HomeMy WebLinkAboutCC Resolution 12482 (Support Reform of Bond Rating System)RESOLUTION NO. 12482
RESOLUTION OF THE CITY COUNCIL OF THE CITY OF SAN RAFAEL
SUPPORTING REFORM OF THE BOND RATING SYSTEM TO
ELIMINATE DISCRIMINATION AGAINST MUNICIPAL BONDS
WHEREAS, the recent turmoil in the municipal bond markets has brought into focus the
higher standards imposed by the three major bond rating agencies in rating municipal bonds
compared to corporate bonds, mortgage-backed securities and other debt instruments; and
WHEREAS, issuers of municipal bonds rarely default on the bonds they sell to finance
streets and roads, public buildings, bridges, flood protection and water systems, and other critical
infrastructure, yet municipal bond ratings fail to reflect that fundamental fact; and
WHEREAS, the rating agencies even acknowledge this disparity, but they ignore it in
their ratings. Standard & Poor's, for example, acknowledges that the historic rate of defaults of
A -rated municipal bonds is 0.23 percent, while that of corporate bonds is 2.91 percent - or 13
times greater; and
WHEREAS, despite the relative default rates shown by their own data, the rating
agencies continue to discriminate against municipal issuers, requiring public agencies to secure
expensive bond insurance in order to secure bond ratings comparable to those of private
corporations; and
WHEREAS, the rating agencies base their ratings of corporate bonds on the risk the
issuer will default. Their ratings of municipal bonds, in contrast, have little relationship to the
risk of default. This difference provides a substantial economic benefit at the expense of
taxpayers across the nation; and
WHEREAS, a coalition of state and local public agencies, led by California 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 investors to the same level of
risk. The Treasurer also testified before the House Financial Services Committee on March 12,
2008 about the need for reform.
WHEREAS, the response by the rating agencies to the call for reform has been uneven.
Moody's has taken the greatest strides, announcing it will assign a corporate -equivalency rating
(what it calls a global scale rating, or GSR) alongside the traditional municipal rating to any
municipal bond at the issuer's request; and
WHEREAS, the current double -standard by rating agencies: (1) drains billions of dollars
from taxpayers' pockets in the form of unfairly high interest rates; (2) forces taxpayers to pay
even more money to buy bond insurance — insurance they would not have to purchase if
municipal bond ratings accurately reflected the slight risk of default; (3) misleads investors by
grossly inflating the risk of buying municipal bonds; and (4) undermines the effective functioning
of a transparent market.
NOW, THEREFORE, IT IS HEREBY RESOLVED that the Council does hereby
authorize the City Manager and Finance Director to call on the major municipal bond agencies to
end the double standard in the treatment of municipal and corporate 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.
RESOLVED FURTHER, that the City Manager and Finance Director are hereby
directed to notify the municipal bond rating agencies by letter of the adoption of this resolution,
with a copy to California State Treasurer Bill Lockyer and to register the City as a member of the
coalition of public agencies supporting the nationwide effort to reform how bond rating agencies
grade state and local bonds.
I, ESTHER C. BEIRNE, Clerk of the City of San Rafael, hereby certify that the foregoing
Resolution was duly and regularly introduced and adopted at a regular meeting of the City
Council of said City held on Monday, the 5t" day of May, 2008 by the following vote, to wit:
AYES:
COUNCILMEMBERS:
Brockbank, Connolly, Heller, Miller & Mayor Boro
NOES:
COUNCILMEMBERS:
None
ABSENT:
COUNCILMEMBERS:
None
ESTHER C. BEIRNE, City Clerk
WACity Managers- WorkFile\Council Material\ResoIutions\2008\municipal bond reso.doc