Navigating the financial services industry can feel like trying to decode a foreign language for the average American. We depend on experts to break down the complexities into simple, understandable terms. Moreover, we trust these experts to be honest and transparent, but unfortunately, that’s not always the case.
What Is A Moody’s Rating?
A Moody’s Rating Report assesses the creditworthiness of borrowers by assigning ratings to their debts, such as bonds, loans, and other financial obligations. It provides insights into the likelihood of default and the overall financial health of entities like corporations, governments, and institutions. In many ways, it’s similar to a consumer credit report used when you take out an automobile loan or home mortgage. These reports play a crucial role in guiding investors to assess the risks associated with their investments. Ratings can range from high-grade (Aaa) to speculative (C), with various subcategories in between. Moody’s comprehensive analysis includes economic factors, financial statements, market conditions, and qualitative assessments.
The following is a guide to the various ratings by different companies and their generalized classification:
What Happens When Your Moody’s Rating Declines?
A decline in Moody’s Rating can have significant consequences for a government entity. Some of the most influential factors include:
- Higher Borrowing Costs: Lenders may begin to charge higher interest rates on any new debt taken out, reflecting the increased risk of lending more money.
- Reduced Investor Confidence: Investors may see the decline as a sign of financial instability, leading to reduced investment or divestment in a municipality’s or a school’s bonds.
- Restricted Access to Capital Markets: It may become more challenging to issue new bonds or obtain to loans and/or refinancing.
- Impact on Existing Debt: The cost of servicing existing debt could increase if it’s tied to variable interest rates when there is a need for re-financing, especially in cases where wrapped around bonds are utilized.
gnoring these consequences can lead to a severe ripple effect, making financial recovery for the entity more difficult and significantly impacting the community and its taxpayers. For those of us in the Pennsbury community, we need only look to the financial hardships and community decline in neighboring Morrisville Borough. Once a bustling area, Morrisville’s troubles began when its Moody’s Rating dropped to Junk Bond Status.
Is Pennsbury’s Moody Rating At Risk Of Declining?
The short answer is yes. In 2021, after years of significant spending by the Democratic-led School Board, Moody’s issued a warning and downgraded our rating from AA2 to AA3. This downgrade dropped our financial stability below that of the City of Philadelphia. In their report, Moody’s noted that our reserves “are somewhat weaker than those of similarly rated peers” and highlighted that “the district has seen a moderately declining enrollment trend due to demographic shifts that is expected to persist over the long term.” Moody’s also mentioned that the rating could have been downgraded even further if not for “the board’s willingness to raise property taxes, which somewhat offsets a more narrow financial position.” In layman’s terms, Moody’s commended our elected officials for taxing our community at the highest Act 1 level. They advised that due to excessive spending, maximum tax increases would be needed indefinitely to prevent further rating declines, especially considering planned capital expenditures (e.g., the new PHS building).
The following is a copy of this latest Moody’s Report from 2024 for everyone to read:
In addition to the stark warnings about the need to keep raising taxes if spending isn’t curbed, Moody’s also compared Pennsbury’s financial standing to that of similarly sized school districts. In its 2024 report, Moody’s noted that “while Pennsbury’s finances are solid and stable, with a fund balance consistently around 10% of revenue and liquidity at about 19%, these metrics still lag behind those of comparable districts nationwide”. This financial stability is largely due to overtaxing the Pennsbury community by an average of $4 million annually since 2020, except for the COVID-19 year. This “cooking of the books” will be explored in a future blog post, detailing the official Auditor General’s complaint filed by Robert Abrams against Pennsbury School District in September 2023. Similar financial misconduct has recently led to sanctions against the Neshaminy School District. For more details on the allegations against Pennsbury, you can read the news story at Levittown Now, which includes an interesting twist on how they plan to finance the new PHS building without a referendum.
What Does It Mean To My Home Value?
A decline in Moody’s Rating can significantly impact the demand and value of your home. While we’ve seen home values soar in our area since the pandemic, Morrisville Borough did not experience the same increase. If Pennsbury continues its reckless spending and debt expansion, we could face similar consequences. Here’s what could happen:
- Higher interest rates: Lenders may increase mortgage rates to compensate for the higher perceived risk, making borrowing more expensive for homebuyers
- Reduced demand: Higher borrowing costs can reduce the number of potential homebuyers, leading to decreased demand for homes.
- Lower home prices: With fewer buyers and higher costs, home prices may decline as sellers adjust to the market conditions.
Although a Moody’s decision to downgrade a municipality’s rating doesn’t directly affect home values, it creates an indirect ripple effect that impacts the local housing market. Morrisville Borough exemplifies these ripple effects, which Falls Township, Lower Makefield Township, Yardley Borough, and Tullytown Borough are likely to experience starting in 2029 due to ongoing financial mismanagement and a politicized School Board.
Additional Reference Details
For those interested in reading the previous Moody’s Reports which repeatedly advised our School Board to keep massively raising taxes if you continue to refuse to focus on cutting costs, click on the links below to review each report:
Moody’s Rating Report – 2023
Moody’s Rating Report – 2022
Moody’s Rating Report – 2021
Moody’s Rating Report – 2020