The City of Mesa is unlikely to suffer the same fate as the Federal Government and have it’s credit rating downgraded. Though the City of Mesa has been hit hard by budget cuts over the past few years, the downgrade of the country’s rating does not mean the city or it’s public schools will have the same issue. In recent years, among other budget cuts, Mesa has frozen hiring, compressed operating hours at public libraries and city buildings, and reduced hours of operation at city parks.
Since Standard and Poor’s, a major credit rating agency, announced on August 5th they was lowering the federal bond rating from AAA to AA+, there have been questions raised regarding the credit worthiness of both state and local governments. However, unlike the federal government, which borrows money to fund daily operating expenses, the City of Mesa borrows only for capital expenses. An example of the difference between these two types of expenses would be if a family was borrowing to pay a utility bill versus taking out loans to purchase a home.
In addition, unlike the federal government, by law municipalities must operate on yearly balanced budgets. Expenses are not allowed to exceed the revenue that is collected. Despite the economy’s impact on the city’s ability to collect revenue and thus it’s impact on budget cuts, Mesa’s credit rating has improved in recent years.
The city borrows money by selling bonds, which are essentially promissory notes that promise Mesa will repay the money, plus interest, over a pre determined number of years. As it does with individual consumers, a higher credit rating gives Mesa access to lower interest rates.
There are generally two types of bonds issued by the City of Mesa, and during a given year they raise the money needed to pay for bonds that mature that year.
General obligation bonds finance items such as streets, fire and police stations, as well as public libraries and parks. Since 1945 most of these obligations had been paid with sales tax revenue; however, beginning in 2009 the city began levying a secondary property tax approved by voters in the 2008 bond election to pay general obligation bond debt. Mesa’s general obligation bond debt per resident is the lowest among large Valley cities at $630. The next lowest was the City of Gilbert at $937.
The second type of bond is revenue bonds, and this type of bond finances Mesa’s utility infrastructure. The cost of these bonds is included in the rates paid by City of Mesa utility customers.
In the spring of 2009 Mesa received news that both Standard and Poor’s and Moody’s, another major credit rating agency, had given the city’s bonds a AA rating. While a AA rating is not the highest rating available, City Manager Chris Brady stated when Mesa sold bonds in the Spring of 2011 they sold at a rate that was comparable to a AAA rating.
Moody’s cited Mesa’s ‘large, diverse economy’, the city’s financial reserves and a ‘moderate debt profile’ as favorable factors influencing their rating.
Standard and Poor’s issued a report last week stating “the fiscal autonomy, political independence and generally strong credit cultures of U.S. state and local governments” might justify, in some cases, credit ratings above those issued to the Federal Government.
Bobette Sylvester, an assistant superintendent with Mesa Public Schools, said the school district also enjoys AA ratings. The school system, which actually operates independently of the city government, intended to ask residents to vote in 2011 on $250 million in bonds to pay in part for new classroom technology and maintenance for the district’s eighty-seven schools. However the school board elected to wait until 2012 when the electorate can be expected to turn out in larger numbers for local, state and national elections. Sylvester said the federal downgrade will not affect the school system due to each government entity being evaluated on their own; although she conceded a second recession may make it more difficult for local governments to borrow. “If we saw a major turn in the economy nationally, it certainly can shake the ratings system,” she said, adding that some school districts’ ratings dropped when their finances became shaky during the 2008-2009 financial crisis.
United States of America Long-Term Rating Lowered To ‘AA+’ On Political Risks And Rising Debt Burden; Outlook Negative
Standard and Poor’s Understanding Ratings
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