Wednesday, November 2, 2016

Why we're all talking about municipal bonds this morning (and why you should care)

The front page cover story in the Boston Globe this morning has a worrisome forecast for Boston, Lawrence, Fall River, and Springfield if Question 2 passes:
In e-mails sent Monday, Nicholas Lehman, an assistant vice president at Moody’s, warned that passage of the referendum would be “credit negative” for the cities.
“Depending on the Nov. 8 vote, the general credit view is the following: A vote of ‘No’ is credit positive for urban cities. A vote of ‘Yes’ is credit negative for urban cities,” Lehman wrote.
Huh? Who are these people and why should we care?

Moody's is a (some would say "the") credit rating agency. Their job is to look at various kinds of data and make projections about the ability of a debtor to pay back debt (and the likelihood of default).

In this particular case, they're talking about municipal credit ratings, which is a grade each city has on its creditworthiness. In other words: is this city able to pay back money that they owe? That grade determines both how easy it is for cities to borrow money--to "float municipal bonds," is how they do it--and how much they have to pay to do it.

Why should you care? Because that's how cities make capital improvements. Cities don't pay for rebuilding bridges, building new schools, upgrading the water system and such out of operating budgets; they float bonds and finance them over time. That's how any city (or town, or state) can pay for projects that are so expensive.

Note that this isn't the first time that Moody's has made this concern known: back in 2013, Moody's issued a announcement that charter schools were the "greatest credit challenge to school districts in economically weak urban areas." In 2015, they issued another announcement, warning that districts could enter a "downward spiral":
"The downward spiral happens when a district loses students to charters or school choice, then loses the revenues associated with those students," says Seymour. "The district cuts expenditures to cope, which weakens its educational product, encouraging more students to attend schools outside the district. The loss of those students results in additional revenue loss, and the spiral continues."
Thus this isn't just about Massachusetts, or question 2, or this election: this is the fundamental question that we're refusing to face about charter schools: how can we as a democracy, that created a system of schools in order to continue that democracy, afford--in all ways--two systems of schools?

No comments: