The \u201cNew Compton\u201d is a phrase that has fallen out of the mouths of Compton politicians for decades now. It promises safety and economic revitalization, it whispers hope into an area marked by blight.<\/span><\/p>\n It\u2019s easy to single out the crack epidemic of the \u201980s and the gang violence of the \u201990s as causes for Compton\u2019s economic woes. But whatever the problems in the past were, the economic trials of Compton\u2019s present are exacerbated by something as simple and mundane as a credit rating.<\/span><\/p>\n Or rather, the lack thereof.<\/span><\/p>\n Because just as a credit rating has a profound effect on where a person can live \u2014 and how well \u2014 a city\u2019s credit rating can dictate how a city governs itself and how well it can take care of its citizens.<\/span><\/p>\n <\/p>\n The Hammer<\/b><\/span><\/p>\n It\u2019s pretty easy for average people to understand the effect a credit score has on their lives. A poor credit score can disqualify them from renting or owning an apartment. It can affect the credit limit available to them when they apply for a credit card. And it affects their interest rate \u2014 something that comes into play in big ticket loans like car loans and mortgage payments. The lower the credit score, the higher the interest rate on these loans, as lenders need greater compensation for the risk they\u2019re undertaking.<\/span><\/p>\n This means a $100,000 house will end up costing more to the homeowner with poor credit, as he or she has to pay a higher interest rate on top of the actual cost of the house. Assuming it takes 30 years to pay off your $100,000 house, a 1 percent difference on the interest rate would amount to an additional $30,000. This has long term implications on the rest of your budget \u2014 whether you can send your child to a private school, how much you can pay for groceries and transportation, and so on.<\/span><\/p>\n Cities, governments, and school districts have credit ratings too. And just like the average Joe or Josephine, it affects how they\u2019re able to manage their cities \u2014 what projects they can undertake, what services they can provide, even how much they may afford to pay their employees.<\/span><\/p>\n \u201cA rating is a third-party review or grade on your financial health, which necessarily includes management, financial management,\u201d said Raul Amezcua, Managing Director for the Public Finance Team at Stifel, an investment banking firm. <\/span><\/p>\n Impacting that credit rating is historical performance, as well as the existence of management tools that help a city weather ups and downs \u2014 like whether it has a budget surplus.<\/span><\/p>\n The highest rating a government or company can receive is AAA.<\/span><\/p>\n \u201cI’ve seen everybody from the President of the United States talk about the importance of having a AAA rating and making the right decisions to preserve it, to governors, to mayors,\u201d said Amezcua. \u201cI think it’s a good tool. It’s a hammer, if you will, that makes people have good financial management in place.\u201d<\/span><\/p>\n AAA ratings allow companies and governments to issue bonds to investors with a relatively low interest rate attached. Amezcua points out that the kind of people who invest in these bonds are risk-averse. As rule, bonds are perceived to be less risky than equities.<\/span><\/p>\n \u201cInvestors who buy bonds want to get paid. Principal and interest \u2014 on time,\u201d said Amezcua. They don\u2019t like to take the risk of non-payments. If they wanted to assume that level of risk, typically they buy riskier investments like equities, stocks.\u201d<\/span><\/p>\n So, what happens if you don\u2019t have a AAA rating? What if you have a poor rating \u2014or even worse, no rating at all?<\/span><\/p>\n The same thing that would happen to a subprime borrower getting a loan to buy a house: you are forced to pay a higher interest rate.<\/span><\/p>\n