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US Backlash Over S&P Rating

Johanna Kassel and Matt Kennard

Three US municipalities have dropped Standard & Poor’s ratings of their local government investment funds in retaliation for the rating agency’s downgrade of US government debt to double A plus.

The move is a tangible sign that S&P’s business is suffering from a patriotic backlash in the US following its decision to strip the world’s biggest economy of its triple A credit rating for the first time.

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Last week, S&P downgraded the investment funds of the three US municipalities, the City of Los Angeles; Manatee County, Florida; and San Mateo County, California, from triple Af to double Af – the “f” signifying that the rating is on an investment fund – along with 11 other local investment funds.

“First of all, we didn’t agree with the downgrade of the US government,” said Dan Wolfson, finance director at the Manatee county clerk and controller. “And, of course, the ripple effect, because of our holding with US government debt, meant our pool rating followed.”

The downgrades of the municipalities were based on their “significant exposure” – greater than 50 percent – to US Treasuries and US government agency securities, S&P said in a note following the decision. S&P rates 90 government investment pools. The three municipalities chose not to renew their contracts with S&P to rate the ­quality of their investment ­portfolios.

Mr. Wolfson said Manatee County, whose investment fund was worth between $620 million and $750 million in 2010, was in talks about the possibility of being rated by another agency. “There’s no requirement for us to have our pool rated, we just decided to not renew the contract.”

Municipalities voluntarily commission ratings from rating agencies to allow transparency of their investments. Ratings also act as a benchmark to compare investment risk to known quantities, including public companies and government agencies. The ratings are based on “overall exposure to default risk”.

Palm Beach County Investment Portfolio, managed by the clerk and comptroller for the county, was one of the funds downgraded to double Af by S&P. The fund has an average value of $1.8 billion and last year earned about $75 million, Sharon Bock, clerk and comptroller for Palm Beach county, said.

Despite the downgrade, Ms. Bock said there would be no immediate change in the composition of the portfolio, which has between 50 and 55 percent of its funds invested in US government agencies, including mortgage-backed securities . She said the main responsibility of the fund was to the taxpayers and past performance also helped to dictate the direction of the fund, in addition to ratings.

The Florida county does not plan immediately to change rating agencies.

“We don’t ever want to make a knee-jerk reaction and we certainly are not going to do it now,” Ms. Bock said. “We are going to evaluate S&P’s critical process and, when we see that criteria, we may decide to change rating agencies.”

Municipalities pay annual fees – Manatee County paid $16,000 – to have their portfolios examined for quality and rated.

“We really sought the rating to provide assurance and comfort to the county commissioners and the citizens, that the money and investment pool were being handled in the best manner possible,” Mr. Wolfson said.

S&P downgraded the US credit rating from triple A, earlier this month. Both Fitch Ratings and Moody’s maintained their top ratings, but Moody’s downgraded its outlook on US government debt to negative. Mr Wolfson said he was not concerned about the quality of Manatee County’s investment fund.

Separately, S&P said in a report released on Thursday that The Federal Budget Control Act could have an effect on municipal credit quality. “In our opinion, the longer-term deficit reduction framework adopted as part of the BCA could undermine the already fragile economic recovery and complicate aspects of state and local government fiscal management,” it said in a note.

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