December 2024
Why is a AAA bond rating important?
Why should we care?
Simply put, it saves us a lot of money!
The City of Richardson (CoR) has earned a AAA bond rating for the past 15 consecutive years from two of the most important United States rating agencies, Moody’s and Standard & Poor’s. This high rating instills investor confidence in our debt and enables the lowest interest rates on CoR bonds.
Richardson has saved many millions of dollars because of this AAA rating.
These savings are a result of conservative management practices from our Mayors and City Councils combined with conservative management by our City Managers and staff. The result is a well-run and financially competent city.
Our current Mayor Dubey, City Council, City Manager Don Magner and CoR staff continue this practice. The Richardson Coalition thanks them for their excellent leadership in the reaffirmation of the AAA bond rating for 2024 by both rating agencies.
The Richardson Coalition
_ _ _ _ _ _ _ _ _ _ _ _ _ _ _
Why a Top Bond Rating Matters for Municipalities Issuing Bonds
When a municipality embarks on long-term projects, whether it’s building new schools, upgrading transportation systems, or revitalizing critical infrastructure, funding these initiatives often requires issuing bonds. However, the interest rates and overall costs associated with these bonds are not set arbitrarily. They’re heavily influenced by something critical: the municipality’s bond rating.
A top bond rating, typically awarded by agencies like Moody’s, Standard & Poor’s, or Fitch Ratings, is a seal of approval on a municipality’s financial health. It conveys to potential investors that the local government is creditworthy and that their investment is safe. This rating can have a significant impact on a city or county’s ability to fund large projects effectively and affordably. Here’s why that top-tier rating is so important.
Lower Borrowing Costs = Lower Taxes
A top bond rating can save municipalities—and ultimately taxpayers—a considerable amount of money. When a municipality earns a high rating, such as an “AAA” or “AA,” it signals to the market that the risk of default is low. This, in turn, allows the municipality to borrow at lower interest rates.
Lower interest rates reduce the overall cost of long-term borrowing, meaning the government spends less on interest payments over the lifespan of the bond. This saved money can be reinvested into public services or even result in fewer tax increases, lightening the financial burden on citizens.
Greater Investor Confidence
When bond rating agencies award a municipality a top rating, it provides a stamp of credibility that investors trust. Investors are naturally drawn to low-risk opportunities, and a high rating makes municipal bonds more attractive. In fact, institutional investors—such as pension funds, insurance companies, and mutual funds—often have strict rules that limit their investments to highly-rated bonds.
This increased demand for a municipality’s bonds can lead to quicker sales and, again, lower borrowing costs. Conversely, municipalities with lower ratings may struggle to attract investors or face paying higher interest rates to entice them.
Access to a Broader Market
A top bond rating not only lowers costs but also opens the door to a much larger pool of potential investors. Large-scale investors, both domestic and international, typically prefer to put their money into highly rated municipal bonds. These top-tier ratings expand a municipality’s access to capital, ensuring it can secure the funding needed for large, transformative projects, whether that means building new schools, modernizing infrastructure, or expanding public services.
Ensuring Financial Flexibility for the Future
One of the most valuable benefits of maintaining a high bond rating is that it allows municipalities to stay financially nimble. By borrowing at favorable terms today, municipalities are better positioned to manage future capital needs. Whether it’s addressing unexpected emergencies or planning additional long-term projects, cities and counties with high ratings have more financial flexibility to respond without facing punishingly high interest rates or limited access to markets.
Building and Maintaining Public Trust
A top bond rating isn’t just a number; it’s a reflection of sound financial stewardship. It signals that the municipality is managing its finances responsibly and that it is making well-considered financial decisions on behalf of its citizens. This fosters trust within the community, reinforcing that tax dollars are being used effectively and that future investments will be handled with care.
By maintaining a top bond rating, municipalities can also avoid the reputational damage that can come with downgrades, which could suggest financial instability or riskier financial management.
The Bottom Line: A Win-Win for the Municipality and Its Citizens
At the end of the day, a top bond rating is about more than just securing low interest rates, it’s about ensuring the financial well-being of the municipality and its citizens. Lower costs on bond issuances mean taxpayer dollars stretch further, while a broad investor base ensures the necessary funding for important, long-term projects. Maintaining a high bond rating is a win-win for both the government and the community it serves, ensuring financial strength and flexibility for years to come.
For municipalities aiming to make lasting investments in public infrastructure, schools, and services, a top bond rating is one of the most important financial assets they can have.
