Wall Street Helped Create Jackson’s Water Crisis
Jeremy Myers, left, of the Aids Healthcare Foundation, delivers water to Shaun Brown in Jackson, Miss. (AP Photo/Steve Helber)
A major credit rating agency jacked up interest rates in Jackson, Mississippi, curtailing infrastructure investments in the years leading up to the city’s recent disaster.
by Matthew Cunningham-Cook & Ricardo Gomez
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 Investor 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 and 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 ratings 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 The Lever. “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, 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 20-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 The Lever. “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 U.S. 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 U.S. 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 multi-trillion dollar intervention in the early stages of the COVID-19 pandemic.
However, a Fed facility set up to support municipalities during the pandemic only purchased $16 billion worth of municipal debt, as opposed to the $42 billion thrown at the corporate market.
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.