Monday, March 3, 2008

What's the score?

There's been lots of talk in the press about individual credit ratings in light of the sub-prime mortgage debacle. Today there is an article in the New York Times about the falling city/state bond ratings. Several states are criticizing the way Wall Street values Main Street, saying that the former is giving the latter short shrift. "Some officials complain that ratings firms assign municipal borrowers low credit scores compared with corporations," according to the article.

A city and a state bond rating impacts the amount of municipal bond wealth that can be used for important projects like roads and schools. States use voter-supported bond bill funds to underwrite infrastructure. In California, for example, the city of Los Angeles has over $20 billion in bond money going into a major public school building investment. (And because public schools do not have the underwriting of a corporate entity, this voter-driven bond money is one of the only ways to invest in a very valuable public commodity.) While California has a solid record of repaying its bond debt, its bond rating is not as high as they believe it should be. This in turn impacts not only their spending power, but also the level of fees attached to any bond funds. It's a lot like our personal credit rating system, where those who have a lower credit score get less credit line and higher interest rates.

“Taxpayers are paying billions of dollars in increased costs because of the dual standard used by the rating bureaus,” said Bill Lockyer, treasurer of California, who is leading a nationwide campaign to change the way the bonds are rated. California, one of the largest issuers of municipal bonds, is rated A; Mr. Lockyer said the state should be triple A.

Because of their relatively weak credit scores, more than half of all municipal borrowers buy insurance policies that safeguard their bonds in the unlikely event that they fail to pay the debt. California, for instance, paid $102 million to insure more than $9 billion in general obligation debt between 2003 and 2007.

These fees are passed along to the taxpayers, who ultimately pay the price for public debt.