In August, clean water stopped flowing from residents’ taps in Jackson, Mississippi. The crisis lasted more than six weeks, leaving 150,000 people 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 Investors Service — a credit rating agency with a legacy of misconduct — downgraded Jackson’s bond rating to a junk status, citing 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, 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 rating 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 us. “We did an analysis that 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, and 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 in 2017.
Jackson’s Water Crisis Has Deep Roots
Some of Jackson’s water infrastructure dates to 1914. The city has a longtime problem 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 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 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 the city later filed against the company for what appeared to be 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 on the $91 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 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 interest rate on the twenty-year bond. Instead, it was forced to pay interest rates as high as 6.75 percent.
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 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.
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 us. “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 US 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 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 in 2021. The firm spent $6.5 billion 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 US 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 to 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 multitrillion-dollar intervention in the early stages of the COVID-19 pandemic.
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 foreclosures and nearly nine million job losses. Often deemed 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 in the 2008 financial crisis when the housing market collapsed.
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 twenty-five cents on the dollar.
When government defaults do occur, as happened in Detroit in 2013 and Puerto Rico in 2016, Wall Street is almost always the culprit. Wall Street firms loaded up these communities with toxic debt that required huge debt service payments, precipitating their bankruptcies.
Moody’s largest shareholder is America’s fifth-richest person, Warren Buffett, who has also waged an aggressive campaign to keep rail workers from having paid sick days. In 2021, a European regulator fined 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 saying 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 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 to mandate that the ratings agencies actually use consistent ratings symbols and definitions across the board, allowing the 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 — two notches above Jackson’s current water debt rating — just two months before the long-troubled 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 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 $200 million in aid to Jackson, which is a fraction of the $1 billion 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.