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States protest bond ratings

Several state treasurers, including those for Idaho and Washington, on Tuesday protested debt rating practices that penalize public bonds safer than the derivative investments blowing up on Wall Street.

In a letter to the three main credit rating agencies, the officials say taxpayers pay billions in additional interest costs because states and local governments are graded differently from investment banks and corporations. Yet defaults on public-issued debt are a fraction of those for private debt, they say.

Many governments also buy insurance – adding still more cost – to upgrade the ratings on their bonds, even though the insurers themselves are struggling with defaults on subprime mortgage debt and other securities.

“The bond insurers are in a world of hurt,” Washington Treasurer Mike Murphy said Tuesday.

He said Washington debt is rated AA+ by Moody’s Investors Service and Standard & Poor’s, yet it trades as if the rating were the higher AAA.

Murphy said he was reluctant to sign the letter circulated by California Treasurer Bill Lockyer, fearing a possible downgrade in retaliation. The state plans to issue about $1.2 billion in debt this year for highways, schools and other projects.

“We value our ratings,” he said, adding that states pay Moody’s, S&P, and Fitch for rating services.

Murphy said he expects the three will downgrade their assessments of corporate bonds, rather than upgrade public debt.

“That’s a good outcome,” he said.

Murphy, who will retire when his current term expires, called the credit crunch a “perfect storm” of sloppy rating, careless mortgage lending and borrowing, and the proliferation of so-called structured investment vehicles whose collapse has cascaded through the banking system.

Among the victims is King County, which is holding $200 million in defaulted securities purchased with cash pooled by dozens of tax districts. Murphy has criticized the county for not booking the full amount of the loss, which represents about 5 percent of the total $4.2 billion in the pool.

The state has avoided SIVs and similar investments for years, he said, as has every county but King.

Spokane County Treasurer Skip Chilberg credited his predecessors for their caution, adding, “If I don’t understand what something is, I won’t invest in it.”

The investment pool he manages, which contains more than $700 million at times, earned more than $31 million last year for the 70 school, fire, cemetery and other tax districts that participate.

To get the lowest rate possible on bonds sold by the county, Chilberg has drafted a debt policy he said will rely more on competitive bidding than private placements.

The city of Spokane pooled the cash in its general fund and department accounts as of Oct. 1. For the fourth quarter of 2007, said Treasurer Ellen Dolan, the annualized yield on the $350 million in the account was 5.67 percent.

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