The staff of the Minnesota Center for Fiscal Excellence, a tax policy group, has an interesting take on the recent spate of municipal downgrades in the state.
They don’t get it.
An article in the group’s late-summer newsletter (PDF), “The Case of the Mysterious Municipal Downgrades,” wonders why 40 cities across the state have seen their bond ratings sink in the past 18 months.
The article says:
The timing may be curious, but the rationale is even more befuddling. From news reports and editorials, a primary factor appears to be concern over the condition and trends of local property tax bases. Part of this is market driven, but according to press reports another consideration was the impact of the 2011 Legislature’s action that transformed the homestead market value credit into a market value exclusion. One result of that change: the reduction of taxable value base across the state.
Some questions the group has:
- Do rating agencies really understand how the local property tax works? It may seem ridiculous to even suggest this (at least it does to us) but the property tax-related explanations hint at a fundamental misunderstanding about Minnesota’s levy-driven property tax system. In states with rate driven property tax systems – in which property values DO partly determine total tax collections instead of just distributing the burden – such downgrades would make a lot more sense. But Minnesota is not one of those states and it seems odd rating agencies wouldn’t recognize this. (Then again, the phrase “triple A ratings on subprime mortgages” leaps to mind.)
- Are new legacy cost analyses beginning to work their way into the ratings? As we noted in our recent blog post (“Sifting Through Pension Rhetoric in Search of Pension Truth”), Moody’s is changing the way it assesses pension liabilities and other legacy costs in its credit ratings. It’s understandable that the new methodology would result in downgrades of local government credit ratings, but it’s unclear what legacy cost sins this handful of cities might have committed that would single them out for this kind of treatment.
- Are downgrades really capturing political will (or lack thereof)? Occam’s razor states the simplest explanation is usually the correct one. Overlooked in all the tax capacity hullabaloo regarding these downgrades is the statement from Moody’s that “political unwillingness to increase levies in some cases has led to fiscal pressure,” and further noting that some cities have not raised property taxes to increase revenue despite “having the ability to do so.” If the fundamental reason is “cities can levy without creating undue burden but don’t because it’s unpopular,” we seem to have even more evidence that our longstanding concern about fanning flames of resentment toward property taxation and conditioning taxpayers to expect local services at a discount is justified. Only now the concern is financial, not just a matter of principle.
- This we can conclude: although this wave of credit downgrades is disturbing, the ratings agencies are still doing Minnesotans a favor if they prompt a serious discussion about the state of our property tax system.