HomeMy WebLinkAbout2008-05-13; City Council; Resolution 2008-1351 RESOLUTION NO. 2008-135
2 A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF
CARLSBAD, CALIFORNIA, SUPPORTING REFORM OF
3 THE BOND RATING SYSTEM TO ELIMINATE
4 DISCRIMINATION AGAINST MUNICIPAL BONDS
5 WHEREAS, the recent turmoil in the municipal bond markets has brought
6 into focus the higher standards imposed by the three major bond rating agencies in
7 rating municipal bonds compared to corporate bonds, mortgage-backed securities and
8 other debt instruments; and
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WHEREAS, issuers of municipal bonds rarely default on the bonds they
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sell to finance streets and roads, public buildings, bridges, flood protection and water
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systems, and other critical infrastructure, yet municipal bond ratings fail to reflect that
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fundamental fact; and
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WHEREAS, the rating agencies even acknowledge this disparity, but they
15 ignore it in their ratings. Standard & Poor's for example, acknowledges that the historic
16 rate of defaults of A-rated municipal bonds is 0.23 percent, while that of corporate
17 bonds is 2.91 percent or 13 times greater; and
18 WHEREAS, despite the relative default rates shown by their own data, the
19 rating agencies continue to discriminate against municipal issuers, requiring public
20 agencies to secure expensive bond insurance in order to secure bond ratings
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comparable to those of private corporations; and
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WHEREAS, the rating agencies base their ratings of corporate bonds on
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the risk the issuer will default. Their ratings of municipal bonds, in contrast, have little
25 relationship to the risk of default. This difference provides a substantial economic
26 benefit at the expense of the taxpayers across the nation; and
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1 WHEREAS, a coalition of state and local public agencies, led by California
2 State Treasurer Bill Lockyer, has called on the three major rating agencies to examine
their practices and treat municipal bonds on par with corporate bonds that expose
4 investors to the same level of risk. The Treasurer also testified before the House
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Financial Services Committee on March 12, 2008 about the need for reform; and
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WHEREAS, the response by the rating agencies to call for reform has been
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uneven, Moody's has taken the greatest strides, announcing it will assign a corporate-8
9 equivalency rating (what it calls a global scale rating or GSR) alongside the traditional
10 municipal rating to any municipal bond at the issuer's request; and
11 WHEREAS, the current double-standard by rating agencies: (1) drains
12 billions of dollars from taxpayers in the form of unfairly high interest rates; (2) forces
13 taxpayers to pay even more money to buy bond insurance - insurance they would not
14 have to purchase if municipal bonds ratings accurately reflected the slight risk of default;
(3) misleads investors by grossly inflating the risk of buying municipal bonds; and (4)
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undermines the effective function of a transparent market.
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NOW, THEREFORE, BE IT RESOLVED by the City Council of the City of18
Carlsbad, California, as follows:
20 1 • That the above recitations are true and correct.
21 2. That the City Council of the City of Carlsbad calls on the major municipal
bond agencies to end the double standard in the treatment of municipal and corporate
22 bonds; to treat taxpayers the same as corporations and rate municipal bonds based on
2~ the risk of default; and to create a unified, global rating approach that treats all issuers
equally, and better serves taxpayers and investors.
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3. That the Finance Director is hereby directed to notify the municipal bond
25 rating agencies by letter of adoption of this Resolution, with a copy to California State
Treasurer Bill Lockyer and to register the City as a member if the coalition of public
26 agencies supporting the nationwide effort to reform how bond rating agencies grade
state and local bonds.
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PASSED, APPROVED AND ADOPTED at a Regular Meeting of the City Council
of the City of Carlsbad on the 13th day of May, 2008, by the following vote to wit:
AYES: Council Members Lewis, Kulchin, Hall, Packard and Nygaard.
NOES: None.
ABSENT: None.
, ayor
ATTEST:
LQRRAINE>/I.WOQ_Dl, City Clerk
SEAL \J(SEAL)