"Not eating chard. That's what all those weirdos eat at their stupid picnics on the Hungry Ghost lawn." -Nina

March 04, 2008

NYTimes: States and Cities Start Rebelling on Bond Ratings

That's the headline from yesterday's front page article in the NYTimes by writers Julie Creswell and Vikas Bajaj, which opens with the question, 'Does Wall Street underrate Main Street?'

The article explores the disparity that exists in bond ratings by rating agencies such as Moody’s Investors Service and Fitch Ratings, with the highest rated municipal bonds reaching A-1, such as Northampton's, in contrast with the highest rated corporate bonds, which are rated triple A. In answering the question posed above the article notes that,

"A growing number of states and cities say yes. If they are right, billions of taxpayers’ dollars — money that could be used to build schools, pave roads and repair bridges — are being siphoned off in the financial markets, where the recent tumult has driven up borrowing costs for many communities.

...some officials complain that ratings firms assign municipal borrowers low credit scores compared with corporations. Taxpayers ultimately pay the price, the officials say, in the form of higher fees and interest costs on public debt."
The issue is pressing enough that on March 12th, the House Financial Services Committee will hold a hearing to examine the issue. Northamptonist sent an email to Chris Pile, the City of Northampton's Finance Director, inquiring how this all might relate to Northampton. His informative response follows in part,
"This issue has only a marginal impact on the City. All municipalities are on the same level playing field with each other. We are all chasing the same market and to that extent, trying to compare us to corporate bonds is, I think, a red herring. Our A-1 rating from Moody's is reasonable and we are able to raise that to Aaa with bond insurance. Of more concern recently has been the problems encountered by the bond insurance companies."
The Times article notes that because of weak credit scores, more than half of municipalities purchase insurance policies as a hedge against the unlikely event that they default on their debt. It goes on to say that,
"The plunging fortunes of bond guarantors, meantime, have cast doubt over the value of the insurance policies municipalities buy.

'We are learning essentially that the emperor may have no clothes, that there is no real reason to require these towns to have insurance in many instances,' said Richard Blumenthal, the attorney general of Connecticut, who is investigating the ratings firms on antitrust grounds. 'And it simply serves the bottom lines of the ratings agencies, the insurers or both.'"
In regard to the problems of bond insurance companies, Chris Pile continued in his email,
This could impact the city and many other municipalities if we are no longer able to get insurance. In that case, our A-1 rating could result in slightly higher interest rates on the market. I think a far more likely scenario is that the the credit crunch will simply result in increased rates because of the scarcity of dollars available to borrow. As the Fed increases rates to fight inflation and constricts the money supply, all municipal borrowing will become more expensive.
Curious, Northamptonist followed up the initial email to Chris with another, asking, "Does Northampton buy bond insurance? under what circumstance? from who, and at what cost?" As of press time, (that's what they say at the paper, right?) we have not heard back from Chris, though this post will get updated as soon as we do.

(photo of an installation by JACE, at Wooster on Spring c. 12.2006, from Northamptonist's Flickr)

LABELS: city government, city finance, chris pile