The City of Los Angeles and two other municipalities that voluntarily commissioned Standard & Poor's ratings for their investment portfolios have dropped those ratings after being downgraded following the ratings firm's cut to the U.S.'s triple-A status.
Some other municipalities, including St. Lucie County, Fla., said they might consider dropping S&P ratings for their investment pools as well.
S&P said it currently rates about 90 such investment pools. It had downgraded 14 of them as part of a broader downgrade last week of 73 funds due to what S&P called "significant exposure" to investments in U.S. Treasury and U.S. government-agency securities, which were downgraded to double-A-plus after S&P stripped the U.S. government of its triple-A rating earlier this month.
So far this week, Standard & Poor's has lost the City of Los Angeles, Manatee County, Fla., and San Mateo County, Calif., from local governments that had paid S&P to rate investment portfolios. S&P had downgraded the three governments' funds last week, to AAf from AAAf; the new ratings are still investment grade and the "f" indicates the rating is on the credit quality of a fund.
"They unfairly penalized us for following best practices," said Dan Wolfson, finance director in the Manatee County Clerk of Circuit Court and Comptroller's office in Bradenton, Fla. "We were trying to follow best practices and have a rating when it was not required."
Peter Rizzo, senior director in S&P's fund-ratings group, said the firm began rating such investment pools in 1994 in response to requests from some municipalities seeking to calm investors following the financial crisis in Orange County, Calif. That year, Orange County filed for the largest-ever municipal bankruptcy after its investment fund lost more than $1 billion, due in part to investments in risky derivatives.
Since then, some local governments have voluntarily sought ratings on their portfolios from one or more credit-rating companies.
"They're doing a good thing to indicate to participants of the pool that it's a sound investment," Mr. Rizzo said. "To have the U.S. government get downgraded, they may feel frustrated and I imagine some are re-evaluating whether they have a need for the rating."
San Mateo County, which has a $2.6 billion investment pool that is mostly invested in U.S. government securities, said it was in the process of renewing its contract with S&P when the downgrade came and decided not to renew.
"We will save the taxpayers $20,000 annually," said Sandie Arnott, Treasurer and Tax Collector at San Mateo County. "We found the whole process of the downgrade flawed." Ms. Arnott said the county had switched to S&P from Fitch Ratings three years ago and will consider another rating firm at a later time.
Other local governments that saw their investment funds downgraded are looking into dropping S&P's ratings for those portfolios. Shai Francis, finance director for St. Lucie County, Fla, says the county hasn't yet made such a decision, but she expects one to be made by Sept. 30, the end of St Lucie's fiscal year.
"We are more than upset" about the downgrade, she said. "It's just kind of mind-boggling at this point. You buy the most secure investment out thereU.S. debtand I don't think anyone can argue about that.
I guess double-A will be the new standard."
Ms. Francis said about half of the county's $325 million portfolio is invested in U.S. Treasurys.
On Wednesday, S&P confirmed that the City of Los Angeles had dropped S&P's rating on its $7 billion general investment pool. The news had earlier been reported by The Bond Buyer.
On Monday, S&P said it had similarly withdrawn its rating on Manatee County's investment portfolio, valued at roughly $700 million, at the request of the fund's investment adviser.
Manatee County said the bulk of its investments were county bonds with some small amounts from neighboring municipalities. As market turmoil took hold in 2007, the county said it called S&P, the first rating firm that came to mind, to rate its portfolio. At an annual cost of $16,000, S&P monitored the investment pool.
One of the county's funds that held collateralized debt obligations backed by mortgages froze during the credit crisis. Manatee County estimates it still holds about $1 million in original value of this toxic debt. In its downgrade, S&P cited this holding as well the fund's holdings of U.S. Treasury bonds, which amounted to $112 million on top of $77 million in debt issued by Fannie Mae and Freddie Mac.
"We wanted to show the citizens that their surplus funds, as it were, were invested in safe, liquid securities," Manatee County's Mr. Wolfson said. "We have one little piece of the portfolio that is kind of impaired, but S&P disproportionately dinged us many points for having it."
Messages left with the Los Angeles treasurer's office weren't immediately returned.
S&P is the only major rating company to have lowered its rating on the U.S. government. Fitch Ratings on Monday affirmed its rating for the U.S. at triple-A with a stable outlook, and Moody's Investors Service affirmed its triple-A rating on Aug. 2 but assigned a negative outlook.