By Archana Pyati
A new administration proposal to change the way the federal government currently awards and administers grants could make life more expensive for all of us.
If the rule takes effect, cities, counties, states, hospitals, and nonprofit organizations across the country could see their credit ratings downgraded (according to Moody’s Ratings, one of the nation’s three major bond-rating agencies). Just as low credit scores make it harder and more expensive for individuals to borrow money, the downgrading of institutional credit would make it costlier for cities, states, and other entities to borrow money – ultimately forcing them to make cuts to critical services and infrastructure or to pass on costs to communities.
OMB’s Proposal
AAU and its member campuses are deeply concerned about the major revisions to the federal government’s Uniform Guidance proposed by the Office of Management and Budget (OMB) last month.
- If finalized, the proposed rule would make executive branch political appointees the ones to decide which grants receive funding.
- It would also allow these appointees to cancel an existing grant at any point in time for political reasons.
Many entities beyond colleges and universities that receive federal grants or other forms of federal financial assistance will be affected by the regulation, which the OMB plans to implement on October 1.
These entities include state and local governments (cities and counties), hospitals, libraries, museums, community colleges, and K–12 schools. Nonprofit groups that provide essential community services – including food banks, afterschool programs, programs for seniors and veterans, homeless and domestic violence shelters, disaster recovery organizations – as well as Native American groups are bracing for impact. University medical centers, which provide health care, train physicians, and conduct medical research, are particularly vulnerable.
States, localities, and nonprofits rely on federal funding to help carry out their public missions. States and local governments depend on federal transportation funds to build and modernize roads, bridges, highways, and mass transit. Federal Emergency Management Agency (FEMA) grants help states and localities with disaster relief. Federal funding also supports local libraries, museums, and the arts in communities.
Credit Downgrades and Their Long-Term Impact
Under OMB’s proposal, the federal government would become an unsteady, volatile source of funding. Entities that rely on federal funds to deliver services or build and maintain critical infrastructure could see their grants canceled midstream if the current administration or a new one decides those grants are not serving the “national interest” or do not comport with their political priorities.
Moody’s Ratings recently warned that the proposal “could prove to be a credit negative" for entities seeking financing through tax-exempt bonds. The regulation “would materially weaken the reliability of multi-year discretionary funding commitments,” Moody’s analyst Nicholas Samuels explained to Bond Buyer.
In plain terms, what Moody’s is suggesting is that, without guaranteed and predictable federal grant funding, states and other entities would be seen as riskier by lenders and at higher risk of defaulting on loans.
Higher Interest Rates Would Make Borrowing More Expensive
States and localities routinely issue municipal bonds for “large, expensive, and long-lived capital projects, such as roads, bridges, airports, schools, hospitals, water treatment facilities, power plans, courthouses, and other public buildings,” according to the Urban-Brookings Tax Policy Center. They can also issue short-term debt to shore up cash reserves and avoid bankruptcy. Borrowers are on the hook for both the principal and interest payments to investors.
Just as banks consider a personal credit rating report for a mortgage or car loan, institutional investors consider the creditworthiness of public entities when buying their bonds. The lower the credit rating, the higher the costs of borrowing to the institution or government – and the higher the interest payments states and localities will owe their investors.
Reductions in Community Services, Programs, Infrastructure Support, and Facilities Maintenance
A lower bond or credit rating for a state, municipality, school, or hospital system doesn’t simply make debt more expensive. It forces tradeoffs and budgets to be reallocated, resulting in cuts to community programs and services, deferred maintenance on facilities and infrastructure, and a general lack of investment.
When the city of Detroit declared bankruptcy in July 2013, its credit rating had already fallen to junk status. This led to years of disinvestment when the city could not afford to maintain its physical assets – including 40% of its streetlights – or even respond to 911 calls in a timely fashion in part because of its inability to maintain its fleet of police cars and ambulances. (Detroit’s bond ratings have steadily improved and are now investment-grade.)
Higher Bills and Uncertainty – for All of Us
Americans – you and me – ultimately pay the price when the budget outlook and creditworthiness of states, localities, and nonprofits worsen because the federal government is no longer a reliable fiscal partner. This will, according to the experts at Moody’s, likely be the consequence if the government adopts OMB’s proposed revisions to Uniform Guidance.
Higher interest rates on bonds get passed through to us in the form of higher taxes or fees, the loss of services, or crumbling infrastructure. Financial uncertainty may cause a hospital or clinic to shift staffing, limit their hours, or forgo investing in state-of-the art diagnostic tools and technologies, affecting patient care and well-being.
OMB’s proposal will not only set back research and America’s scientific enterprise for generations, but it will hit all of us in our local communities and our pocketbooks.
Learn more at AAU’s resource page on proposed revisions to OMB Uniform Guidance.
Archana Pyati is editorial and content officer at AAU.