Fine-and-fee reliance should be bond rating warning sign, Torsella says

In one of his last acts as Pennsylvania treasurer, Joe Torsella called on the three major rating agencies to evaluate the roles of and reliance on fees and fines for revenue in setting municipal bond ratings.

“If implemented, this added protection would reveal risk and increase transparency of the nation’s $4 trillion municipal bond market,” said Torsella, a Democrat. Republican Stacy Garrity, who defeated Torsella in November, was scheduled to take office Tuesday.

"Widespread use of criminal, traffic and civil fees and penalties ... can be too heavily relied on to bolster, and sometimes artificially inflate state and local finances," said departing Pennsylvania treasurer Joe Torsella.
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“We have an obligation to scrutinize widespread use of criminal, traffic and civil fees and penalties that can be too heavily relied on to bolster, and sometimes artificially inflate state and local finances.”

Rating agencies, he said, are positioned to identify “the truest risk” to investors.

Torsella invoked a social-justice theme with his announcement.

“When incentives push criminal and civil justice toward becoming a for-profit practice, public servants become pressured to drive revenue, making them into tax collectors rather than administrators of justice to their friends and neighbors,” he said.

Messages seeking comment were left with Moody’s Investors Service, S&P Global Ratings and Fitch Ratings.

Co-signing the letters were Philadelphia City Controller Rebecca Rhynhart and state Rep. Donna Bullock, D-Philadelphia, chairwoman of the Pennsylvania Legislative Black Caucus.

According to a Governing magazine report in August 2019, nearly 600 cities nationwide depended on fines and fees for more than 10% of their revenue, with some municipalities exceeding 40% total revenue from these sources.

“The concept is one that is hard to argue with in terms of the use of court costs and fines as a revenue source, but it is a political issue, not a direct credit issue,” municipal bond analyst Joseph Krist said.

“One of the basic characteristics that separates the municipal market from every other is the fact that in the end, municipal management relies on politics,” Krist said. “The credit rating agencies are not a substitute for political will. If they were, things would be a lot different in many states, cities and towns.”

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