HomeMy WebLinkAbout2008-05-13; City Council; 19436; Support of Municipal bond rating system reformCITY OF CARLSBAD - AGENDA BILL
AB# 19,436
MTG. 05/13/08
DEPT. CA
SUPPORT OF MUNICIPAL BOND
RATING SYSTEM REFORM EFFORT
DEPT. HEAD
CITY ATTY. £g*>
CITY MGR. UA— •
RECOMMENDED ACTION:
Adopt Resolution No. 2008-135 supporting the campaign for reform of the municipal
bond rating system to eliminate discrimination against municipal bonds.
ITEM EXPLANATION:
Although municipal bonds carry a very low default risk for investors, their ratings are
subject to higher standards than corporate bonds, mortgage-backed securities and other
debt investments. That fact has prompted California Treasurer Bill Lockyer, 10 state
treasurers and financial officers from a number of local agencies, to call for rating agency
reform.
According to Treasurer Lockyer the current rating system discriminates against local and
state agencies which issue bonds which results in the public agencies paying a higher
interest on the bonds than private corporations with similar default exposure. The practice
penalizes taxpayers because public money that could be invested in infrastructure is
instead being used to borrow at high interest rates.
Municipal bonds are extremely safe investments, especially compared to other bonds.
Standard and Poor's has found that the default rate of A-rated municipal bonds is just .023
percent, while corporate bonds have a default rated of 2.91 percent. California has spent
$102 million purchasing insurance which is unneeded given the extremely low default rate.
Treasurer Lockyer testified before the House Financial Services Committee in March 2008
stating and re-enforcing the fact that California is the eighth largest economy in the world
and has constitutional protection for debt payment and that its bonds are extremely secure
investments.
The League of California Cities Board has strongly urged cities to pass resolutions
supporting municipal bond rating reform.
DEPARTMENT CONTACT: Ron Ball 760-434-2801
FOR CITY CLERKS USE ONLY.
COUNCIL ACTION: APPROVED
DENIED
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FISCAL IMPACT:
There is no direct or indirect fiscal impact in supporting reform of the bond rating system.
However if the reform is successful, lower public agency interest rates could result in a
savings to the City.
ENVIRONMENTAL IMPACT:
This action does not constitute a "project" and is not subject to review under the California
Environmental Quality Act regulation 15060(c)(3).
EXHIBITS:
1. Resolution No. 2008-135
2. Sample letter to the rating agencies
1 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
9 WHEREAS, issuers of municipal bonds rarely default on the bonds they
10 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
13
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
1 Q rating agencies continue to discriminate against municipal issuers, requiring public
20 agencies to secure expensive bond insurance in order to secure bond ratings
21
comparable to those of private corporations; and
22
WHEREAS, the rating agencies base their ratings of corporate bonds on
23
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
5
Financial Services Committee on March 12, 2008 about the need for reform; and
6
WHEREAS, the response by the rating agencies to call for reform has been
7
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
^ 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;
15 (3) misleads investors by grossly inflating the risk of buying municipal bonds; and (4)
16
undermines the effective function of a transparent market.
17
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
», 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.
>, Mayor
ATTEST:
LQRRAINElvl. WOOd, City Clerk
(SEAL) \J(SEAL)
Sample Letter to Rating Agencies
_, 2008
Mr. Robert Grossman
Group Managing Director
U. S. Public Finance
Fitch Ratings
th33 Whitehall Street, 27tn Fl.
New York, NY 10004
Ms. Gail Sussman
Group Managing Director
Public Finance
Moody's Investors Service
250 Greenwich Street
New York, NY 10007
Mr. William Montrone
Head
U.S. Public Finance Dept
Standard & Poor's
55 Water Street
New York, NY 10041
SUBJECT: Ending Double Standard in Ratings of Municipal and Corporate Bonds
Dear Mr. Grossman, Ms. Sussman and Mr. Montrone,
The current system of assigning credit ratings to bonds issued by governmental entities
which provide essential services to the public leads to indefensible market discrimination
against state and local municipal issuers. The rating agencies' own studies show that the
likelihood of default by municipal borrowers is much lower than for corporate borrowers
with similar ratings. Ratings should be based primarily on an evaluation of the likelihood
investors will suffer a loss due to default. Unfortunately, for municipal bonds, they are
not. This practice costs taxpayers enormous amounts of money that could be invested in
public programs and infrastructure.
The City Council of recently adopted a resolution (copy enclosed),
urging your companies to end the double standard in the treatment of municipal and
corporate bonds. The City Council urges you to treat taxpayers the same as corporations
and rate municipal bonds based on the risk investor loss due to default. Finally, we urge
you to do this by creating a unified, global rating approach that treats all issuers equally,
thereby better serving taxpayers and investors.
Thank you.
U