DC's credit rating improved. What does it really mean?


DC government and the city as a whole have received a magnificent present tied with a big, beautiful bow: superlative credit ratings. From whom? The "Big Three" credit rating agencies—Fitch Ratings, Standard & Poor's, and Moody's.

On July 3, Fitch announced the firm had upgraded their "ratings on approximately $4.8 billion of general obligation (GO) bonds to 'AA+' from 'AA'." Standard & Poor's also upgraded DC to AA+. In their announcement, Fitch wrote:

The upgrade of the District's IDR and GO rating to 'AA+' from 'AA' reflects ongoing strong economic and fiscal performance despite federal contraction and the District's repeatedly demonstrated ability to manage its budget to meet identified needs, most recently by increasing revenues to provide enhanced funding for the Washington Metropolitan Area Transit Authority (WMATA, the local public transit operator). Fitch has raised the assessments of the District's revenue framework and long-term liability burden key rating drivers. A more than 40-year history without Congressional intervention in revenue policy substantially mitigates concerns about the theoretical limit to the District's independent revenue control implicit in the federal relationship while the improvement in the long-term liability burden assessment incorporates the strong growth prospects for the District's resource base and recognition of the notable share of its liability burden that is exported to non-residents.

Moody's—self-described as "an essential component of the global capital markets, providing credit ratings, research, tools and analysis that contribute to transparent and integrated financial markets"—delivered similarly good news to the District Wednesday, July 12: Moody's upgrades District of Columbia GO ratings to Aaa, assigns Aaa to Series 2018A & 2018B; outlook stable (subscription) (accessible PDF).

Aaa is the highest rating Moody's gives and signals that the District government's financial house is in order and, too, that the city government is on stable financial footing. Moody's wrote:

The District has exemplary fiscal governance, and its updated four-year financial plan is its strongest ever. The District already has among the lowest pension liabilities of any large city, and has pre-funded its other postretirement benefits (OPEB) liability, which affords it significant financial flexibility. It plans to eliminate its deferred capital maintenance backlog over the next ten years. The dynamism of the District’s economy has led to the largest population in 40 years and strong growth in the tax base. Financial governance is exemplary.

A general obligation bond is a common type of municipal bond in the United States that is secured by a state or local government's pledge to use legally available resources, including tax revenues, to repay bond holders. (Wikipedia, accessed July 20, 2018)

But wait. What does this actually mean?

Mayor Bowser was pleased with the ratings increases. In response to Moody's, she said

This rating is a recognition of the hard work our community has done to build a fiscally responsible city—a city that is a great place to not only live and work, but to invest in and do business. More importantly, for our city and our residents, it means that we are going to have more funds to build on our progress and create pathways to the middle class for Washingtonians across all eight wards.

When Mayor Bowser talks about having "more funds to build on our progress," she is assuming that the government will pay lower interest rates and that the difference between the old rates and the new rate equates to spending on "progress." But bond ratings don't work the way her statement suggests. The recent bond rating improvements apply only to future GO bonds sold and the related debt to the District, not bonds which have already been sold. And there's no guarantee that the District will be able to borrow at a lower interest rate.

So will more money be available for programming in the future? Maybe, but even if there is more money, there's no way to identify what money in FY 2020 "progress" programming (the FY 2020 budget is the earliest the lower interest rates will be in effect) would have gone into debt service. And keep in mind that debt service makes up only a tiny portion—3.1% in 2017, according to the 2017 Citizen's Financial Report—of the District's annual budget. Putting less money into debt service would have a small, perhaps negligible, positive effect on programming.

"Debt service is the cash that is required to cover the repayment of interest and principal on a debt for a particular period." (Investopedia, accessed August 3, 2018)

What do we do with this information?


There are two things to do. First, follow the news such as the bond ratings change. This may mean you learn the ins and outs of government finance or that you follow APACC or budget expert DC Fiscal Policy Institute. You can also learn about the budget process. Bridges Inc. has a useful document in DC Budget Process Map.

Second, regularly and clearly educate and advocate on important issues. Advocacy is important in good times and bad. Keeping your issues in front of elected and appointed officials, as well as community members and the media, is what results in change.