Our present Mayor, Lynn Peterson, never fails to mention Thunder Bay’s credit rating of A+ whenever her handling of the city’s finances are questioned. I wonder just how good is A+ in the Standard & Poor’s rating system. Is it really THAT great? In high school, I would have killed for an A+ . Even an A was a symbol of excellence. Is an A+ credit rating worth killing for when it comes to the world of municipal bonds? The answer is no.
General Summary of The Opinions Reflected by Standard & Poor’s Ratings
* AAA – Extremely strong capacity to meet financial commitments. Highest rating
* AA – Very strong capacity to meet financial commitments
* A – Strong capacity to meet financial commitments, but somewhat susceptible to adverse economic conditions and changes in circumstances
* BBB – Adequate capacity to meet financial commitments, but more subject to adverse economic conditions
* BBB – Considered lowest investment grade by market participants
Ratings from ‘AA’ to ‘CCC’ may be modified by the addition of a plus (+) or minus (-) sign to show relative standing within the major rating categories.
So the ratings levels go AAA, AA+, AA, AA-, A+, A, A-, BBB+, BBB, BBB-. As you can see, A+ is in the middle of the S&P Ratings Investment Grade Table.
The best rating S&P can bestow on a city government is AAA. The ratings table goes down all the way down to D but BBB- is considered the lowest investment grade rating. Anything less than that such as BB+ down to D are considered speculative grade. Junk bond territory. A municipality does not want to be below BBB-. In fact, there is no reason why a municipality should be rated below AAA. Municipalities rarely default. Almost never. In fact, the rate of default on municipal bonds is less than the AAA rated corporate bonds.
Cumulative Historic Default Rates (in percent)
Source: U.S. Municipal Bond Fairness Act, 2008.
If that is the case, then why is the City of Thunder Bay’s credit rating at only A+? There must be more to the story than Mayor Peterson is telling us.