Ferguson Junk

Last month, the ratings agency Moody's downgraded the credit rating of Ferguson, Missouri, to "junk status." From Reuter's:

Moody's Investors Service cut the credit rating of Ferguson, Missouri to "junk" status on Thursday, citing its sharply deteriorating finances following the fatal shooting of a black teen by a white policeman in the city in August 2014.

The rating agency said the seven-notch downgrade of Ferguson's general obligation rating, to Ba1 from Aa3, was due to a "severe and rapid" financial deterioration that could lead to insolvency for the St. Louis suburb by the end of its fiscal 2017.

While the events of August 2014 certainly precipitated a sharp deterioration in finances, the financial situation in Ferguson has been precarious for some time. The city is well into the desperation phase of the Suburban Ponzi Scheme having, after a generation of unproductive growth, taking on enormous levels of debt in an attempt to keep everything going.

On page 26 of their most recent budget document, the city of Ferguson reports that the city has $176 million of total wealth. That is the cumulative assessed value of all properties within the city. According to page 3 of their latest financial report, the city has $21.7 million in debt. They are claiming, after accounting for depreciation, $32.6 million in "assets", if you consider a stroad that you are obligated to repair and maintain despite that investment producing insufficient tax base to do so an asset (government accounting standards do).

The notes on page 33 of the financial report show $40 million in infrastructure and buildings -- the long term investments that are the platform by which the community's wealth is built. We'll work with this number even though I believe it to under-represent -- by a wide margin -- what the city will be expected to spend in maintenance and replacement over the next generation to sustain that $176 million in tax base.

Let's look at a couple of ratios that you won't find in a Moody's report. First is the ratio of private investment to public investment. For Ferguson, using their numbers, that ratio is 4.4.

$176 million / $40 million = 4.4


That's far below the 20:1 ratio that we identify as the minimum stable condition for the city. Ferguson has too much stuff to fix and maintain and not nearly enough value being created by those investments to manage the task. This is a recipe for decline because, with ratios this low, it doesn't pay (or simply can't pay) to make the investments needed to keep everything running. As an interim fix, the city takes on debt while it defers non-critical maintenance, a combination that turns an acute decline into a chronic one. This has been decades in the making.

That brings us to the other ratio: debt to locally produced revenue. The Strong Towns Strength Test calls on a city to not spend more than 10% of its locally-generated revenue on debt service. The concept here is that non-local revenue sources, even when they have been consistent over time, are risky because they are out of the control of the local government and subject to rapid and unpredictable change. When taking on long term debt, it's critical to be able to cover that debt locally otherwise your in a vulnerable (not strong) financial position.

This year the city is projecting $16 million in revenue (page 11). When you remove transactional sources (fees for service, fines and other sources not tied to the city) you have $12.3 million.

  • Sales Tax: $6.3 million
  • Utility Receipts: $2.6 million
  • Property Taxes: $2.3 million
  • Assessments: $1.1 million

It's hard to figure out just much the city pays each year on that $21.7 million in debt as it passes through many different funds. Government financial documents are notoriously difficult and opaque in this regard. Starting on page 25 of the budget document, I've calculated a total annual debt service of $1.8 million.

  • General Obligation Bond: $523,000
  • Certificate of Participation 2012: $225,000
  • Certificate of Participation 2013: $599,000
  • Capital Improvement Bonds: $500,000

There is an additional $1.1 million in what they are calling tax increment refunding revenue bonds that should also be counted but it appears they are paid off by now so I'm not going to count them. I also suspect there is utility debt that is not reflected in these books, a common practice. As it is, Ferguson's ratio is around 15% (24% if we count the TIF bonds).

$1.8 million / $12.3 million = 14.6%

This decline has been decades in the making....

You combine these two and it is clear that Ferguson does not have the wealth to meet its obligations and their current approach, which is heavily reliant on debt, is making the situation worse. This will be spun by government officials and others as a direct result of the turmoil that happened there last year. It is anything but. This decline has been decades in the making and their use of fines, fees and debt was just their way of delaying the inevitable.

Places built in this pattern -- the vast majority of what has been constructed in North America since World War II -- experience a generation of prosperity followed by a second generation of stagnation ending in rapid decline. The way we phase, finance and tax this growth creates perverse incentives for cities to take on huge long term liabilities in exchange for the short term revenue increase that comes from new growth. That only works so long until a city ends up where Ferguson is today: very fragile with limited options for overcoming the distress that is, sadly, exacerbated by their own decline.

Even more depressing, this a preview of coming attractions for cities all over the country.

Some final words from the summary of the budget document:

The City recognizes that it currently finds itself in perilous circumstances. Anticipated continued litigation costs coupled with the desire and immediate intent to maintain current service levels and corresponding expense bases is not sustainable relative to the City’s significantly eroded revenue base. In fact, continuation of the status quo would result in the city becoming insolvent sometime in Fiscal Year 2016-2017.

Let's not let people get away with putting Ferguson in a special class of dysfunction the way many have with Detroit, San Bernardino and other places that have hit the wall sooner than others. They are not anomalies; they are canaries in the coal mine. Let's learn from them now and start building strong towns.