You might think that after the blunders of the recent past, public borrowers would have learned the lessons of 2008, but that would be wrong. Rather than increasing the information available, municipalities are providing less transparency to lenders. Gunjan Banerji and Heather Gillers write in The Wall Street Journal:
U.S. cities and counties are using fewer ratings to assess the risks of the bonds they sell, providing investors with just one opinion on an increasing amount of new debt.
Roughly 25% of the dollar value of all municipal debt issued this year carried a single grade from one of the major ratings firms, according to Municipal Market Analytics data as of Oct. 3. If that percentage holds through the end of the year, it would be the highest since the research firm began tracking the data in 2006. For the riskiest debt, the single-grade ratio by dollar volume was 37%.
Municipal officials and advisers said fewer ratings help cities trim expenses and save time when they borrow money for everything from school construction to sewer repairs. Bond issuers typically pay rating firms to issue a report. But some analysts said opting for one grade from a single firm puts smaller investors at a disadvantage as less information circulates through the $3.8 trillion municipal market.
“Mom-and-pop investors and small asset managers without their own research staff are at a disadvantage,” said Matt Fabian, a partner with Municipal Market Analytics.
Scores attached to municipal debt are important in the public finance world because investors rely on these opinions to help make decisions about buying or selling bonds that governments use largely to pay for new construction projects. The grades range from gold-plated triple-A to several levels of “junk.”
The largest graders are S&P Global Inc.,Moody’s Corp. and Fitch Ratings, which together are responsible for 96% of all global bond ratings among firms registered with U.S. regulators. Some municipalities are required by statute to get grades of a certain quality from at least one ratings firm before borrowing
Read more here.
Cities and states across America are underfunded and too deep in debt. With rates rising, a reckoning could be coming. I have written before about the dire straits many local governments find themselves in:
