Baltimore City Paper

Baltimore's bond rating was raised by Standard & Poor's. But what's in a rating?

There was good news in recent days: Standard & Poor's, the big bond-rating agency, raised Baltimore City's bond rating one notch to AA, up from AA-.

Yvonne Wenger did a nice job explaining what this means, for all of you (and all of me) who don't usually think much about the municipal bond rating. She quoted an expert named Frank H. Shafroth:


Baltimore's new score — and its upward mobility — signals that the city is a "very safe" place to invest, he said. AAA is the highest rating, followed by AA and A. Rates fall in categories ranging from A to D, which is default.

The two takeaways here are, 1. Baltimore's rising bond rating is a result of the hard choices mayor Stephanie Rawlings-Blake and her administration have made over the past several years: slashing pensions for municipal employees, forcing firefighters to work longer, cutting city workers from the payroll—all that has been to please the likes of S&P, so that, 2. Baltimore City taxpayers can save "millions of dollars" (in The Sun's phrase) in interest payments on its bonded debt.


In round figures, the city borrows about $50 million a year in general obligation bonds, and has about ten times that outstanding. In 2009 the figure was $588 million. The interest rates vary, but as this screen shot from a 2011 bond issue shows, it's not a lot.

[See the graphic up top.]

Bond rates have been very low since the recession hit in 2008, the result of federal policies that are meant to make it easier for companies and others to borrow money and get things done, employing people in the process.

Again: interest rates are very low, because the federal government wants businesses and governments to hire more people.

So how does it make sense, public-policy-wise, to lay off workers and generally pinch pennies so that a private, for-profit New York company will tell lenders that you are a better credit risk?

The answer used to be: well, that's what we've always done.

But that changed about five years ago, when state and local governments noticed two big and important things:

1. Bond ratings agencies are risibly bogus; they have always rated government debt more harshly than private debts of all kinds, including toxic mortgage bonds that were designed to fail.

2. The municipal bond market is (or was, anyway) rigged in a vast "pay-to-play" conspiracy that collectively robbed local taxpayers of many millions of dollars more than any interest rate break they might have reaped through kinder ratings from S&P. As is customary, this resulted in a few fines and restitution.


Baltimore was certainly aware of both of these shocking discoveries. (It even made itself a party to a lawsuit against the banks that rigged the LIBOR, an interest rate benchmark undergirding lots of municipal debt — which was yet a third wholly unforseeable scandal involving the young men who get paid according to their handle of the three or four-trillion-dollar market.)

So why are Baltimore's leaders — as well as those of most other cities and states — still jumping through the same old circus rings?