State treasurers seek overhaul of muni debt ratings

By Jim Christie

SAN FRANCISCO, March 4 (Reuters) - Eleven U.S. state treasurers urged Wall Street's three major rating agencies in a letter on Tuesday to create new rating standards for municipal bonds that could save U.S. governments billions of dollars in debt-related expenses.

California state Treasurer Bill Lockyer spearheaded the letter, which charges that municipal debt issuers are being held to higher standards than corporate debt issuers.

That inflates the risk of investing in municipal bonds, the letter said. It also costs taxpayers and ratepayers billion of dollars in increased interest costs and bond insurance premiums, according to the letter.

"Recent events in the debt markets have highlighted the problem," according to the letter on Lockyer's stationery, which points to once triple-A-rated collateralized debt obligations and structured investment vehicles that are now insolvent or at risk of insolvency.

"Meanwhile, the vast majority of municipal issuers have not shown strains that would suggest they may default on their bonds," according to the letter. "Nonetheless, many strong municipal issuers continue to carry much lower ratings than our corporate counterparts, in some cases even lower than the bond insurers about whom the market has understandable concerns."

Lower ratings translate into higher borrowing costs for states, counties, cities, towns and special districts, which are effectively paid by taxpayers and ratepayers.

The letter was signed by Lockyer and the treasurers of Connecticut, Idaho, Iowa, Maine, Nevada, New Jersey, New Mexico, Oregon, Rhode Island and Washington state.

Also signing the letter were Los Angeles and Minneapolis officials and New Jersey Educational Facilities Authority and East Bay Municipal Utility District officials.

Lockyer, treasurer of California, the largest U.S. municipal bond issuer, with about $44 billion in general obligation debt outstanding, is leading the effort amid hopes that Congress takes up how municipal debt is rated in hearings this month.

Rating agencies have justified their separate ratings for municipal debt to distinguish among different quality levels. They say that if municipal debt is rated on the same scale as corporate debt, the majority of municipal bonds would be extremely high-rated, giving investors little information about differences among issuers. (Editing by Jan Paschal)