HomeMy WebLinkAboutRES 2008-15RESOLUTION 2008- 1-5
RESOLUTION SUPPORTING REFORM OF THE BOND RATING SYSTEM TO
ELIMINATE INEQUITABLE STANDARDS 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 ignore it in their ratings,
such as Standard & Poor's acknowledgement 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 impose inequitable standards 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, while the ratings of municipal bonds have little relationship to the risk of default; 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; and
WHEREAS, Moody's has taken the greatest strides, announcing it will assign a corporate -
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.
THEREFORE, BE IT RESOLVED that the City Council of the City of Diamond Bar 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; to create a unified, global rating approach that treats all issuers equally, and better
serves taxpayers and investors; and direct staff to notify the municipal bond rating agencies by letter
of the adoption of this resolution 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.
PASSED, APPROVED, AND ADOPTED this 20th day of May, 2008.
Jack Tanaka, Mayor
I, Tommye A. Cribbins, City Clerk of the City of Diamond Bar, California, do hereby certify that the
foregoing Resolution No. 2008-15 was duly anmeetin passed
on the 20th dayboftMay,he 12008,ubylthe
l of
the City of Diamond Bar, California, at its regularg held
following vote, to wit:
AYES: COUNCILMEMBERS:
NOES: COUNCILMEMBERS:
ABSENT: COUNCILMEMBERS:
ABSTAIN: COUNCILMEMBERS:
Chang, Herrera, Tye, MPT/Everett, M/Tanaka
None
None
None
Tommy A. Cribbins, City Clerk
City of Diamond Bar
2006 -15