Mayor Lenny Curry announced last week that the credit rating agency Fitch had given the City of Jacksonville a historic best AAA credit rating, but what does that mean?
“This is a tremendous win for the City of Jacksonville,” said Mayor Lenny Curry. “I’m proud of the history we are making by bringing strong fiscal management to our city. My administration will remain consistent in our commitment to respect the hard-work of taxpayers.”
Abdel Missa, a Resource Professor of Finance at Jacksonville University, says a AAA from Fitch is the highest rating you can get. “It’s “like an 800 credit score, if you want, for individuals.”
Missa is the CEO and founder of MarketCipher Partners LLC, which he describes as an alternative investment management firm. He’s also the president of the Harvard Business School Club of Jacksonville and has more than ten years of experience on Wall Street, where he managed a $300 million portfolio with Deutsche Bank.
Missa said a credit rating for a city is very similar to an individual’s credit score. In both cases, what’s being assessed is the risk of loans not being repaid. The higher the credit score, the less likely there will be a default.
National credit-rating agencies calculate scores by looking at two main factors.
“On one hand you have assets. In the case of the city it’s like the future taxes that the city is going to be making,” said Missa. “And on the other hand you have liabilities. So you’re borrowing money, through bonds for example, or you have pension liabilities for your employees.”
When liabilities grow faster than assets or sources of revenue, credit ratings are lowered. But, according to Missa, Jacksonville’s liabilities have decreased because the city is doing great from an economic standpoint. He also pointed to a recent restructuring of the city’s pension plans.
According to Missa, new city employees, who started in 2017 or later, were moved to a defined contribution plan. That means employees manage their money, for example through 401Ks, so the risk has been transferred from the city to the employees. “Because of that, there are then less liabilities for the city,” Missa said.
Missa said the perks an individual gets for having a good credit score are very similar to what a city will get for having a great credit rating.
One of the main advantages is access to low interest rates. Missa said interest rates aren’t just reflective of Federal Reserve interest rates, they also take credit risks into account. A low credit score indicates that a city or individual is unlikely to repay loans, so a premium is charged.
But Jacksonville’s credit rating is strong, which means the city will be offered lower interest rates. “That means the city can fund infrastructure projects and other projects with very low, cheap interest rates,” Missa said. And those savings will be passed onto the taxpayers, who will be paying less for the same projects.
City employees will also reap the benefits of Jacksonville’s credit rating. As Missa mentioned, they have defined plan benefits, which means the city owes them and will pay their benefits in the future. “Well those employees need to feel now more comfortable with the situation versus before, because now it just made it even safer so they can rely on that money,” he said.
The city’s upgraded credit rating is also great news for Jacksonville’s business ecosystem. “Think about it as like, if you’re a company evaluating to move a business to Jacksonville, it’s another advantage,” Missa said. “Because now you’re dealing with a city that’s going to go in to support you and that has a very strong fiscal situation. So that’s also positive, in terms of bringing new businesses to the community.”
On top of the news from Fitch, Standard & Poor’s (S&P) upgraded Jacksonville’s special revenue bond rating from AA- to AA (S&P’s second highest rating) earlier this year and Moody’s recently reaffirmed the City’s Aa3 (fourth highest on Moody’s scale) credit rating on the special revenue pledge.