City of Champaign likely avoids credit downgrade

City of Champaign likely avoids credit downgrade

The threat has already passed, and in reality, it was probably never an issue to begin with. But Moody's credit rating service recently informed the city that its credit rating is "resilient," even after the Standard & Poor's downgrade of the federal government.

Every municipal government with a "Aaa" credit rating (the highest attainable, which is what Champaign has been rated) was put on review after the federal government faced its debt ceiling issues and the possibility of a default on its loans. It's because there's a trickle-down effect -- states depend on the federal money coming in, and municipalities like Champaign depend on a lot of state money (which, indirectly, means they depend on part of that federal money).

There are other municipalities which depend more heavily on direct federal funds, but Champaign is not one of these. These likely are the municipalities whose credit ratings would have been marked "vulnerable" by Moody's. The states with the best credit ratings are at a higher risk for downgrade because they also depend directly on federal revenues.

The state of Illinois has an A+ credit rating, as determined by Standard & Poor's; if this were a grade school report card, that would be great. But actually, this is only one notch above the worst possible rating. The bright side is that Illinois is not on credit watch, so don't you worry about our state's debt (end sarcasm).

Champaign Finance Director Richard Schnuer said that, even though it would still be unlikely the city would lose its Aaa rating, a federal default would mean a higher risk for a downgrade, depending on what cuts would be made at the the highest level (a good example of that is Medicare -- states depend heavily on Medicare money, so a cut to Medicare liabilities as a result of a federal default would be a huge blow to state budgets). But even then, Schnuer is confident in the city's credit rating.

But, just for fun, let's assume the worst case scenario and say the federal government defaults on its loans and Moody's downgrades Champaign's credit rating two notches to Aa2. Ultimately, that would mean that big projects like last year's huge bond issue for storm water drainage improvements throughout the city would be more expensive.

Bond sales are the way municipal governments take out loans, and they pay interest on those bonds the same way a homeowner would on a mortgage. And just like that homeowner, the city's interest rate is based on its credit rating. A lower credit rating means a higher interest rate, and a higher interest rate means a higher payoff amount.

The city's financial adviser estimates that a two-notch downgrade to the city's credit rating would make a $20 million bond issue $600,000 more expensive over 20 years, so roughly $30,000 extra in annual payments. For comparison, that's less than half the cost of a police officer and only a fraction of an infrastructure improvement project. So, yes, it's an extra cost to taxpayers, but considering the city's annual budget (including its capital improvements budget) is well above $100 million, it's probably nothing to lose sleep over.

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