"Taxpayers are paying billions of dollars in increased costs," California Treasurer Bill Lockyer said.
Municipal bonds are usually a sure bet, but bond evaluators routinely give higher ratings to corporate securities than to municipal bonds.
California, like many states and municipalities, has an A rating, The New York Times reported, and since that's not the top grade it means municipalities must buy insurance for their bonds.
But one study showed that A-rated municipal bonds failed far less often than corporate bonds with Triple-A ratings, the report said.
"We are learning, essentially, that the emperor may have no clothes, that there is no real reason to require these towns to have insurance in many instances," the attorney general of Connecticut, Richard Blumenthal, said.
Moody's, which rates bonds, is open to change. Standard & Poor's says they use one evaluation process for all bonds. But others say upgrading municipalities would create a homogeneous Triple-A rated landscape, which would not help investors make decisions.
Analysts said investors understand the double standards, but the House Financial Services Committee has scheduled a hearing on the rating systems for March 12.
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