FAIRER BOND RATINGS

The nice thing about insurance is that it’s so reassuring. If you wreck your car or your house burns down, you get – theoretically, at least – the money to buy a new car or a new house. But some hazards are so rarely encountered, like being struck by lightning, that it makes no sense to insure against them. Maine’s municipal bonds may be a case in point.

Maine’s state treasurer, David G. Lemoine, has joined California and nine other states in an effort to give municipal bonds a fairer shake by the ratings firms, get rid of insurance costs, and save the nation’s taxpayers and investors billions of dollars.

Municipal bonds are issued to pay for highways, bridges, schools, public housing, public health and other purposes. The interest they pay is generally exempt from federal taxation and from taxation in the state of issuance. They have long been considered safe and conservative investments. Most states, including Maine, have often bought insurance on their bonds, in effect renting the high ratings enjoyed by the big insurance-rating companies to avoid the lower ratings imposed under the current discriminatory dual-rating system.

Suddenly, with the deepening worldwide investment crisis, the whole picture has changed. Those expensive AAA ratings by Moody’s Investors Service, Standard & Poor’s and Fitch Ratings came into question when they gave no warning that Bear Stearns hedge funds were about to fail or that Maine’s $20 million investment in Mainsail II commercial paper was close to worthless. And big bond insurance companies had invested heavily in risky mortgage packages and are struggling to maintain their own AAA ratings. It was time to strike.

California, the largest municipal bond issuer in the United States, is leading a revolt with a letter to the three major rating agencies urging them to adopt a fairer system of rating municipal bonds.

Maine’s treasurer, in signing on to the California letter, said, “The current dual-rating system inflates the perceived risk of state-issued bonds, adds a false sense of volatility and often imposes an artificial need for bond insurance.” He said Maine would likely have saved $75,620 in the cost of issuing general obligation bonds last June if Maine had been rated on a common scale with corporate bonds.

“There is essentially zero risk that the state will not pay all its general obligation debt service obligations on time, and our credit ratings should reflect that fact,” Mr. Lemoine said. He reasoned that the security of state-issue bonds rests on the fact that no state is going to go out of business during the life of its bond issue – unlike corporations, which can go bankrupt at any time, especially lately.

The unfair system of rating municipal bonds is long overdue for a change. And Maine is helping lead the way toward a fair and realistic system.