S&P’s Credit Downgrade for the U.S: Its Significance to Nonprofits and Communities

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The unprecedented downgrading of the credit rating of the United States is  a very important inflexion moment for the U.S. economy with potentially profound and long lasting effects for poor people and middle class communities. Nonprofits, however, which are largely concerned about the health and well-being of these communities are largely silent about the potential outcomes for the country and the communities they  work with. NPQ would like to begin a conversation with this salvo but we need your thoughts and opinions to seed it.

Like much of the rating industry after the financial meltdown, Standard & Poor’s doesn’t come to the current debt ceiling crisis with a stellar record (remember it claimed that securities backed by subprime mortgages were AAA ?) and didn’t help itself by making a $2 trillion error in its calculations and initially responding to Treasury officials who pointed it out with “stunned silence”. But its downgrading of the credit rating of the U.S. is, nevertheless, a powerful, serious and very conscious act, albeit mostly symbolic. 

But symbols are powerful and this is, in fact, the nation’s first-ever drop in its credit rating since S&P began doing sovereign debt rating in 1917. We figure that Nonprofit Quarterly readers probably have a lot to say about the potential effects of downgrading the credit rating of the world’s largest economy from AAA one notch down to AA-plus. What fundamental problems exist in our social economy that may be at the bottom of all this? How will—or should—the nonprofit sector respond? How will you respond? Weigh in with us…About its effects:

  • What do you anticipate as issues you may have to face in your community and your work/organization during this extraordinary period of churn and change?
  • Are you thinking about doing anything different at your organization as a result nation’s credit downgrade? 

About its causes:

  • What do you see as the causes of this historic situation?

What does the nonprofit sector need to do to insert itself into this dialogue with the power that befits its role in society? What do you want to see happen from this point on?

We want to hear what you have to say about this event.

As fodder, we thought we would look at the S&P report itself (PDF)  to highlight some of the more provocative lines to spur your and our thinking.  Without companion pieces from Moody’s and Fitch’s (though the latter might issue something as we speak), the S&P document  reads like a political rather than economic document, but that doesn’t make it uninteresting for nonprofits.  It very succinctly says things that some of us have been saying for a while and other things that should provoke policy discussion. 

Dysfunctional government:  “The political brinksmanship of recent months highlights what we see as America’s governance and policymaking becoming less stable, less effective, and less predictable than what we previously believed. The statutory debt ceiling and the threat of default have become political bargaining chips in the debate over fiscal policy.”  This is an indictment of both political parties, a perception of the President’s coming late to the party and the Republicans’ (particularly those in the Tea Party wing) being obstructionist.

No signs of governmental improvement:  “(T)he prolonged controversy over raising the statutory debt ceiling and the related fiscal policy debate indicate that further near-term progress containing the growth in public spending, especially on entitlements, or on reaching an agreement on raising revenues is less likely than we previously assumed and will remain a contentious and fitful process.” Our country’s long journey into dysfunction is seen as not ending soon.

Legislative punts:  “We also believe that the fiscal consolidation plan that Congress and the Administration agreed to this week falls short of the amount that we believe is necessary to stabilize the general government debt burden by the middle of the decade.”  The man and woman in the street could have told S&P that. 

The ideological divide:  “Despite this year’s wide-ranging debate, in our view, the differences between political parties have proven to be extraordinarily difficult to bridge.”  The failure of the White House and Congress wasn’t simply failure to reach a deal for the future, but a divide over worldviews that has not narrowed despite debates and talk, including the bipartisan Gang of Six efforts and Vice President Joe Biden’s talking to anyone with an ear and a pulse.   

Fix the entitlements:  “(T)he plan envisions only minor policy changes on Medicare and little change in other entitlements, the containment of which we and most other independent observers regard as key to long-term fiscal sustainability.”  Everyone knows this, but the nation is being held hostage to slogans and fear-mongering. 

The never-ending recession:  “(T)he revisions show that the recent recession was deeper than previously assumed, so the GDP this year is lower than previously thought in both nominal and real terms…(T)he revised data highlight the sub-par path of the current economic recovery when compared with rebounds following previous post-war recessions.”  My goodness, haven’t we and other observers been saying that the recession that ended two years ago never really ended?  S&P knows it too.

If you listen to the television pundits, they seem to be floundering about how important the credit downgrading is, how the markets will react, and whether the solution is raising more revenues, cutting deeper into spending, reworking entitlements, or all of the above and how much.  What should the nonprofit sector do, locally, regionally, and nationally, to make sure our voices are heard in the debates about the downgrading and what should be done—occurring at the tail end (or is it the tail?) of the worst economic climate since the Great Depression? 

We want to hear from you! Tell us what you think about the meaning of the nation’s new AA-plus credit rating and most of all we want to hear your ideas about how we should all be responding.  We need the nonprofit sector lens on the societal issues of our day, not just nonprofit-specific issues. Please comment below and share your responses with us.

  • Jeannette Courchesne

    You discuss GNP and go no further. Manufacturing for the past century has been the backbone of the US GNP. Why doesn’t the USA have a manufacturing policy? Instead of financing banks (very short term problem delaying tactic for a small number of

  • Robert Barr

    This article sounds like our President waited too long to increase the debt limit and the Republicans are guilty of trying to prevent it. It is a fact of life that you can not spend money you don’t have without going into debt to someone. That someone for our government right now appears to be mainly China. When you go in debt to someone, you give them control over you. They can manipulate our government by threatening to call in the debt. The Chinese are the last people we should hand control of our government over to. We need to hold the line on spending to free money for the private sector to recover.

  • Kim Davis

    AND I heard recently that the US gives China “x” amount of $$$$ to help their economy. I don’t recall the amount but am sure it’s in the millions. What is up with that???

  • Aine Creedon

    Jon Pratt submitted this response to NPQ:
    As just 10% of the economy and a very unprofitable name, nonprofit organizations end up having a smaller voice on economic matters — but still need to express a point of view. While nonprofits are a reform and advocacy vehicle of choice for environmental issues, and often for education and health care, economic reform is a rare mission for nonprofits — with most of the activity is on the laissez-faire side.

  • hema

    S&P is right in downgrading the rating.Postponing it anyfurther would only have postoned the pain to strike at a later date with a more devastating effect.However, it is not just US that is profligate most other nations are following the leader.Although the present US govt seems to be paying the price for earier mistakes too.
    But we expected this Govt to be different.At least in the remaing period it is hoped that the solid steps required would be taken.What those steps are,are known to the administration.There have been enough warnigs from leading Economists.

  • Cheryl Black

    As with any economic decline, my first thought is to the increase in demand for services. While increased demand is a challenge for any org, when paired with stagnant or declining funding, it’s no longer just a challenge it’s a threat to sustainability. To help, I encourage all orgs to pay very close attention to their constituents. Give each one the individualized attention they need and deserve. In this way you can increase the lifetime value of donors, transform advocates and volunteers into donors and ultimately provide more support for your mission.

  • EMejia

    A bond’s rating is what dictates its associated level of financial risk. The lower the rating, the higher the risk. How much more interest does a person pay when they try to get a home loan with a 620 credit score versus a 720 credit score? That’s the relationship in a nutshell.

    Municipal bonds are used to support projects like; schools, streets and highways, bridges, hospitals, public housing, sewer and water systems, power utilities, and other various public projects.

    Consider the vast number of financial instruments used across the country that base their stability and medium/long range financial forecasting on municipal bond ratings, which up until last week, have been AAA rated.

    What this means in dollars and cents is, the downgrade will affect the available funds at the local/state level.

    So, what happens when the stability of those bonds are downgraded?? It means that local tax revenues that would otherwise be directed to city underwritten programs and community based organizations has to go toward making up higher interest rate levels.

    It means community based organizations will have to work that much harder at staying solvent. And, there will be that much more “unmet need” in communities around the country. You can already see what has happened to cities across the country due to the diminishing tax revenues connected to the foreclosure crisis.

    Spend a few minutes and read this article about one municipality in Pennsylvania that nearly defaulted on it’s bond-financing and the affect it would have had on the entire commonwealth.


  • Christina

    No one seems to be addressing the questions at hand. How will this affect the nonprofit sector? I work in fundraising for the arts, and while there has been little discussion within or outside of my organization about the credit rating, there are some clear complications that this poor economy is having on nonprofit arts.

    My organization relies heavily on education, but when writing for grants that pose an interest in education, or even in the arts, their perception of what projects are worthwhile have shifted to the basics: reading, writing, and math. While studies show that the arts compliment and enhance these subjects, everyone is concerned about the bottom line. Related, businesses that have considered sponsorship or donations are now slower to respond.

    No one wants to tell us “no” but they also don’t want to commit to a donation. While I have not had the opportunity to have specific conversations about how the economic state is involved in such responses, it is clear that nonprofits, particularly those related to the arts, are in need of a different approach. More than ever, we are going to be expected to show why our causes are not only worthwhile, but essential to economic advancement. Otherwise, the fear that the credit rating issue has generated will keep people’s, and particularly business’s, pockets tightly shut.

  • Joyce J Dorsey

    Some get rich while others pay the bills!