Baltimore Paradox: City Finances Strong, Anti-Poverty Policies Weak

The tragic death of Freddie Gray and ensuing riots in Baltimore have highlighted the stark contrast between the city’s impoverished inner core and its outlying neighborhoods. As Washington Post writer Michael Fletcher points out, Baltimore reportedly has the highest concentration of heroin addicts in America. Gray’s own neighborhood of Sandtown-Winchester recently sent the highest number of people to prison in the state of Maryland. Fletcher writes:

In the more than three decades I have called this city home, Baltimore has been a combustible mix of poverty, crime, and hopelessness, uncomfortably juxtaposed against rich history, friendly people, venerable institutions and pockets of old-money affluence.

Yet Baltimore is not alone in its juxtaposition. Across the country, many cities with nominally high poverty rates have been able to maintain strong finances through carefully managing operating expenses, debt burdens and pensions, according to a study by Moody’s Investors Service, High Poverty, High Ratings.

Moody’s (in full disclosure, a former employer) reports that while high poverty is correlated with weak economic characteristics like low median incomes, high unemployment, depressed home values, weak tax collections, and heavy demand for government services, these burdens are often mitigated by a vibrant and diverse surrounding tax base. In fact, of the 50 Moody’s-rated large cities with the highest poverty ratings, some 27 are rated Aa3 or higher, the fourth spot in Moody’s 21-point bond rating scale. All cities nationwide have an average rating of Aa2, just one notch higher. (Poverty is one of several socioeconomic measures that contribute to the economic factors in the firm’s methodology, which comprise just 30 percent of the overall rating. Non-economic factors such as finances, management, debt and pensions are all key drivers, too.)

For all Moody’s-rated cities with populations over 100,000, the agency found a weak correlation between higher poverty rates and lower ratings, as shown. Each dot on the scatter plot represents a Moody’s-rated city with a population of over 100,000. Each dot’s location indicates both the rating of that entity (on the x-axis) as well as the poverty rate (on the y-axis). Despite the modest link between high poverty and low ratings, the correlation is relatively weak (correlation coefficient of 0.31).

Their data shows the distribution of high-poverty cities compared to all cities, and the distributions are similar.

Baltimore’s general obligation bond rating has been unchanged since 2007, when it was upgraded from A1 to Aa3. It was recalibrated as Aa2 in April 2010 and has remained stable since.

“That rating surprises a lot of people, especially people from Baltimore,” says Moody’s spokesman David Jacobsen.

Baltimore has long suffered demographic challenges, including a population drain of 36 percent since 1980 (though there was a slight uptick of 1,000 new residents in 2012). The city had a per capita income of $22,975, which is 66.7% of the state of Maryland’s average and 85.3% of the nationwide average, according to 2010 Census data.

On the other hand, the city benefits from the well-regarded Johns Hopkins University, an anchor tenant of a privately-developed $1 billion science and technology park in East Baltimore. Baltimore, relatively speaking, has a somewhat high pension burden—$3.8 billion or an above-average 2.33 times of operating revenues by Moody’s methodology—yet it has been maintained by fully funding annual required contributions.

So if the city overall is financially strong, that leads to questions on how to effectively target the core high-poverty areas. Baltimore, along with most urban areas, has been dominated by Democratic politicians who have failed to empower vulnerable residents to rise out of poverty. The State of Maryland and the City of Baltimore, have long proven hostile toward school choice and charter schools, despite their academic success and wild popularity among low-income parents. Entrenched teachers’ unions, who donate millions to Democratic politicians, are fiercely protective of low-performing teachers and administrators.

Maryland is also home to onerous occupational licensing requirements, which have been shown to disproportionately harm the poor. At the federal level, expensive regulations under Dodd-Frank are associated with shuttering of community banks, particularly those owned by African-Americans, driving poor families into the arms of shark lenders or out of the financial system altogether.

As author Jason Riley has recently shown, liberal policies enacted in the five decades since the “War on Poverty” began have not addressed the core poverty afflicting urban areas like Baltimore. The question is whether progressive politicians running the show are willing to open their minds to alternatives to help prevent further urban deterioration.