HomeMy WebLinkAboutReso 47-2008RESOLUTION NO. 47-2008
CITY COUNCIL, CITY OF SOUTH SAN FRANCISCO, STATE OF CALIFORNk~
A RESOLUTION 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 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 acorporate-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.
RESOLVED, by the City Council of the City of South San Francisco that it calls 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.
NOW, THEREFORE, BE IT RESOLVED that the City Manager/Finance Officer is 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 hereby certify that the foregoing Resolution was regularly introduced and adopted by the
City Council of the City of South San Francisco at a regular meeting held on the 14th day of May
2008 by the following vote:
AYES: Councilmembers Mark N Addi~o Richard A. Garbarino Kevin Mullin.,
NOES:
ABSTAIN:
ABSENT:
Mayor Pro Tem Karyl Matsumoto and Mayor Pedro Gonzalez
ATTEST:
..
City Clerk