Why Bond Ratings Matter

The City sells bonds to investors when we need to complete a major capital project, such as reconstructing a street. The buyers of the bonds are basically loaning money that the City pays back over a period of ten to twenty years. Like a mortgage on a house, the City’s total payment includes both principal and interest payments.

One of the factors that determines the interest rate the City pays on its bonds is our bond rating. Bond ratings reflect our credit worthiness, similar to a credit score for individuals. The City is presently rated AA- by S&P (Standard & Poor’s) Global Ratings. AA- is considered to be a very strong bond rating.

As anyone who has bought a house knows, interest rates matter. Just a 1/10 of one percent (or 10 basis points) difference in the interest rate on a $5 million dollar loan increases our interest payments by $55,000 over the life of a 20 year loan.

Some of the factors that determine our bond rating are in our control (financial policies and amount of debt); others are not (economy). During our first work session to develop a long term financial plan for the City, we reviewed the results of our last bond rating report:

As we move forward, we want to make sure that we are maintaining our strong bond rating and not relying on short term fixes – such as using reserve funds – to balance our budget. One of the added benefits to doing a long range financial plan is that it strengthens our standing in the eyes of the bond raters. They look favorably on communities that plan ahead.