By Spain, Cathy
Nation's Cities Weekly , Vol. 32, No. 1
For many months, serious disruptions in the municipal bond market have affected the ability of cities and other governments to finance infrastructure and meet other capital financing needs and increased the cost of existing variable debt. NLC, in cooperation with the National Association of Counties (NACo), created a Blue Ribbon Commission on Municipal Credit Enhancement last fall to identify remedies to improve market access and reduce municipal borrowing costs.
Downgrades of the AAA credit ratings of municipal bond insurers were the primary impetus for establishing the commission. Issuers choose to buy bond insurance because the exceptional ratings of bond insurers lower issuers' borrowing costs. An estimated $2 billion is paid to insurers on an annual basis. If insurers are downgraded, the benefits of their product are lost.
Other market problems noted by the commission were increased interest rates on variable rate debt; uncertainty about the system for rating municipal market issuers due to calls for a new, unified credit rating system; and the requirement for issuers to make unanticipated payments to debt service reserve funds because of downgrades of their surety providers.
A final report recently issued by the commission recommends three actions that NLC and others can take to help stabilize the municipal bond market.
The first is to support federal tax law changes that would increase the demand for municipal debt by providing incentives for banks and other corporations to purchase these bonds. While the focus of the commission's work was on credit enhancement, it was very concerned about the growing credit and liquidity crisis in the market and the oversupply of bonds that was occurring as institutional buyers of bonds were selling their holdings to obtain needed funds.
Of particular interest is a commission suggestion that NLC and other groups representing local issuers investigate the feasibility of creating a mutual insurance company that would be owned and operated by local governments.
The nonprofit company would insure new, fixed rate general obligation bonds of cities, counties, and school districts and revenue bonds sold to finance essential governmental services such as water and sewer facilities.
The commission also urged the groups to seek support from the federal government for the creation of the new mutual company by having it provide capital for the new entity, a federal guarantee for the company or reinsurance.
The 17-member commission consisted of issuer representatives, bond lawyers,, underwriters, financial advisors, academics, rating agency and retirement system staff and bond insurance professionals. Bob Inzer, clerk of the court, Leon County, Fla., chaired the commission and Pat Born, chief financial officer, Minneapolis, served as the vice chair.
In coming to its recommendations, the commission discussed financial guarantees provided by state agencies, credit enhancement programs sponsored by state pension funds and banks, how rating agencies rate insurers and the state of the municipal market. …