We’ve read a bunch of stories over the past few days about municipal bonds that could have big implications for Nutter's proposal to borrow $4.5 billion to fund the city's pension system. This stuff is mind numbingly complicated, so bear with me...
According to one of the articles that ran in the New York Times, a growing number of cities and states are complaining that the cost of borrowing money is too high. Corporations are able to get money at a lower interest rate despite the fact that government bonds have traditionally been a safer investment.
What does this actually mean? Anyone who has borrowed a large sum of money knows that your credit score plays a major role in conditions of the loan. Lenders use your credit score to determine how much money you can borrow and at what interest rate. Cities are also assigned credit scores, called bond ratings, which calculate the risk of lending money to that municipality.
If a city has a low bond rating but still needs money, where does it turn? A rating can be improved by purchasing bond insurance. If a city cannot repay its debt then the bond insurer pays back the lender. It's similar to having a co-signer on a loan. Buying bond insurance makes it possible for cities to get more money at a better rate, but also increases the overall cost of the loan.
Still with me? Now, let’s return to the Times article. Governments looking to borrow money, led by California, are claiming that bond ratings are being kept artificially low, forcing them to purchase insurance. This has put a lot of pressure on the rating agencies to make it easier for cities and states to float bonds at competitive rates.
So, how does all of this impact Philadelphia ability to get a good deal on the $4.5 billion Nutter wants to borrow for the pension fund? According to Amy Resnick, who edits The Bond Buyer, “The current environment means that Philadelphia will be negotiating from a position of strength. They will be able to borrow at competitive rates.”
We’ll be following this story closely over the next few months, so stay tuned...