Historically rating agencies have used different standards for rating municipal securities and corporate securities, resulting in ratings that lack uniformity. While the credit rating agencies acknowledge that the default rate of municipal securities of a given rating is a fraction of comparably rated corporate securities, in most cases municipal securities are rated lower than comparable corporate securities. Additionally, many municipal securities are backed by the full faith, credit and taxing power of the government, a trait not found in corporate securities.
The lack of uniformity between the two rating scales contributes to additional costs for bond insurance and excludes some municipal bonds from eligibility as money market mutual fund investments (under SEC Rule 2a7), which ultimately increases costs for taxpayers. Also, the lack of uniformity creates problems for crossover taxable investors (e.g., many retail investors, international investors and pension funds) to invest freely in the municipal bond market. A uniform rating scale system would better reflect the true risks of securities by recognizing the levels of financial management and transparency.
It is the position of the Government Finance Officers Association (GFOA) that ratings on municipal and corporate securities should be made on a uniform basis.
- Publication date: June 2009