The Government Finance Officers Association and 11 other issuer groups are urging House Financial Services Committee chairman Barney Frank to reintroduce legislation that would require rating agencies to rate municipal and other securities on the basis of default alone. The move came after Moody's Investors Service last week assigned a negative outlook to the entire tax-backed local government sector.
In a two-page letter sent to the Massachusetts Democrat on Tuesday, the groups warned that Moody's action will likely exacerbate what issuers have long argued is a double standard of rating municipal bonds on a more rigorous scale than corporate debt, despite munis' relatively low historical default rates.
"History has shown that the default rate on municipal securities is a fraction of that for corporate securities," the letter said. "Yet, many government securities are rated lower than their corporate counterparts - a practice that may very well increase due to Moody's recent actions."
Specifically, the groups are asking Frank to reintroduce the "Municipal Bond Fairness Act," which cleared Frank's committee last summer but was not voted on by the full House and had no corresponding legislation in the Senate.
The letter comes as Frank's staff is drafting an omnibus muni bill that would provide a federal guarantee for general obligation municipal debt, provide some type of federal liquidity facility for variable-rate demand obligations, and possibly include the rating provisions from last year's muni fairness act, congressional staff have said.
Susan Gaffney, director of the GFOA's federal liaison center, said the issuer groups do not have a preference for whether the "fairness" legislation is reintroduced as a stand-alone bill or as part of the broader muni legislation that Frank is working on.
"We appreciate the continuing attention chairman Frank has given the credit rating recalibration issue, and would like the issue readdressed in this Congress either as stand-alone legislation or within broader legislation that the chairman may be introducing," she said.
In the letter, the issuers said they believed that pressure from Frank played a key role last year in pushing the rating agencies to reconsider dual scales for municipal and other types of debt. They noted that the mere fact Frank introduced the "fairness" bill led Moody's to detail plans to cease rating munis on a separate scale.
But Moody's ultimately reconsidered its recalibration, ostensibly because of the economic crisis, and Frank needs to introduce his bill again, the issuers argued.
"In the current economic climate, it is important to state and local governments and the municipal bond market to address problems associated with different credit rating scales for different securities," the letter said. "We expect that ensuring that rating agencies use uniform and accurate credit ratings for all securities will lower borrowing costs and make it easier for new investors to participate in the municipal securities market."
In addition to the GFOA, the letter was also signed by: the National Association of Counties, the National League of Cities, the United States Conference of Mayors, the Council of Infrastructure Financing Authorities, the International Municipal Lawyers Association, the National Association of State Auditors, Comptrollers, and Treasurers, the National Council of State Housing Finance Agencies, the National Association of County Collectors, Treasurers, and Finance Officers, the Association of School Business Officials International, the National Institute of Governmental Purchasing, and the National Association of Health and Educational Facilities Finance Authorities.