Moody’s to review all CA bond ratings

August 18, 2012

On Friday, August 17th, AP reports that Moody’s has floated the idea of cutting the bond ratings of all California cities. In my earlier post MH Debt and Bonds I mentioned that one of the things that those of us in Mountain House need to worry about are the external financial forces and how they influence the interest rate on our massive $309M debt. The AP article strongly backs up my point. Our current S&P bond rating is A-. If our bond rating drops we will pay a higher interest rate on bonds as we finance our debt and this means our taxes will have to rise. Now remember S&P, another bond rater, has already stated that Mountain House taxes are high. Ironically, high taxes are NOT good for bond ratings. Here is the reason. If a community ever has trouble paying but already has a high tax rate, then raising taxes even higher may do more harm than good for the community’s economy. In other words, raising taxes brings in more money if tax rates start from a low point. However, raising taxes to very high levels actually hurts residents and business. The residents and businesses move away leaving the community less able to pay their bonds and bringing in less taxes. This is precisely what is happening in California right now. More companies are closing and leaving than are starting. Long-term wealthier residents are leaving the state to avoid taxes and new usually poorer immigrants are barely able to keep the population stable.

Interesting data points in the AP article

  1. 10% of California cities have declare fiscal emergencies
  2. California is 20% of the muni bond market
  3. Pension reform as was done in San Jose and San Diego offers some hope

AP Story on California Bond Ratings and Moody’s

John McDonald

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