Credit Rating (Municipal)
An assessment by a rating agency (Moody's, S&P, Fitch) of a city's ability and willingness to repay its debt obligations. Higher ratings mean lower borrowing costs.
How It Works
Credit ratings are issued by Nationally Recognized Statistical Rating Organizations (NRSROs) designated by the SEC. The three primary muni rating agencies are Moody's Investors Service, S&P Global Ratings, and Fitch Ratings, all regulated under Dodd-Frank Title IX. Moody's scale runs Aaa (highest), Aa1-Aa3, A1-A3, Baa1-Baa3 (investment grade), Ba1 through C (speculative grade, "junk"). S&P and Fitch use AAA through D. Most U.S. cities carry investment-grade ratings (Baa/BBB or above), with the national median general-obligation rating in the Aa2/AA range. Rating agencies evaluate five primary factors: the economic base (wealth, employment diversity, population trends), financial performance (fund balance, structural balance, liquidity), debt burden (direct debt per capita, debt to assessed value, debt service to expenditures), pension and OPEB obligations (funded ratio, ARC payment discipline), and management and governance (multi-year planning, policies, political stability). A single-notch downgrade (e.g., Aa2 to Aa3) typically increases borrowing costs by 15-40 basis points; a multi-notch drop from AA to BBB can add 100-200 basis points, costing tens of millions over the life of a $500 million bond issue. Detroit was downgraded from investment grade to junk in 2009 and ultimately to C before its July 2013 bankruptcy. Chicago has been downgraded multiple times since 2014 primarily due to pension underfunding, with Moody's assigning Baa3 ratings while Fitch kept the city at BBB. Puerto Rico was downgraded from investment grade to default between 2014 and 2016. Credit ratings are monitored in the CitySpend fiscal trend weighting (10%) and feed the overall Health Score.
Related Terms
- Municipal Bond, A debt security issued by a city, county, state, or other government entity to finance capital expenditures. Interest income is generally exempt from federal income tax.
- General Obligation Bond (GO Bond), A municipal bond backed by the full faith, credit, and taxing power of the city, meaning the city pledges to raise taxes if necessary to repay bondholders.
- Debt Service, The annual cost of repaying outstanding municipal debt, including both principal payments and interest on bonds and other borrowings.
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About This Definition
This definition is part of the CitySpend Municipal Finance Glossary, 59 terms explaining how city governments fund and manage public services. All definitions are written in plain language for taxpayers, journalists, students, and municipal bond investors.