Mike the Mad Biologist

If they are right, billions of taxpayers' dollars -- money that could be used to build schools, pave roads and repair bridges -- are being siphoned off in the financial markets, where the recent tumult has driven up borrowing costs for many communities.

A complex system of credit ratings and insurance policies that Wall Street uses to set prices for municipal bonds makes borrowing needlessly expensive for many localities, some officials say. States and cities have begun to fight back, saying they can no longer afford the status quo given the slackening economy and recent market turmoil.

Municipal bonds, often considered among the safest investments, sank along with stocks last week, darkening the already grim mood in the markets. Several big hedge funds unloaded bonds as banks further tightened credit to contain the damage from mounting losses on home mortgages and other loans.

States and cities rarely dishonor their debts. The bonds they sell to investors are generally tax-free and much safer than those issued by corporations. But some officials complain that ratings firms assign municipal borrowers low credit scores compared with corporations. Taxpayers ultimately pay the price, the officials say, in the form of higher fees and interest costs on public debt.

"Taxpayers are paying billions of dollars in increased costs because of the dual standard used by the rating bureaus," said Bill Lockyer, treasurer of California, who is leading a nationwide campaign to change the way the bonds are rated. California, one of the largest issuers of municipal bonds, is rated A; Mr. Lockyer said the state should be triple A.

The state is soliciting support from other municipalities for a letter it intends to send to the ratings agencies, arguing that municipal bonds should be rated on the same scale as the one used for corporate bonds.

Because of their relatively weak credit scores, more than half of all municipal borrowers buy insurance policies that safeguard their bonds in the unlikely event that they fail to pay the debt. California, for instance, paid $102 million to insure more than $9 billion in general obligation debt between 2003 and 2007.

Ratings agencies like Standard & Poor's, Moody's Investors Service and Fitch Ratings are paid a second time to evaluate the insured bonds.

Lookee! A picture:

What's really absurd are the defenses of this practice. The most ludicrous argument is that municipal bonds have to be rated more strictly than corporate bonds because most municipal bonds are so good, it's hard to tell them apart. It's the "Graded on a Curve" defense. Or maybe it should be called the Soft Bigotry of Low Corporate Expectations....

Not only is the taxpayer getting the shaft, along with schools, parks, museums, and other public services, but this also distorts the value of municipal versus corporate bonds: corporate bonds are overvalued, while municipal bonds are undervalued. In an indirect way, this is an involuntary, undemocratic subsidy of corporate capital raising by state and local governments, simply because a private ratings agency says so.

And if you're wondering why I bring this up, this is the context in which funding of science education happens.