WHY CREDIT MATTERS IN MOUNT VERNON
You’ve probably heard a fair amount in recent weeks about Mount Vernon’s loss of its bond rating by Moody’s Investors Service. For those of you familiar with credit ratings, a lot of this column might be a review, but for those of you who are not, let’s use Mount Vernon’s current financial situation as one of those “teachable moments” – one that you can, hopefully, utilize in your own personal finances, as well. The same principles apply when you are talking about applying a credit rating to a city as when you’re talking about a single individual. And, the negative consequences for doing the wrong things are equally painful.
Let’s start with the basics. What is the City’s bond rating? Just about every city finds itself at one time or another in need of more money than it can raise from taxpayers. This usually happens when a city wants to do some major capital project and needs the funds to build it, even though it may recoup those funds over time from tax revenue. If a city wanted to build a new stadium, it might need to borrow the up-front funds to pay the contractors to build that stadium. The most common method for borrowing money, if you’re a city, is by issuing municipal bonds. These are basically loans made by investors to the city on the assumption that the city will repay the loan with future tax revenue. Municipal bonds have, historically, been a good investment for people because cities have regular streams of money coming in (i.e., your tax payments) that they can use to pay off these bonds.
Moody’s is a bond rating agency. It’s job is to look at the way a city operates, the way it handles its finances, and the way it pays off its vendors. It then applies a “bond rating” to the city for future bond issuances. The better your rating, the better the interest rate the city will pay on its loans. The poorer the rating, the higher the rate it will have to pay to get people to loan it money. In that sense, a bond rating for a city is identical to an individual’s credit score.
As many of you know, an individual’s credit score is impacted by a number of factors, including: length of time you’ve maintained credit (longer is better); the number of open accounts you have (too many is bad); the amount you have due as compared to the amount you are allowed to borrow (a lower percentage is better); and your on-time payment history (longer is better). There are some other factors which play into it as well, including things like bankruptcies, how many times you apply for credit, and sometimes just errors and wrong information. This last piece is why you should always check your credit score, at least once per year. You can get free credit scores at various places on the internet. AnnualCreditReport.com and CreditKarma.com are two free resources you might check out.
In Mount Vernon’s case, the situation is actually much worse. Moody’s removed our bond rating entirely. If it’s possible, that’s even worse than having a bad rating. It means that Mount Vernon has done such a poor job at giving the rating agency confidence in its financial operations and ability to make repayments that they won’t even bother with a bad rating. It also basically means we cannot borrow any money on the bond markets until we get this fixed. That’s the bad news.
The good news is that we know how to get it fixed. We need to conduct audits of some of the Mayor’s “black box” agencies (Water Department, Urban Renewal Agency) dating back to 2016 so we can close the City’s books for those years. It’s not a small job, but a necessary one and one everyone agrees needs to be done. Who is going to pay for those audits has been the subject of some disagreement between the City Council, the Comptroller and the Mayor – which has caused needless delays in getting it done. As part of the Memorial Field lawsuit, the judge in that case tasked the City with getting those audits started immediately. I put forth legislation that approved the Mayor’s choice of auditors to be paid for by the City, but that legislation was not passed by the full City Council. That’s an unfortunate result, especially given the real consequences it has on the City’s financial reputation and ability to borrow.
You’ve seen the newspapers. The Department of Public Works (DPW) has enormous challenges with its vehicles and equipment. Replacing those DPW trucks should be a priority, for sure. But, we would need to borrow money to do it. And, without doing the work to get the bond rating back in place, we simply cannot borrow money, no matter how important the reason. We’re going to need more money for infrastructure repairs, Memorial Field, and even upgrades to our internal systems. Again, it doesn’t matter what we might need the money for. Right now, we’re shut out of those money markets.
Per the direction of the Court, the Mayor has until Friday to come up with enough money in his allocated budget to pay for the auditors, and, if necessary, I’ll help him identify where that money can come from. We both agree this needs to be done and done quickly.
The Mayor has also suggested another possibility, one I absolutely do not agree with: private borrowing. In the context of an individual, this is akin to having been denied a loan by every bank in town and going to a loan shark to get one instead. Personally, I think that’s insane, but I will ask the Mayor for his detailed plan on this front, just the same. That said, there must be a solution by Friday, so he does need to find the money in his budget to pay for the auditors, If not, the Council will.
The short answer is this: if you are not diligent in your financial responsibilities, you will pay more and in some cases, considerably more than you should. Often times, it’s a downward spiral as a result. The same principles apply to Mount Vernon. Pay bills on time, don’t get yourself over-extended with debt you don’t need, look honestly at your financial situation, and make sure you understand the consequences for not tending to your “financial reputation” out there. I recognize this is not always easy for everyone, and I don’t mean to suggest it’s ever going to be. But, if you know what to look out for, you have a better chance to succeed.
At the City level, we know what needs to be done. It’s time to come together to get it done. Quickly. Transparently. Responsibly.
If you have any thoughts or comments, reach out to me at ADWCMV@gmail.com.