Last week, the Economist ran a story that described the growing economic dominance of America’s richest cities. Not only are cities such as Austin, Raleigh-Durham, San Jose, San Francisco and Seattle getting richer, their measures of success are diverging from other communities. As reported in the article, the population of American cities between 2010 and 2014 grew by 3.7%, while the 50 richest cities grew by 9.2%. The growth of their economic output is also outpacing the other communities. The output of those top 50 cities in 2001 was 27% greater; today they now produce 34% more per capita.
Those cities are growing because they have continued to invest in infrastructure and their urban cores. Many of the top cities benefit from the presence of elite universities. Location benefits and public investment have also been a magnet for successful businesses, which benefit from the presence of a well-trained workforce. This, in turn, attracts people looking to live in a vibrant community with businesses that provide relatively high wages.
We have noted that the general obligation bonds of most of the richest cities have the top bond ratings, and in many cases the very highest rating, AAA. The strong economic characteristics of those cities provides for a strong tax base and financial resources that help provide financial flexibility. The ability to attract businesses and a growing population, however, does not automatically result in the highest grade ratings for a community. While ratings are influenced by wealth metrics, SNWAM analysts also review how those wealth levels are converted into a strong tax base and how statutory provisions, public policies, management abilities and levels of leverage can undermine what would otherwise be a highly rated community. The annals of the municipal bond market are filled with stories of wealthy communities that have faced financial crises because they did not effectively utilize their wealth in their utilization of debt.
Sources: the Economist, Moody’s, Standard & Poor’s