WASHINGTON — Municipal governments and hospitals swept up in the credit crisis are pressing Congress to let them borrow money without having to make costly payments to troubled bond insurers.
They back legislation to let thousands of banks nationwide that are members of the Federal Home Loan Bank system to guarantee tax-exempt municipal bonds, not currently allowed under federal law.
The ability of local governments to raise money at attractive rates "has been crippled by what's going on in the credit markets," said John Price, chief executive of the FHLB of Pittsburgh.
After scrutinizing the credit quality of the municipal government agency or hospital issuing a bond, a FHLB member bank could extend a letter of credit guaranteeing the debt and carrying the triple-A, investment-grade rating held by the 12 regional banks at the helm of the FHLB system.
It would lower borrowing costs and encourage credit availability for the municipal government agencies or hospitals, advocates say, because higher credit ratings bring lower borrowing costs. Bills to make this change are pending in the House and Senate and have bipartisan support.
Created by Congress during the Depression, the home loan bank system has some 8,100 members around the country, including banks, savings and loans, and credit unions.
The credit crunch also has underscored a long-standing need. Even before it struck, bond insurers were typically unwilling to back municipal bond sales of less than $10 million, experts say.
Rep. Phil English, R-Pa., one of the bill's sponsors, said the credit crunch makes the change especially necessary for local governments planning projects, such as roads or sewer lines. "It's going to be very difficult for some time for municipalities to have confidence that when they go into credit markets that investors are going to nibble," he said.
Supporters hope the idea could be included in a potential second economic stimulus package.
Most municipalities do not have "AAA" ratings so they go to bond insurers, such as MBIA Inc. and Ambac Financial Group Inc., and pay to access their ratings.
Some critics also argue that bond insurance often is unnecessary, even more so now that the financial health of some bond insurers is in question.
California's state treasurer, Bill Lockyer, has argued that municipalities "have paid enormous sums to buy bond insurance" of questionable value. California has paid $102 million since 2003 to buy bond insurance, Lockyer says.
Critics of the current system argue that municipal governments are being unfairly tarred by the woes of mortgage-related investments even though municipal debt continues to post fewer defaults.
Smaller banks would welcome the opportunity to back such projects, said Steve Verdier, senior vice president at the Independent Community Bankers of America.
"Our banks specialize in local and small projects," Verdier said. "They're on the ground. they know what the community needs are."
The bill would give hospitals another way to enhance their credit rating and borrow money more cheaply "at a time when capital markets are under pressure and hospital capital costs are soaring," wrote Rick Pollack, executive vice president of the American Hospital Association, in a letter in support of the House bill last month.
Earlier this year, credit problems contaminated the market for auction-rate bonds sold by government and nonprofit agencies they could save money by selling auction-rate bonds. Those securities have terms of up to 30 years, but have their interest rates reset at frequent auctions.
That market seized up last month due to concerns about bond insurers' health. The auction failures were unprecedented and left short-term financing in disarray at schools, student loan companies and transportation authorities around the country.
