For the money, Hub's A-OK

16 February 2005

There likely will never come a day when the mayor stands before a throng of screaming children and their parents and bellows out, "Moody's Investors Service has just assigned a rating of Aa1 to Boston's 2005 Series A general obligation bonds! That's up from Aa2, generating us a net present value savings of 3.3 percent!"

Gee, how thrilling Mr. Mayor. Could you tell us about the new playground?

So it goes with issues of finance and fiscal management. They're ignored.

Too bad. Boston's bond rating has just hit an historic high - and that achievement may well be the most important legacy of Mayor Thomas Menino's 12 years in office.

Moody's is but one of several rating agencies (others are Standard & Poors and Fitch) that rank the credit-worthiness of towns, cities, states and even national governments. Boston's upgrade to Aa1 puts it just one notch below perfection (Aaa).

How good is that? Much better than New York's grade of A2 (unlike school grades, when it comes to public finance, an A is middle of the pack). Indeed, with rare exceptions (such as Seattle) Boston is ahead of most similarly sized cities; it even ranks better than the state of Massachusetts.

There's even more to crow about. In 1981, Boston's finances were so dire that Moody's suspended its ratings. Banks refused to buy Boston bonds. Under Mayor Ray Flynn and Ray Dooley, his director of administrative services, Boston slowly moved its rating to an A.

Menino made financial management a priority. He has had three strong chief financial officers, all respected on Wall Street. John Simmons was deputy general treasurer for finance in Rhode Island. Ed Collins, a hard-nosed state and local government veteran, took over in 1996. After he suffered a stroke in 2000, a one-time analyst, Lisa Signori, took over (Collins still consults). Despite her age (at 37, she is perhaps the youngest CFO of any major U.S. city), she has impressed many.

Equally impressive, however, is that Menino allowed his financial people to do their work. That's not easy for a pol, since there is little glory in balancing budgets. Yet in and out of City Hall, on or off the record, Menino gets the credit. Boston's management is "extremely strong and proactive," Moody's says. "This financial performance is particularly impressive as the city has lost approximately $75 million of state aid since 2002."

Praise like this you just can't buy (really - efforts to do so get you thrown in jail).

But, aside from bragging rights, what's it all mean?

The most obvious effect is on interest rates. A better rating gets you a lower rate. Boston now carries around $780 million in bonds. By my calculation, the difference between its current rating and Ba (the sorry level of two decades ago) is roughly $4.7 million annually.

That's a lot of playgrounds. But it goes deeper than that.

The ratings measure not only the strength of the city's finance department, but also the strength of the city. Crime rates, housing prices, business activity and residential growth all figure into assessments of a city's stability and its long-term prospects.

Moreover, it's self-reinforcing. A bad credit rating, for example, raises fears of new taxes and badly delivered services, driving businesses away. Good ratings have the reverse effect, strengthening the economy and eventually pushing the ratings even further upward.

Yeah, it's dull stuff. You won't see bond ratings discussed much in the mayoral campaign. But it's true what Menino says. "If finances work, the city works."