Issuer groups pushing for the Senate Banking Committee to add language in financial regulatory reform legislation mandating that municipal securities be rated on the same scale as other kinds of debt are getting a boost from an unlikely source: the Service Employees International Union, one of the largest labor unions in the country.
The SEIU, with about half of its 2.2 million members employed by states and localities, believes mandating that municipals be rated on a uniform, or corporate-equivalent, scale is chiefly a matter of fairness. It also believes munis rated on such a scale would generally translate into a lower cost of borrowing for their members’ employers, which in turn could lead to the creation or retention of jobs.
“At a time when there’s huge pressure on government budgets and the closing down of social services and schools, why should we keep paying higher interest rates to Wall Street simply because the rating agencies are applying a tougher standard to state and local governments than they do to corporate issuers?” asked Steve Albrecht, director of benefits and capital stewardship at the SEIU.
“To the extent that we can alleviate the financial pressures on local government agencies, the easier it will be for them to maintain services, keep jobs, and not further depress the economy by putting additional people on the unemployment roles.”
He added that the SEIU sees legislation as the only reliable way to change the existing system, in which municipals are rated on a more rigorous scale even though they have much less likelihood of default than corporate bonds.
“So it’s a jobs issue, it’s also a service issue at the local level, and it’s a question for taxpayers: Why should they have to pay taxes that go straight to Wall Street for in effect a risk factor that doesn’t exist?” Albrecht asked.
His comments come after issuer groups like the National Association of State Treasurers have appealed to key lawmakers in the House Financial Services and Senate Banking committees to include uniform rating scale provisions in their respective financial regulatory reform language. The House approved such language as part of an enormous regulatory reform bill it passed in December, though many market participants believe the uniform ratings language is muddled.
The Senate Banking Committee’s draft financial regulatory bill originally unveiled in November does not include a uniform ratings provision, and the panel’s chairman, Sen. Christopher Dodd, D-Conn., is said to be noncommittal on the subject.
Spokesmen for Sens. Jack Reed, D-R.I., and Judd Gregg, R-N.H., who have been charged with reworking the draft legislation’s credit rating agency and derivatives provisions, also are reportedly noncommittal. Lobbyists said they have focused their efforts on Sen. Robert Menendez, D-N.J., who has privately indicated support for uniform ratings. Spokesmen for the four senators either declined to comment or could not be reached.
Matt Fabian, managing director of Municipal Market Advisors, said there is not much historical difference in the statistical risk of default between a general obligation bond rated triple-B versus one that is A-rated. But he said a “credible” scale based on the likelihood of default would help the rating agencies police better practices in the market, “because a downgrade would have meaning.” While he believes rating agencies have done a good job understanding municipal credits, the scale on which they are rated is “flawed.”
Fabian noted that he will moderate a panel that will discuss the issue next week at a National Federation of Municipal Analysts’ conference in Florida. Panelists include an SEIU policy analyst.
Meanwhile, the three major rating agencies have admitted to flaws in the way they rate munis. Moody’s Investors Service, along with Fitch Ratings, committed in mid-2008 to implementing a uniform scale, but postponed their recalibrations in October of that year, citing the unsettled financial markets. Standard & Poor’s maintains that it already uses a uniform scale, but it has upgraded hundreds of credits it said were too low.
Michael Adler, a Moody’s spokesman, said yesterday that Moody’s plans to provide guidance to the market on its planned migration to a global scale during the first quarter, as it announced it would do last year. Moody’s officials have previously said they remain committed to the migration when markets settle.
Richard Raphael, executive managing director and head of public finance for Fitch, yesterday said his agency has been reviewing the findings reached in its July 2008 ratings framework proposal that was subsequently suspended, “but has no conclusions to announce at this point.”