Local and State Governments Call for Changes in Bond Rating System

One of the peculiarities of bond rating is that state and local bonds are typically rated much lower for a given level of risk than those of private entities, which requires that they purchase bond insurance.

This is the still lucrative core of the now almost insolvent monoline insurers business.

A number of public officials have expressed their concerns to the rating agencies:

On March 4, Bill Lockyer, the treasurer of California, sent a five-page letter to Moody's Investors Service, Standard & Poor's Corp. and Fitch Ratings asking for justice.

`"State and local governments almost never default on the bonds they issue," the letter says. "The safety of municipal bonds is grounded in a fundamental fact: a city or state simply is not going to go out of business during the life of its bond issue."

The letter was signed by 14 other state and local officials, including Michael Murphy of Washington, Michael Fitzgerald of Iowa and Patrick Born, the chief financial officer of Minneapolis. I mention these three in particular because they are public finance veterans who really understand the business.

Maybe every one shouldn't be rated AAA, the letter asserts. Just most of them.

They are absolutely right.

As the system stands now, most state and local governments have to buy insurance in order to get an AAA rating, but the risk of default is minuscule compared to commercial AAA bonds.