One of the more unusual results of the controversial downgrading of US Treasury bonds from AAA to AA+ by Standard & Poors on August 5th is that bonds issued by the City of Berkeley are now rated at the same level as the world’s most liquid and largest financial instrument.
“We’re AA+,” said Robert Hicks, the city’s Director of Finance. “That’s the rating the US government has,” he adds with a slight chuckle.
Bond ratings determine the creditworthiness of a debt issue, such as the revenue and general obligation bond issues by Berkeley. The S&P rating for Berkeley, AA+, is the second highest possible rating, just a notch below AAA. AA+ is a high grade rating, as is Aa3, the rating Berkeley receives from Moody’s, one of the other principal ratings agencies.
Berkeley Unified School District is also AA+, but along with thousands of other agencies across the country, it was moved from a “stable” rating to a “negative” rating when the country’s sovereign rating went down. The downgrades in outlook were caused largely by increased uncertainty about future flows of federal funding. (For real financial wonks, you can study 60,000 bonds, including the BUSD ones, that were moved from AA+ stable outlook to AA+ negative outlook on this spreadsheet. BUSD issuances are rows 5841 and following.) Thousands of municipal bonds were downgraded from AAA to AA+ in line with the federal downgrade.
Banking analyst Meredith Whitney, who was ahead of the financial crowd in spotting the problems in financial institutions pre-2008, has been outspoken about what she sees as a looming municipal bond apocalypse. Other analysts are more sanguine about the outlook.
According to Hicks, Berkeley has improved from AA- to AA to the current AA+ in recent years. The difference between single steps of high grade ratings can be on the order of 25 to 30 basis points (each basis point is 0.01%), which reduces the cost of bond issuance for the city.