CalPERS Demands Ratings Reform

The California Public Employees’ Retirement System (CalPERS) yesterday threw its weight behind an effort that calls on the nation’s three leading rating agencies – Fitch, Moody’s and Standard & Poor’s – to reform their methods for rating government-issued bonds.

The CalPERS Board of Administration joined 15 major municipal bond issuers across the country, including California’s State Treasurer Bill Lockyer, saying the current system of rating municipal bonds compared to corporate bonds is unfair and misleads investors about the risk of default.

Leaders of the pension fund believe the bond rating system should be fair, accurate and transparent.

“It is in our best interest to ensure that the rating system better serves all investors and taxpayers,” said Rob Feckner, President of the CalPERS Board, in a statement.  “A fair rating system is key to an efficient and transparent market, an important goal for CalPERS.”

At issue for municipal bond issuers is the current dual rating system, where municipalities are held to a higher standard than corporate issuers. The 15 municipal bond issuers point to recent events in the debt markets that have highlighted the problem.

In a letter to the rating agencies they said, “Many collateralized debt obligations and structured investment vehicles that your agencies rated triple-A have become insolvent or are at risk of insolvency.  As a result, your agencies have been forced to downgrade those securities, as well as the ratings of some of the bond issuers who guaranteed them.  Meanwhile, the vast majority of municipal issuers have not shown strains that would suggest they may default on their bonds.  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 concern.”