This article does not necessarily reflect the attitudes or opinions of APAUT or the APAUT Executive Committee.

My oldest daughter just got her first job, a huge step for a 16-year-old to take. Right on cue, before she had a chance to pour even a single cup of overpriced coffee, she received a debit card offer in the mail. It had her name and account number already on the plastic with a promise of a two-day advance on her next paycheck.

Her first paycheck.

Obviously, she’s not being sent a card with a modest line of credit because she is a great credit risk. She’s a wonderful young woman with lots of self-discipline and I’m sure will do fine managing her money, but they don’t know that. She has no credit history, no proof of her credit worthiness. However, she fits a profile and risk structure that suggests to an investor that, with a small enough credit line and a large enough interest rate, there is money to be made.

For me, she is my daughter with a whole life of opportunity and wonder before her. For a yield-starved investor, she is a potential revenue stream.

Knowing this, flip the frame around and look at this through her eyes. How should she interpret this? Should she recognize her position at the bottom of the financial food chain, her role as predator to the liquidity prey? Or should she interpret this as some sort of affirmation, that a credit company has looked beyond her simple profile and identified her as someone in a uniquely strong financial position for her age?

Local governments often do the latter—and proclaim it loudly to their residents—when they should be doing the former. In 2018, I wrote a 5-part series about Cobb County (Georgia) and their acclimation of a AAA bond rating. They told their residents that the rating reflected their “sound financial position” and “proactive management.” I called that “a joke” and showed, line by line, how their budget is a debt-laden Ponzi scheme.

Ratings agencies like Moody’s and Standard and Poor’s don’t write reports for taxpayers. They don’t write reports for city officials. They put together ratings for potential investors in municipal bonds. When it comes to muni bonds, investors really just want to know one thing: How likely is this community to pay back the money lent to them?

Now some may argue that the ability to pay money back is an indication of sound management, but that’s not what is going on in Cobb County. Or Eagan, for that matter. Both of those governments are in the early stages of the Growth Ponzi Scheme, the part of the process where a lot of growth makes budgets flush with cash while liabilities in the ground accumulate.

From the vantage point of the investor, Cobb County and Eagan are seen as very low risks—especially during the timeframe of a bond issuance—and rightly so. They have good present cash flow and, even if things got a lot worse in terms of new growth, they are many years away from having to deal with serious maintenance and replacement costs for their core infrastructure systems. Eagan’s future may be a predictable insolvency, but they have more road between them and the crash than, say, the neighboring city of Richfield, which is well into the second stage with debt and taxes climbing while liabilities accelerate.

In this context, a AAA bond rating says a lot about where a community is in its life cycle and very little about its management. It doesn’t say anything about how the city analyzes the viability of projects. It says nothing about its financial productivity or return on investment. It doesn’t even say anything about the quality of life there and whether people will want to stick around once the sheen wears off.

That’s because the ratings agencies don’t care about any of these factors. I’ve met with them and, while the people that work there and do these analyses are smart and interesting, they work for investors. They don’t care if the pipe in the ground doesn’t support enough connections to retire the debt to put it there. They don’t care if the stroad is really expensive to build and won’t yield anywhere near the tax base needed to sustain it. They don’t care that each new subdivision the city does puts it deeper into a financial hole.

All they care about is the community’s present capacity to retire new debt.

Eagan has done nothing to “earn” their rating any more than my daughter did anything to earn a credit card (other than reach the age of 16). Furthermore, a AAA credit rating will do nothing to “help keep our community strong,” as the Eagan video asserts, especially if it induces the community to take on more debt and do more projects like the low-productivity parking wasteland featured in their video.

Let’s not let our local governments be fooled about whom they work for. They work for their residents, not investors. They should seek the approval of their citizens, not the ratings agencies.

Local leaders should not allow the credit card offer in the mail to trick them into thinking they are smarter than they are. A great credit rating, especially for a young and fast-growing community, is a potential curse, not a blessing, especially if it is interpreted as a license to borrow without discipline.

Never forget: Strong Towns is an ongoing approach, not a destination reflected in a rating.

https://www.strongtowns.org/journal/2021/4/23/bond-ratings-are-for-investors-not-taxpayers#:~:text=Ratings%20agencies%20like%20Moody’s%20and,potential%20investors%20in%20municipal%20bonds.