Mamdani vs. the Credit Rating Machine
Credit Rating Agencies Ruin Debtors’ Lives — and They’re Coming for a City Near You
If you were forced to take on debt to go to college, to pay for a medical emergency, or to secure housing, then you’re quite familiar with the added fear and stress that accompanies not being able to afford a payment: a drop in your credit score. Although credit scores are a new invention, they have an outsized impact on every aspect of working-class people’s lives, from higher interest rates to additional barriers to securing employment and housing. A low credit score is the very definition of kicking someone when they’re down.
But the credit rating system doesn’t just have the power to ruin individuals’ lives — it can also impact how institutions and entire cities are run. This is where municipal debt comes in. Cities rely on municipal bonds — debt securities issued by public and private entities — to fund infrastructure and public services. Like individuals, they, too, are “rated” and penalized through credit rating systems that benefit investors over the working class. For example, credit rating agency Moody’s recently moved New York City’s outlook from stable to negative.
This rating is laughably premature, and yet they’ve done it despite the budget being months away from completion. Even though this rating depends entirely on what happens in Albany, which is flush with cash, the credit raters can’t help butting in and ringing alarm bells to undermine an administration trying to serve the working class. Crucially, these agencies disagree with Mamdani on how to use reserves to help the poor and working class. While Mamdani says that the city might need to dip into them to help people out in a difficult time, the rating agencies say that if he does, he will face consequences. Even finance guys agree that the outlook announcement is political in nature.
“Just How Things Work”
When credit-rating agencies like Moody’s send a warning signal, it impacts everything in the city budget, which then impacts everything in the city. Specifically, the threat of a negative outlook or even a downgrade makes it more expensive for NYC to borrow, taking away money from working-class programs and forcing it over to the bondholder class. It’s basically a hidden Wall Street tax.
Cities have to borrow money to pay for things, just like you and me. They have to borrow at punitive rates on complex schedules and be subject to forces of interest rates, market fluctuations and racial capitalist flights of fancy. The municipal bond market is an extractive regime that in principle is supposed to provide the public with liquidity for infrastructure using the magic of market efficiency, but in practice is just a sprawling way to blame victims of the system and make tax free-interest payments in the process. The credit rating is at the center of it all.
This is all well-documented. Michel Feher has written about how governments have to subordinate themselves to credit raters. Alberta Sbragia writes how the municipal money chase leads to a debt wish. Eleni Schirmer has called bonds the great unequalizer of public education, while Muntaner and Wozniak say they harmfully indebt children. Destin Jenkins calls them bonds of inequality. Claire Cahen recently noted the disciplinary force credit ratings have. The CCI has called it all unhealthy. I’ve called it a straight jacket that socialists in municipal power have to put on.
The impact of the credit rating shouldn’t be underestimated, even if it feels hard to understand for most of us. For those few in the know, debt service is a quantitatively small part of operating expenditures that, to most wonks running budget offices, is “just how things work.”
Jim Lebenthal, the municipal bond evangelist famous for his shlocky commercials, said in one spot that “you can’t take a shower, take the subway, go to school…without a municipal bond touching your life.” It’s true, though like most ruling-class capitalists of that (and any) era, he probably never considered the notion of unwanted touching.
Everyone in the budget office and in the municipal government lives in fear of the credit rating. Any expenditure that goes too high, any slight transformation, or any sudden fiscal move could cause the credit raters to ding you. It could be a report that moves your outlook to negative. It could be a downgrade. It could be the rumor of a possible downgrade coursing through the chats and emails where the credit raters work. It’s like a gun to your head — the shot could come at any moment.
When that happens, it’s like a sickness that comes over the municipality’s material conditions, making everything more difficult. In financial terms, more money must be paid in order to get the money needed to pay for things, all of which ultimately will have to be paid back with interest. But in cultural and political terms, public confidence wanes. The administration is seen as irresponsible, and its critics run story after story like an acidic drip of budgetary insults which have the sound and feel of truth, because who really knows how all this works? We have to trust the experts! And the credit raters are just a neutral, technocratic temperature taker, right? They’re “agencies” for god’s sake, impartial watchdogs for upstanding fiscal and monetary health!
No. They’re businesses too. They hold public governments to the same standards as private companies. They punitively rate. They take at least 1% of the principal just on school bonds. They were a key node in crashing the economy in 2008.
Public Policy Made by Private Enterprise
Even if the Mamdani administration thinks that Moody’s rating was unfair, there’s not much they can do about it. The credit raters can do what they like with impunity. In a 2018 article, Roger Biles recounts the power of ratings agencies over local governments:
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 lawsuit 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.
Moody’s put out hurtful analyses against the wishes of the public school district who paid for the service. The schools sued them. 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 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 long before the rise of neoliberalism! What Lebenthal said is true — cities and states and localities of every kind have to sell themselves as commodities on Wall Street to get the money they need for infrastructure. There’s no other way to do it.
Investing in the Common Good
The municipal bond regime and its credit rating apparatus is deeply rooted in the United States, but there are alternatives. These policies and practices were begun and maintained, so they can be weakened and ended. The first step, as always, is knowing that you have a problem and understanding practices like bonding, credit ratings, and municipal debt. Learning about these systems is best done in groups: if you’re a teacher or professor, join the Debt Collective’s Educator Debt Cancellation Caucus. You can also refer to resources like our Back to School Finance workshops and the Healthy School Finance worksheet.
In this process of understanding the regime, alternatives pop up on the horizon. A great report from 2024 lays out the histories and possibilities for investing in the common good. I chart a number of them in my new book As Public as Possible: Radical Finance for America’s Schools, such as Minnesota’s tax base sharing programs, Vermont’s Act 60 from 1998, Richard Nixon’s abandoned value-added tax for public education, a national investment authority, a Green New Deal, strategies to invest for the common good like fiscal mutualism, and following up on some of the destroyed promise of the Inflation Reduction Act.
Working-class people can build solidarity and push back against the whole structure that makes the credit rating a threat to delivering for a city’s diverse working class. There are new energies out there to do people’s credit ratings, bonding for the common good, public banks, and cooperative public finance banks. So, before you let a credit score define you — or the city you love — follow the money and ask yourself what’s behind the headlines.
David I. Backer (@schooldaves) is an associate professor of education policy at Seton Hall University whose research, organizing, and teaching focus on finance and ideology. He is the author of the recent book As Public as Possible: Radical Finance for America’s Schools (New Press), and writes a weekly newsletter called Schooling in Socialist America.
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