As the city of Asheville and Buncombe County prepare to weather the effects of COVID-19, the illness brought on by the new coronavirus, their financing departments are handling to discover a silver lining amidst the state of emergency situation. Healthcare employees may be stressed out, public events may be delayed until further notification, but the cost of money is looking much better than it has in years.
“With various things like the coronavirus and other concerns about how that’s going to affect the economy, what’s taken place is interest rates have really boiled down,” states Doug Whitman, treasurer for the city of Asheville. On March 15, the U.S. Federal Reserve cut the federal funds rate, an essential financial standard, to 0 to 0.25%, its most affordable level since December 2008.
That’s fortuitous timing for city governments. Over the 30-day period that began Feb. 27 and goes through March 26, the city and county are planning to provide a total of nearly $233 million in financial obligation.
In times of problem for the stock exchange– since press time, the Dow Jones Industrial Average had actually experienced its three largest single-day point losses in history on March 9, 12 and 16 and is currently in bear territory– investors generally turn towards government-issued bonds, which are considered much more secure financial investments. And when need for that security is high, cities and counties pay less to borrow money, which they can then utilize to refinance old financial obligation or fund brand-new jobs.
How much less? In 2000, when Asheville last issued basic commitment bonds, the city paid around 5% every year to borrow money for five years. For one set of bonds offered in February, the city is paying a reliable rates of interest of simply 1% to obtain cash for 10 years, or a 5th as much interest for a loan two times as long. Buncombe County estimates that it can conserve taxpayers $20.5 million on interest over the next 15 years by refinancing formerly issued financial obligation.
But both the city and county claim another factor contributes to their favorably low rate of interest: a AAA credit ranking. Asheville Chief Financial Officer Barbara Whitehorn discusses that this mark, granted by rating companies such as Requirement & & Poor’s and Moody’s, signifies the best possible professional self-confidence in the security of holding a federal government’s debt.
“They’re essentially stating to an investor, ‘If you buy these bonds that are twenty years out of now, we give you the greatest level of guarantee that we can that you will get that cash back,'” Whitehorn states. “It’s really a big offer.”
With a lot funding set to flow into regional coffers, Xpress took a look at what enters into a AAA credit ranking– and what impact keeping that rating has on Asheville and Buncombe County’s approaches to finance.
Views of the top
In recent years, both the city and county have been eager to be acknowledged as sensible stewards, and both governments have pointed to their credit rankings as evidence. When Buncombe first earned its AAA in 2012, then-County Supervisor Wanda Greene mentioned in a press release that the score affirmed the county’s ability “to support our service community, to offer effective and effective services and conservatively manage our tax dollars.” A 2017 release following Asheville’s own upgrade to AAA called the relocation “confirmation of the city’s sound financial policies and expert management.”
(In August, Greene was convicted of federal corruption charges and sentenced to 7 years in prison. Federal indictments of the previous county supervisor detailed deceitful financial activities including inappropriate purchase card usage and funneling $2.3 countless taxpayer money earmarked for a claim settlement to purchase life insurance policies for herself and other county staff members.)
Don Warn, Buncombe County’s financing director since November 2018, explains that 30% of a federal government’s credit ranking is originated from the health of its economy, which determines its offered tax base. Buncombe County, with its ever-expanding tourism market and rapid pace of building and construction, scores particularly well on that front.
The remainder of the score, Warn continues, is based on the government’s own actions. Lower levels of general financial obligation, higher cash reserves, greater budgeting oversight and more in-depth financial policies, he states, all contribute in a ranking company’s decision.
“The better your score is, it just states we’re doing the best things,” Warn states. “You can’t have a AAA score without having strong management, strong fund balance, strong financials, strong economy.”
Professionals beyond government, however, generally take a more minimal interpretation. Matt Fabian, a partner with Massachusetts-based research study company Municipal Market Analytics, says that the monetary industry regards government credit scores exactly like individual credit rating– no more, no less.
“A great deal of cities use the credit score as a proxy for some sort of seal of approval that they’re doing things correctly or that they are running the government in a suitable method,” Fabian states. “However that’s not precisely real, in the same way that running your life just to maximize a credit rating is maybe not an appropriate thing for all people to do.”
Very first rate?
Federal governments with a AAA credit score, acknowledges Fabian, do get the most affordable possible rate of interest when borrowing cash. Yet due to unusually high need in the municipal debt market– “The official term is ‘bananas’: For every single possible customer, there are 20 loan providers,” he says– the benefit of a AAA compared to a somewhat lower score can be just a tenth of a portion point on a 30-year bond.