[A major credit rating agency jacked up interest rates in Jackson,
Mississippi, curtailing infrastructure investments in the years
leading up to the city’s recent disaster.]
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WALL STREET HELPED CREATE JACKSON’S WATER CRISIS  
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Matthew Cunningham-Cook & Ricardo Gomez
October 4, 2022
The Lever
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_ A major credit rating agency jacked up interest rates in Jackson,
Mississippi, curtailing infrastructure investments in the years
leading up to the city’s recent disaster. _

Jeremy Myers, left, of the Aids Healthcare Foundation, delivers water
to Shaun Brown in Jackson, Miss. , AP Photo/Steve Helber

 

In August, clean water stopped flowing from residents’ taps in
Jackson, Mississippi. The crisis lasted more than six weeks, leaving
150,000 people
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without a consistent source of safe water. The catastrophe can be
traced back to a decision by a credit ratings agency four years ago
that massively inflated the city’s borrowing costs for
infrastructure improvements, most notably for its water and sewer
system.

In 2018, ratings analysts at Moody’s Investor Service — a credit
rating agency with a legacy of misconduct
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— downgraded Jackson’s bond rating to a junk status, citing
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in part the “low wealth and income indicators of residents.” The
decision happened even though Jackson has never defaulted on its debt.

Moody’s move jacked up the price of borrowing for Jackson, costing
the cash-strapped city between $2 and $4 million per year in
additional debt service costs — a massive financial roadblock to
officials’ plans to fix the municipality’s aging water system. And
since the state of Mississippi and the federal government refused to
use their powers to address the city’s infrastructure problems, that
meant Jackson was essentially powerless to stop the impending
catastrophe.

The situation underscores how Wall Street works to prevent governments
from fixing their public works and contributing to an infrastructure
crisis nationwide. Such actions by ratings agencies are particularly
harmful in majority Black and Brown areas like Jackson, which have
tight budgets and often receive minimal federal support.

All major — and most minor — cities, states, school, and utility
districts take on debt to pay for infrastructure improvements. That
debt is issued as bonds, which are agreements to pay back loans at a
set interest rate. Bondholders are typically wealthy residents of the
state where the bonds were issued who are seeking to accrue tax
advantages, banks, insurance companies, and mutual funds.

To determine creditworthiness for this debt, bond ratings agencies
give state and municipal governments a credit rating, based on factors
like the community’s existing debt load and its current pension
obligations. When the rating is lower, the debt is considered higher
risk, and the interest rate to pay back the loans increases
substantially.

Historically, the lowest possible bond ratings have been reserved for
Jackson, Puerto Rico, American Samoa, Detroit, and other places long
plagued by systemic disinvestment — meaning that it becomes almost
impossible for these communities to finance their way out of their
infrastructure crises.

“The practices of the ratings agencies are often extremely
racist,” Brittany Alston, research director at the Action Center on
Race and the Economy (ACRE), told _The Lever_. “We did an analysis
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showed that all the cities at the bottom of the ratings scale have
been majority-minority. As I’ve been monitoring the reporting,
I’ve noted how the local government is characterized, I’ve heard
the term ‘mismanagement’ multiple times.”

Alston continued: “I think that term has been used to really vilify
local governments who are working with what they have, and are
struggling because they’re stuck in a system that has denied them
federal support for decades.” The federal government’s share of
contributions to water infrastructure fell from 31 percent in 1977 to
just 4 percent
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in 2017.

Jackson’s Water Crisis Has Deep Roots

Some of Jackson’s water infrastructure dates to 1914
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The city has a longtime problem
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with industrial concerns dumping their waste into the city’s water
system, in part driven by Environmental Protection Agency underfunding
and weak environmental regulations in Mississippi.

Nationally, federal government support for water infrastructure has
dwindled. And at the state level, Mississippi has seemed more
interested in diverting $8 million
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of state funding to enrich former NFL player Brett Favre than
investing in Jackson’s infrastructure, despite frequent water system
failures in the past.

In 2010, the transnational engineering firm Siemens made an offer to
automate Jackson’s water billing system, assuring the city that the
energy savings it could create would more than pay for the contract.
In the largest contract
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in Jackson’s history, the city agreed to pay $90 million based on
Siemens’ promise to create $120 million in “guaranteed savings,”
according to a lawsuit
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the city later filed against the company for what appeared to be
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a fraudulent and defective system.

The Siemens performance contract put Jackson on the hook to Wall
Street bondholders for over $200 million, with more than 55 percent of
that total collected as interest
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million principal loan amount.

Money that could have gone to new water infrastructure, in other
words, instead went to Siemens, as well as the banks and investors who
owned Jackson’s water sewer debt.

Progressive Jackson Mayor Chokwe Antar Lumumba pledged
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during his 2017 mayoral campaign to use the city’s bonding authority
to fix the water and sewer lines. But the following year, Moody’s
downgraded Jackson’s debt to junk status.

The drop in credit rating severely limited the city’s ability to
refinance the 2013 water bond it issued for the Siemens project. If
Jackson had been given the highest possible bond rating — AAA — it
would have been able to score a 3.55 percent
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bond. Instead, it was forced to pay interest rates as high as 6.75
percent [[link removed]].

That move stopped Jackson from being able to get decent borrowing
terms for any new infrastructure investment, which is likely why the
bond Lumumba campaigned on was never issued.

One other major ratings agency, S&P Global Ratings, also rates
Jackson’s municipal debt. While S&P has been less critical
[[link removed](JACKSON%2C%20Miss.),of%20the%20COVID%2D19%20pandemic.]
of Jackson’s general obligation debt, which was issued to fund
day-to-day operations of the city, it has rated the city’s water and
sewer debt harshly
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Meanwhile, Jackson has faced significant challenges. A freeze in
November 2021 that caused the city to lose potable water was the
canary in the coal mine, said Catherine Robinson, a community
organizer based in Jackson.

“For me, when the Jackson water crisis first hit in November 2021,
my mom had just had a stroke,” Robinson told _The Lever_. “I had
to go outside of Jackson to take showers and to cook. It was a winter
storm — we really couldn’t travel like that because the roads were
so icy.”

There is an entrenched racial component to this state of affairs.
Mississippi’s leadership — every statewide official, the Speaker
of the House and the President Pro Tempore of the state Senate, and
both U.S. Senators — have been white since the Reconstruction era
ended 140 years ago, despite the state being 37 percent Black.

In an analysis of five million bonds issued to cities in the municipal
bond market between 1970 and 2014, economic historian C.S. Ponder at
Florida State University found
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that majority-Black cities are categorically charged higher interest
rates to build basic infrastructure for water systems and sewage.

The same applies to Moody’s. The firm is very disconnected from life
on the ground in Jackson. Moody’s CEO Rob Fauber earned $9.7 million
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in 2021. The firm spent $6.5 billion
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on stock buybacks over the past decade, using the capital of the
company to drive up the stock.

Two of the largest municipal bankruptcies in U.S. history have been
filed by majority-Black urban areas — Detroit, Michigan, and
Jefferson County (Birmingham), Alabama — whose water systems were
made targets of financial extraction. In both places, the federal
government mandated upgrades to their water and sewage systems without
providing funding to do so, creating roughly $5.7 billion in debt for
Detroit and $3.3 billion for Jefferson County on the municipal bond
market.

For its part, the Federal Reserve has the authority
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purchase municipal bonds directly to support the finances of
communities like Jackson, as it has done with bonds for major
corporations, such as when the Fed made a multi-trillion dollar
intervention
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in the early stages of the COVID-19 pandemic.

However, a Fed facility set up to support municipalities during the
pandemic only purchased $16 billion
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municipal debt, as opposed to the $42 billion
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corporate market.

Flooding Cities With Toxic Debt

While state and federal government action, or lack thereof, has
factored into the shoddy infrastructure of several American cities,
Moody’s also bears significant responsibility for the current state
of affairs.

The bonds ratings agency made incredibly consequential decisions in
the lead-up to the 2008 financial crisis, which caused 7.8 million
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foreclosures and nearly 9 million
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losses. Often deemed
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the most consequential factor contributing to the crisis was Moody’s
decision to rate large tranches of controversial Collateralized Debt
Obligations (CDOs) and mortgage-backed securities (MBSs), financial
products composed of low-quality mortgages, at the safest possible
rating of AAA.

The firm did so because of a perverse incentive model whereby
Moody’s and other ratings agencies would inflate ratings to generate
additional fees from Wall Street firms. Holders of many of those
assets, however, were nearly wiped out
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in the 2008 financial crisis when the housing market collapsed.

The other two major ratings agencies, S&P
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and Fitch
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also engaged in the ratings inflation of risky Wall Street financial
products leading up to the 2008 financial crisis.

At the same time, Moody’s and other agencies often rated many states
and municipalities with far lower ratings — even though they had
much lower probability of default, due to the unlimited taxing power
of states and municipalities, as well as harsh consequences for
politicians that allow defaults.

Lehman Brothers, the Wall Street firm at the epicenter of the 2008
financial crisis, was rated at A1 — seven notches above Jackson’s
water and sewer current debt — in July 2008, just two months before
the firm collapsed and Lehman’s bondholders received 25 cents on the
dollar.

When government defaults do occur, as happened in Detroit in 2013
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and Puerto Rico in 2016
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Wall Street is almost always the culprit. Wall Street firms loaded up
these
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communities
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with toxic debt
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huge debt service payments, precipitating their bankruptcies.

Moody’s largest shareholder
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is America’s fifth-richest person, Warren Buffett, who has also
waged an aggressive campaign
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to keep rail workers from having paid sick days. In 2021, a European
regulator fined
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Moody’s $4 million for inflating the credit ratings of other
Buffett-owned companies.

Moody’s has in the past justified the yawning discrepancies between
its corporate and financial ratings and its municipal ratings by
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that it had different standards for each class of debt. Those claims
were not taken seriously when Congress wrote and passed the Dodd-Frank
Wall Street Reform and Consumer Protection Act in 2010 to address the
misconduct leading up to the 2008 financial crisis. The law mandated
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that Moody’s and the other ratings agencies use “consistent
application of rating symbols and definitions,” and that the
Securities and Exchange Commission (SEC) initiate rulemaking to that
effect.

However, under President Barack Obama, the SEC failed
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to mandate that the ratings agencies actually use consistent ratings
symbols and definitions across the board, allowing the ratings
agencies to continue to rate municipal debt more harshly than other
forms of debt, despite its far lower likelihood of default.

The massive discrepancies have continued to today. In November 2018,
Moody’s rated Pacific Gas & Electric’s (PG&E) debt at Baa3
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— two notches above Jackson’s current water debt rating — just
two months before the long-troubled
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utility company suffered one of the largest bankruptcies in history.

Jackson, meanwhile, has never defaulted on its debt. And unlike PG&E
executives, who collected millions of dollars
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in raises in the aftermath of the company’s bankruptcy, a default by
Jackson would likely prove to be a major blow to Lumumba and his
expected campaign for a third term in 2025.

Congressional Democrats are now proposing
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$200 million in aid to Jackson, which is a fraction of the $1 billion
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that experts say is needed to meet the scale of the crisis. If
Republicans gain control of either chamber of Congress in November, it
is likely that any additional aid to the city will be cut off.

===

* Jackson
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* Mississippi's Water Crisis; Moody's Investor Service; Municipal
Bonds;
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