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The downgrades of several bond insurers, and the higher costs that imposed on many municipalities with variable rate bonds backed by those insurers, has led to calls for rating agency reform. In many cases public agencies seek bond insurance to secure higher ratings, thereby equalizing the differences between how municipal and corporate bonds of comparable risk are rated. This added cost to compensate for the discrimination against municipal bonds is staggering. California state officials estimate they have spent $102 million between 2003-07 on bond insurance for $9 billion of bonds to secure higher bond ratings (and lower interest rates as a result). California State Treasurer Bill Lockyer has been leading the campaign nationwide to end discrimination in municipal bond ratings. He was recently joined by 10 other state treasurers and financial officers from a number of local agencies, including the City of L.A., in calling on the three major rating agencies to examine their practices and treat municipal bonds on par with corporate bonds that expose investors to the same level of risk. The Treasurer also testified before the House Financial Services Committee on March 12 about the need for reform where widespread concern was expressed about this discriminatory practice. Standard & Poor's objects to the call for reform, claiming they have one consistent rating scale, despite the evidence of their own default studies to the contrary. Fitch acknowledges the existence of two scales and has announced it is undertaking a review of whether they should continue using two scales or move to a single scale. Moody's has taken the greatest strides. The firm announced that it will assign acorporate- equivalency rating (what it calls a global scale rating or GSR) alongside the traditional municipal rating to any municipal bond at the issuer's request. The League of California Cities recommends sending a letter to the three major bond rating agencies, endorsing the reform of the bond rating system. A list of other agencies and individuals supporting the reform effort, appearing on a website established by Treasurer Lockyer for this purpose at http://www.treasurer.ca.gov/fairbondratings, is attached. Submitted by: David P. Culver Director of Finance Attachments: 1. Resolution 2. List of supporting agencies 3. List of major bond rating agencies 4. Sample letter to rating agencies Approved y: Nelson Fialho City Manager Page 3 of 3