scowling, purse-lipped pair of them in their high, starched collars with their hair parted down the middle — Pastor Scott Griggs of the Church of Fiscal Redemption and Philip “Digger” Kingston, proprietor and funeral director of the Home of Reasonable Returns.
I could tell from the set of their jaws, they were going to tell me something I wouldn’t like. Yep, sure enough:
East Dallas City Councilman Kingston said to the rest of the council: “Frankly, the briefing this morning makes it sound like maybe the downgrade was a good thing. I’m having a hard time understanding how that can be true.”
I was maybe worrying about that same aspect in the back of my mind as well. The bond rating is the city’s credit rating. It’s an expression of the rating agencies’ estimation of how likely a person is to get paid back if he loans money to the city of Dallas, and the rating just went down. Twice. At Moody’s and at S&P.
Later, after the hearing, I looked at some of Moody’s backup material to explain the downgrade. They don’t see Dallas as a terrible risk, not even a bad one. In fact we’re in better shape than a lot of cities. But they do think we have problems.
Moody’s compared us with 10 other cities — Austin, Chicago, Houston, Los Angeles, New York, Philadelphia, Phoenix, San Antonio, San Diego and San Jose. Of those 11 cities in all, counting us, only four have lower amounts of debt as a percentage of the value of the tax base, which is good. That means if you look at our real asset base — taxable real estate and other tax income — we have not borrowed up to the hilt.
But then they also have to look at how much a city has already borrowed compared to what it’s costing taxpayers to run the city. There’s a kind of built-in instability if a city has been loading up the taxpayers with debt service while keeping total taxes down by going cheap on operating costs. Ask anybody who dinged a rim on a pothole in Dallas recently. It’s just not a stable long-term way to run the ship.
Dallas is way bad on that score. Of the 11 cities, the only one where debt service is a higher percentage of operating expenses than ours is Chicago. And then you get into demographics. Of the cities Moody’s compared us with, only Philadelphia had a higher overall poverty rate. We had the lowest median family income of the 11.
Moody’s had lots of good things to say about Dallas. They cited a “large, growing and diverse tax base that anchors the DFW metroplex; population and employment growth trends that surpass national averages; consecutive years of operating surpluses with expected surplus for fiscal 2015; ample revenue raising flexibility.”
But when Digger Kingston made his sour remarks to the effect that a downgrade in the credit rating seems like a … well, you know … a bad thing, I thought, “Yes indeedy,” and that just set me to clutching my purse even tighter. I wanted to admire those riverboat boys so much and agree with them and just go home happy or maybe even go on a riverboat ride with them. But then, oh, no, now here came Pastor Griggs. What was he going to have to say about it?
Oak Cliff Councilman Griggs called attention to the fact that Moody’s had been peppering the city with questions about debt for about a month before the downgrade. I have actually seen some of that correspondence, and in it Moody’s was asking the city and its financial adviser some very direct questions about whether the city planned on borrowing any more money any time soon.
Last October 7, Denise Rappmund of Moody’s asked Wayne Placide, the city’s bond adviser at First Southwest Co., whether the city had any “near-term debt plans with [general obligation bond] backing?”
Placide told her the city was about to borrow $225 million in the bond market to pay for some projects but also to pay off “outstanding commercial paper,” the fiscal equivalent of taking out a bank loan to pay off a credit card.
Griggs pointed out at the briefing that shortly after receiving this answer, Moody’s downgraded the city’s credit rating. He also pointed out that when the City Council was asked by the city manager to vote approval for the $225 million borrowing, the city manager didn’t tell the council that Moody’s had been asking about it or even that Moody’s was in the process of reviewing the city’s credit rating.
“In the interest of transparency,” Griggs said at the hearing, “management should have informed the council that we were under review, since we had quite a bit of back and forth correspondence with Moody’s at the beginning of October, and we were expecting a decision.”
Sitting here with my little purse gripped fretfully in my lap, I didn’t like what Pastor Griggs and Digger Kingston had to say. I didn’t like it one bit. I liked what the riverboat boys told me. They made me feel better — sprightly, again, especially with those naughty winks.
But something told me the pastor and the funeral director must be right. How can you get a downgrade from two of the three major bond rating agencies and just tell yourself they don’t know what the hell they’re talking about? Why would you tell yourself that? Why wouldn’t you listen to the good pastor and the fine funeral director, instead?
Then it came to me. I had a maiden aunt long ago who fell in with the riverboat boys. She started pooh-poohing credit ratings and the like, thinking she knew better. Took up hotel dancing and cigarettes. I lived with her when I was just a tyke. It had been so long, I could barely recall. And then, ah, yes, I did remember her name: Aunty Detroit.
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