S&P's downgrade impacts local bondsDespite the media frenzy, a day of Wall Street losses and political prognostications, the impact of Standard & Poor's downgrade of U.S. government debt from Triple A to AA+ has had little impact locally except for debates and conversations at the local coffee houses. Normally, a downgrade means interest rates should start to rise. But just the opposite has happened, so far. The city of Pleasanton, in fact, is losing out, albeit slightly, by the recall Monday of several million dollars in Treasury bonds where it has salted away reserves. These were bonds with 1-1/2 to 2-1/2 years to run, which was considered a good short-term lifespan. They have now been reissued at lower rates of return with a fractional, yet less positive yield.
Still, that move may prove financially beneficial to the city treasury. Finance Director Emily Wagner said she is re-evaluating golf course bonds that have been paying its holders 3.4% and are callable starting Oct. 1. They're likely to get a notice from Wagner that those good days are over, with refinancing likely at much reduced rates. Bonds held by the Livermore-Amador Valley Water Management Agency (LAVWMA) that have been paying even higher interest rates could be called as early as next month when their call protection ends.
The long-term impact of Standard & Poor's actions could also affect the credit ratings of as many as 7,500 municipalities in the U.S., according to Wagner, although Pleasanton isn't one of them. However, the National League of Cities believes most cities and states will keep their favorable bond ratings. The League points out that there's a difference between the U.S. federal debt and the municipal bond market. Municipal debt is typically not used to finance day-to-day operations. Local and state governments use municipal bonds to finance infrastructure projects, such as the Callippe Preserve Golf Course in Pleasanton. Also, nearly all local and state borrowing is longer term (20 or 30 years) and debt service payments are predictable (usually the same amount each year). Additionally, the League's Gregory Minchak said that the overwhelming majority of municipal debt issued by general-purpose local and state governments, such as Pleasanton's, remains highly rated and secure.
According to the National League of Cities, municipal bonds are an important tool for regional economic development and major infrastructure projects. Potential downgrades could add higher costs for infrastructure projects, further constraining local and state budgets. Local and state governments comprise three quarters of U.S. infrastructure spending, and debt financing has been the primary mechanism for funding the nation's system of public works -- nearly 4 million miles of roadways, 500,000 bridges, 1,000 mass transit systems, 16,000 airports, 25,000 miles of intercoastal waterways, 70,000 dams, 900,000 miles of pipe in water systems, and 15,000 waste water treatment plants.
Although the state of California has an ongoing deficit, made worse this week by the announcement that tax revenues are running far short of expectations, cities such as Pleasanton with balanced budgets and spending restraints will continue to provide the critical services residents demand. That may not be the case for school districts, including ours, which may feel the financial brunt of any shortfall in state funding.
Pleasanton's Wagner points out that the fundamentals of municipal finances haven't changed -- and won't change -- as a result of S&P's action. Cities such as ours still operate under debt cap limits and must go through exhausting processes prior to any borrowing to ensure their ability to repay. Pleasanton has a balanced budget requirement and our elected officials require steps to be taken to address financial problems early and publicly.
Even so, concerns remain about financial stability in the long run because of uncertainties in the economy overall and the ability of the state to handle its deficit. While we can appreciate the city of Pleasanton's financial leadership in these difficult times, we also must remain vigilant at the local level to make sure these strong fiscal policies continue.