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Principles of finance ah la shmoop rating Munity bonds with

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ketchup With cheese with onions With mustard with your asha

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with plum sauce All right Well think communi bond ratings

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Lots of variables go into investor taste when they put

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money into a munich bonn grated in a given class

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Well most of the ratings revolve around who stands behind

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paying off the munich bond Should things you know go

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awry a different kind of rye bread With that out

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of here as in most things financial the most important

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element here is price or ah that is risk adjusted

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price The more risk investors perceived investing in immunity bond

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while the more return or interest they will demand for

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him parting with their precious pennies So let's take the

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nickel tour or the you know five trillion dollar tour

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here of credit rating's in mini bond land Okay so

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credit ratings check these out right here moody standard poors

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fitch Yes they matter especially with munich bonds high credit

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ratings imply high financial stability of municipality and low risk

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of default This powerful combo usually means lower interest rates

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for the city Seeking to build a new park expand

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a parking volume thing near the mall and or widen

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their sewer from a three inch pipe toe one that's

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four feet wide Coinciding with the city's new embrace of

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high fiber diets i don't think about that a bunch

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of factors affect the rating itself One key element revolves

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around the perceived stability of the entire region that is

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an area which regularly votes in tax increases or special

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tax assessments for projects well usually garner higher ratings and

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cheaper debt then areas which have drawn a line in

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their tax bill and said you know read my lips

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all right next up ability to pay a municipality that

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already has a lot of outstanding debt is just like

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a corporation that has a lot of outstanding debt regardless

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of how senior this new debt purport to be While

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the chances of default are still hire you want to

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look at its credit history Has it paid other debt

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on time Ever defaulted in the past Doesn't have wealthy

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city neighbors who would bail it out in times of

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crisis Well the key focus is the ability to pay

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test here which focuses on the municipalities ability to collect

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taxes and nor fees on things like sewer hook up

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you know for new homes real estate tax transactions and

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cable egress and door rite of passage and fees and

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tolls so that enough net profits are coming into the

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city so that paying off their debts and more less

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on time is a layup And yes munich bonds funded

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the city basketball courts as well There Thank you very

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much So you know what a deadbeat debtor is right

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Well it's someone who took out alone promised to pay

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it back and then re nig leaving the person who

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loaned them the money in a pickle Well the same

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thing happens with cities Local politicians want to look like

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heroes of the moment and find ways with all kinds

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of false promises to borrow money and build that social

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aquarium Everyone has been jonesing for called fish book Unfortunately

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the throngs of munich people may or may not show

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up in schools A city lives on its taxes It

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levees them It hopes that everyone pays but they don't

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They just don't know Sadly there has to be a

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collection ratio Thats the dollar amount actually collected divided by

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the dollar amount levied Like normally you'd expect a given

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city to collect well over ninety nine percent of the

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taxes it bills But in tougher economic times a bunch

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of nail salons when they can go bankrupt and skip

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found without paying their tax bill and they do a

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low collection ratio is a sign that the city is

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economically unstable or a kind of falling apart Just is

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in corporate america there are debt covenants while the munich

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bonn world has the same limitations Thank goodness unfettered in

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many cities just like congress would vastly overspend their budgets

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trying to do good for their towns I you look

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like heroes get reelected etcetera but taking everyone to the

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poor house in the process by borrowing money they had

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no hope of ever paying back so most cities have

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ceilings on how much debt they can issue It may

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be based on total tax revenues collected or a specific

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dollar amount per head or an index which includes a

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running average of interest rates or some other combination thereof

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But just as in corporate america where a debt to

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even the ratio of a greater than five acts number

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makes investors really nervous and thus the bonds usually carry

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very high interest rates the same or less is true

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for in municipalities Let's think about how population factors into

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this issue Well you'd expect san francisco a very populated

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city to carry a lot more debt with its masses

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of wealthy populace Then you'd expect from say peoria illinois

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a large population usually bodes well for general obligation Munib

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bonds remember these air the bonds backed by the full

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faith and credit or the general obligation of the entire

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city so usually pretty safe because of a geo bond

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ever didn't pay well it would sort of mean the

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end of the financial life of the city think today's

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detroit and related lee of equal import are trends in

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the population It's a problem if your city is crumbling

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and everyone is moving out of it to the burbs

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or to another state because well in the debt doesn't

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disappear even though your taxpayers do remember that nineteen sixty

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three detroit wass the silicon valley of the country our

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best and brightest graduates from harvard on down would do

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anything to get a job building and selling this new

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huge growth industry called cars but as you know that

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didn't work out so well Well most local schools make

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their money from real estate taxes the local public schools

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borrow money against the promise of future taxes coming from

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real estate in their area when the value of homes

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goes up a lot Well usually the taxes collected from

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those homes also goes up a lot and life is

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grand when the tax base is growing And when you

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think about rating munich bonds while growing areas usually mean

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higher ratings and cheaper capital cost to the borrowing city

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that's right the borrowing the money gets cheaper things are

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good right And there are a few other sources of

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municipal revenue You have sales taxes and finds like this

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parking meter people which can be a big part of

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the municipalities revenue base And yes so stupid parking people

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are actually a positive line item from the income statement

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of most is stupid idiots can't believe they get paid

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so much money All right we're moving on Another big

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concern of mu ni investors is the big ugly specter

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of unfunded incheon liabilities Okay so what is a pension

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And one is a liability Well in california and illinois

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and a few other highly indebted states for decades politicians

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wanted to coddle Police and firemen and other unions because

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they wanted to look good their constituents and get re

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elected and other than burglars and arsonists Well who doesn't

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like cops and fireman not talking to you The nfl

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but politicians negotiated and their advisors presumed that their state's

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economy would always remain strong and grow to infinity Over

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time his taxes corrupt upward businesses and highly taxed old

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people who are wealthy began leaving the state and then

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the internet made telecommuting and other things dramatically easier to

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manage remotely like from cheaper red states So the relative

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tax dollars per person started to decline is the wealthy

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and just a lot of business began to leave the

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states in Suddenly cities inside the state could no longer

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afford the armies of cops and fireman and other infrastructure

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they had grown and it was one piece of very

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bad legislation that harmed things financially for the cities police

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and fire and other unions created a structure which most

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cities followed blindly in any given city with saving one

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hundred thousand people there likely dozens and dozens of cops

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who are retired taking home fifty to one hundred fifty

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thousand dollars a year for doing nothing in pension winnings

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which taxpayers will pay until those cops died decades later

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the policemen earned fifty going to one hundred fifty grand

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a year working for the state for the city for

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for thirty years retiring at age fifty five Then in

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these highly indebted states many of these people keep something

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like eighty five percent of their final few years salary

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average for the rest of their lives meaning that for

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the next twenty thirty forty years of their existence they

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can sit around on their porch swatting flies and get

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something like ten grand a month for doing nothing Well

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this political chicken ary ended up being a huge liability

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for many millions of dollars per year For big and

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small cities alike The cry from the local population was

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the cutbacks would have to be made to the police

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force and that this was dangerous for the locals Well

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when a local dennis asked about cutting back the ludicrously

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high pinch and grants teo retired cops and fireman you

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could imagine that the retired cops weren't too happy about

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the suggestion And for good reason They did nothing wrong

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They just cut The best deal they could with politicians

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Unfortunately for the taxpaying population smart cops cut the deal

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with idiot politicians who weren't really looking out for the

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people who elected them In response it is sadly common

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now to read about cities simply firing their entire police

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and fire departments and having outsource them to rent a

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cop Organizations who aren't subject to the owner of state

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managed pension systems The rent a cop organizations pay fair

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wages but don't suffer huge pension liabilities and the jury

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is out as it were in determining whether this will

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save cities balance sheets or not But early returns look

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good and because the pension liabilities have become such a

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large line item in city budgets well though garner a

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lot of more scrutiny going forward So why does all

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this matter to rating munich bonds Well you know where

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the devil lives And yeah all of these details in

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sum total have an effect on the financial performance of

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cities and of states most of whom are poised precariously 00:09:40.395 --> [endTime] on mountains and mountains and mountains of debt

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