Despite 'Condescending' S&P, California's Lockyer Bullish on Rating Reform

SAN FRANCISCO -Bill Lockyer predicts success in his campaign to reform the credit rating system for municipal bond issuers. Even Standard & Poor's, despite what Lockyer described as a "condescending" attitude toward his calls for reform, will come around, the California state treasurer said Friday.

"I know who their parent company is," said Lockyer, delivering a speech here at the Information Management Network's California Municipal Finance Conference. "It's just going to cost them a whole lot more headache from people like me who want to go have proxy fights with McGraw-Hill."

The speech focused largely on the treasurer's recent efforts to change a rating system that he says assigns unfairly low ratings to municipal bonds in comparison to corporate debt with higher default rates.

"I'm sorry for being a one-string guitar with regard to this topic," he said.

Lockyer said his efforts at ratings reform have drawn positive reaction from many other bond issuers and investors.

He also praised Moody's Investors Service and Fitch Ratings for being willing to engage in a dialogue about the rating system, exemplified by Moody's plans to begin allowing tax-exempt issuers to obtain ratings on Moody's more favorable global scale, as well as its recent effort to solicit comments from the users of its ratings.

In contrast, he said, Standard & Poor's has stonewalled. "They are wrong on this," he said. "Big wrong."

The motive - and opportunity - for public finance ratings reform evolved from the subprime mortgage crisis, and the rating agencies' role in it, Lockyer said.

"Because the ratings agencies are in such hot water because of their triple-A ratings of structured finance and SIVs and everything else that's underwater, everybody's asking that question, 'What went wrong here?' " Lockyer said. "So it's an opportune time for us to raise the similar sort of inverse question of why is it that public finance is ... discriminated against in this dual standard of analysis."

All three rating agencies rate California general obligation bonds at the A-plus level.

Lockyer acknowledged that the state has a persistent problem with its structural budget deficit - one that the rating agencies discuss at length in their ratings reports - but added that the discussion was irrelevant to the question of whether or not California will default on its GOs.

After education, which has a first claim on the state budget, the next highest claim on the remaining $60 billion of annual general fund revenue is $4 billion in debt service, which has a continuing appropriation that doesn't require adoption of a budget, Lockyer said.

That means there is essentially no risk of default, he said, so the state's GO bonds should be rated triple-A.

 

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