Dear Winnipeg

A Fun Blog About Infrastructure and Municipal Finance

The City’s Bond Rating Isn’t What You Think It Is

Dear Winnipeg,

Two days ago, Glen Murray announced he was entering the mayoral race, which prompted Scott Gillingham to issue a press release the following day. I never thought I’d have to be fact-checking the mayoral race so soon, and yet here we are…

Scott Gillingham had this to say about Glen Murray’s presser:

“Yesterday, Glen Murray claimed that the City is in “deep financial crisis” and that he solved a similar crisis in the 90’s using “sustainable funding practices”. Neither claim is true.”

Scott Gillingham on Twitter, June 23rd, 2022, 1:11PM

He is correct to question Glen Murray’s claim that he solved the city’s financial crisis in the 90s using sustainable funding practices. But we’ll get back to Glen.

You see, before he entered the mayoral race, Scott was Chair of the City’s Finance Committee, a position he had held since 2016. So you’d think he knows what he’s talking about when talking about the City’s finances. But you’d be wrong.

Despite overwhelming evidence to the contrary, Scott does not believe the City is in a financial crisis.

Despite the fact that our roads keep falling apart, even with record spending in the last decade.

Despite the fact that we keep dumping raw sewage into our rivers with no ability to pay for the $2 Billion upgrades required. At least not this century.

Despite the fact that our tree canopy is dying, and we don’t have the money to replace it.

Despite the fact that our parks and recreation infrastructure will cost more to repair than we are able to borrow.

Despite the fact that when we first put together this 4-year budget, we actually considered turning off street lights to save money. Quite literally “struggling to keep the lights on”.

Despite the fact that the City is insolvent.

Even the policy analyst for Scott’s campaign piled on here, mistaking “illiquidity” for “insolvency”. Although illiquidity is a type of insolvency (“cash flow insolvency”), as long as you have more assets than liabilities, you can usually sell some assets in order to get out of cash flow insolvency.

However, balance sheet insolvency (also known as “technical insolvency”) is when what you owe (liabilities) exceeds what you own (assets). This is also called “negative net assets”, “negative net financial position”, or in the City’s case, “Net Financial Liabilities”, as is clearly spelled out in the City’s annual financial statements. This means that even if the City sells all its assets, it will not have enough to pay off its outstanding debts.

This is where the City finds itself right now. Insolvent. By definition.

[I guess anyone can call themselves a policy consultant. It’s not a regulated term or anything.]

And it keeps getting worse over time:

So, in the face of this, how can Scott and his campaign staff claim that the City’s finances are A-OK?

Well, it all comes down to the City’s bond rating.

From Scott’s press release:

“Mr. Murray used mid-2000s credit ratings to back his claims of management success. In fact, those same credit rating agencies prove his “crisis” claims to be unfounded. Just three weeks ago, S&P increased Winnipeg’s credit rating to AA+…”

— Scott Gillingham press release, June 23, 2022. The bold is in the original document.

And again from his policy consultant, in direct reference to me:

“If that blog was right, why did S&P increase the City’s credit rating just weeks ago?”

— Brian F Kelcey, in a June 23rd, 2022 post on Twitter

While I’m flattered to even be mentioned in someone’s mayoral campaign, I do have to take issue when what is being said is misleading, or even outright false.

You see, in equating a good bond rating with prudent financial management, Brian and Scott (and even Glen!) commit a classic error: bond ratings are for investors, not taxpayers.

In the hierarchy of “who gets paid first” in a city, bond holders are on top. Any money that comes in first goes to them (debt payments). Then current City employees (wages), then past employees (pensions), then taxpayers/residents (services/infrastructure). [This is obviously a simplification, but you get the idea: bond holders first, the people of Winnipeg last.]

This is true for any corporate structure, whether a business, a charity, a non-profit, or a municipal government. We the owners, the shareholders, who elect a board of directors (Council), get paid last. So when things go sideways financially, we feel the effects first. Maintenance will be neglected, services will be cut, taxes will be raised.

The bondholders will feel it last. Because as long as there is a library left to close, a golf course left to sell, a street light left to be turned off, bond holders will still get their money. And so the bond rating will reflect that.

But that’s obviously not a city anyone wants to live in. A good credit rating does not reflect whether we have built a nice city to live in. It doesn’t even reflect whether our finances are being managed prudently. It only measures whether we have enough liquidity to pay our debts, which is the actual lowest bar we can set as a financial goal.

And there’s a reason bond ratings agencies aren’t afraid that we won’t have enough liquidity to make those payments. As I said before, as long as we have services we can cut, taxes we can raise, infrastructure we can neglect, we’ll be able to come up with the money, no matter the effects on residents. But even more important is this, from Moody’s credit assessment of the City:

“Winnipeg’s rating incorporates Moody’s assessment of a high likelihood of extraordinary support from the Province of Manitoba in the event that Winnipeg faced acute liquidity stress.”

— Moody’s periodic review of City of Winnipeg’s bond ratings, October 25th, 2021

In other words, the ratings agencies are confident that the Province will bail the City out if ever we came close to not being able to make our debt payments.

When your parents are co-signing your loans, the bank is not afraid to lend to you. Even if you get evicted from your apartment because your parents will pay your loan but not your rent. The bank doesn’t care about that. It just wants its money.

So, to paraphrase a Strong Towns article on this very subject, should we interpret this as some sort of affirmation, that a credit company has identified Winnipeg as a city in a uniquely strong financial position, or should we instead recognize our position at the bottom of the financial food chain, and our role as prey to the liquidity predator?

And just in case there’s still any doubt left in your mind that a good bond rating equals sound financial management, I’d like to take you back to not so long ago, the global financial crisis of 2008. You know the one. The one that was brought on, in part, by ratings agencies attributing high ratings to subprime mortgages and CDOs.

CDOs that were made up of thousands upon thousands of NINJA mortgages, NINJA meaning “No Income, No Job or Assets”. Real toxic financial garbage, and they were rated AAA investment grade. The ratings agencies even paid fines for this, before they went back to business as usual.

It’s incredibly obvious to us now that those ratings had nothing to do with the quality of the underlying financial asset.

So why do Scott and Glen think our City’s does?

Bond ratings agencies work for bond investors, not for us. That two major mayoral candidates do not understand that is worrisome.

And while I’m on the topic of fact-checking, and just so Scott doesn’t feel picked on: No, Glen did not “solve” our City’s financial crisis when he was Mayor in the early 2000s. True, our Net Financial Position improved in those years (even going back into the positive numbers!), it was mostly due to selling our electric utility, Winnipeg Hydro, in 2002. That didn’t “solve” anything… it just kicked the can down the road a couple decades.

So yes, we are back where we started 20 years ago. But this time, we don’t have a Winnipeg Hydro to sell.

There is a way out of the financial mess we find ourselves in. But it won’t be easy or quick. And we won’t get there by burying our heads in the sand and claiming that we aren’t in dire financial straits. We are. But the first step is admitting you have a problem.

If this episode is a sign of what we can expect of this mayoral race, especially from the two candidates who style themselves as “front-runners”, then Winnipeg might be in more trouble than I thought. But it’s not too late to change course, for these candidates to back down from this untenable position.

If anyone from Scott’s or Glen’s campaign is reading this (and I know you are), please know that I am always happy to talk more about these issues with you. [I’m a policy consultant now!]

And that goes for all the mayoral candidates, plus anyone who is planning a run for Councillor in their ward. I’d be pleased to talk about City finances with you. As anyone who has ever written to me knows, I answer every email. And as anyone who has ever invited me for a meeting knows, I always accept.

I’ll be waiting for your message.

And finally, for everyone else, please keep calling out candidates when they’re saying things that are false or misleading. Truth is power!


Elmwood Guy