Moody's outlook puts cities in bad mood

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Kai Ryssdal: The problems homebuilders like Pulte and Centex are having are of a piece with the larger economic picture, of course. As people lose their jobs, and property values decline, governments can't collect enough taxes to cover their costs. That leads to budget gaps, which in turn leads to cities and counties having to borrow more. Which they do by issuing what are called municipal bonds. This week Moody's, the credit rating company, gave those local governments a poke in the eye. It gave the whole municipal bond sector -- that is all those cities and counties -- a negative outlook. From New York, Marketplace's Amy Scott reports.


AMY SCOTT: A government's bond rating is a bit like your credit score. The lower it goes, the more expensive it is to borrow money. Moody's warning this week suggests it could downgrade the bond ratings of cities, counties and school districts. Matt Fabian of Municipal Market Advisers says it's about time.

MATT FABIAN: The factors that they note are high unemployment, a poor stock market, a poor housing market. These are all things that have very obviously been affecting credit. So that it's taken them so long I think is more of a surprise than the action itself.

The action did catch Reina Farrales off guard. She's deputy manager of San Mateo County in California. Her county lost $150 million from the Lehman Brothers bankruptcy but held onto its high credit rating. Now Farrales says the rating's up for review.

REINA FARRALES: We're certainly in a situation where we would never be in a position to default, so why they would issue a negative outlook on all jurisdictions is a bit of a surprise.

This isn't the first time Moody's has released this kind of blanket warning. Ben Watkins directs the state of Florida's division of bond finance. He says Moody's issued a similar negative outlook for states about a year ago. He says that sends a signal to investors that these governments are under stress. But it's a big leap from stress…to default.

BEN WATKINS: The default rate on state and local governments' plain municipal bonds are virtually nil. It virtually never happens.

That's because government officials will bend over backwards to avoid it. Even when Orange County filed for bankruptcy in the 90s, bondholders got their money back.

In New York, I'm Amy Scott for Marketplace.

About the author

Amy Scott is Marketplace’s education correspondent covering the K-12 and higher education beats, as well as general business and economic stories.

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