What to do in Denver when in debt
While researching a seemingly never-ending paper on the Philadelphia School District's relationship with the municipal bond market between 1993-2021 and its spending on buildings (watch this space, it'll come out in the next year I hope!), I found a story from Denver that's really interesting.
In a great article by Roger Biles from 2018 in Journal of Urban History, where he recounts the power of bond ratings agencies on local governments, he mentions the following:
When a Denver school district disputed the ratings it had received from Moody’s and stopped paying fees for the service, the agency relied on information available in the public domain and issued unsolicited ratings that continued to be available publicly. The school district filed a law suit against Moody’s but lost when a federal court upheld the agency’s right to publish its ratings publicly. Concurring with Moody’s characterization of its ratings as “opinions,” the court grounded its ruling in the constitutional guarantee of freedom of speech.
Let's take a look at this slowly. We know that public school districts get credit ratings. They have to borrow from the municipal bond market to get the money they need for capital programs and sometimes fill budget holes. Investors can buy and sell public school districts' infrastructure like investment commodities and get tax-free profit from the interest on those investments.
The credit ratings "agencies" do assessments of districts' creditworthiness to see whether they're good or bad investments. Just a note that the word "agency" is such an insult here. These "agencies" are private companies that make money from the fees they charge for the service of providing these credit ratings. Calling it an 'agency' makes it seem like some kind of public service or regulation. No, it's just another racket (which, if we remember, had a big role in the 2008 great financial crisis when they graded all kinds of terrible loans as if they were good deals).
The credit raters write up these reports. They have a big impact because they provide a key piece of information that makes it more or less expensive, difficult, and punitive for public school districts to get loans for their buildings and budgets. If you have a high credit rating you're seen as "investment grade," which means the geriatric millionaire investors and their bankers will feel better about investing in you and you'll get a lower interest rate. But if you have a low credit rating you're "junk" and not as many people want to buy what you're selling, which in this case is your ability to pay back the principal and interest on a loan to build a new elementary school or something. All this piles up in your debt service payments in yearly budgets, grows the sinking funds, sending upwards of 10% of a district's yearly revenue out the door before it even comes in.
The credit raters do these assessments and publish them. They sometimes do them when school districts don't even ask for it. It's like one of those windshield wiper guys who comes up and washes your windshield without your permission and asks you for money, except in this case your windshield is your creditworthiness and sometimes the wiper guy bangs on the windshield with a hammer and breaks it if he wants to. And you still have to pay him after.
That's what happened to Denver public schools. According to Biles, the Denver public school district got a credit rating that was bad and it hadn't even asked for that rating. So it disputed the rating. The credit rater dug in, publishing the bad rating against the will of the district and charging it for the service. Then Denver sued.
The courts decided the credit raters could publish the reports because they're "opinions," and preventing them from doing so would violate their free speech rights. Biles continues:
Armed with such legal protection, the ratings agencies have continued to issue unsolicited credit ratings and bill the cities for the service; fearing the consequences they might suffer for future solicited ratings, cities have usually paid for services they failed to request.
Biles's thesis is that private financial firms like credit raters' basically run local governments that are supposed to be public. Their laws are "public policy made by private enterprise" (and it's been this way since way before neoliberalism!), a familiar but powerful point that fits with the general question I've had since studying school finance: are public schools in American capitalism really public? To what extent is public school policy made by private enterprise? And what should that mean for how we think about "public" schools generally?
As a postscript, I couldn't find any other sources on this anecdote. Biles's footnotes don't make mention of it and all my searches came up blank or confusing. I emailed him but it bounced back. If you know anything about it, or know him, let me know! I'd love to study the case more carefully.