Blue states clap back against red state pressure on rating agencies

California's state controller and other states' finance officials wrote aletter to the three largest bond rating agencies asking them to base their rating analyses on sound financial practices and not bow to pressure from Republican state attorneys general.

"Credit ratings are not political endorsements, they are financial risk assessments," California State Controller Malia Cohen said in a statement. "When outside interests attempt to dictate what risks can or cannot be considered, they threaten the integrity of the rating process and the confidence investors place in our markets."

The letter was addressed to Ian Linnell, Fitch Ratings' president; Rob Fauber, Moody's Corporation's president and chief executive officer; and Martina L. Cheung, S&P Global Ratings' president and chief executive officer.

The other signers of the letter are: Brooke Lierman, Maryland's state controller; Deborah B. Goldberg, Massachusetts state treasurer and receiver-general; Mark Levine, New York City Comptroller; Julia Blaha, Minnesota state auditor; Erick Russell Connecticut treasurer; James Diosso, Rhode Island state treasurer; and David Young, Colorado state treasurer.

"We are concerned that recent arguments regarding credit rating practices mischaracterize the role of ratings and would narrow risk analysis in ways inconsistent with sound credit practice and the needs of investors and issuers," the letter reads.

The three rating agencies failed to respond to a request for comment by deadline.

The rating agencies, like buy-side analysts, have included more guidance on economic impacts from natural disasters in their analyses over the past decade.

The rating agencies' inclusion of analysis on a state's dependence on natural resource extraction (which is being challenged by the Republican AGs) has long been a factor in ratings, said Howard Cure, partner and the director of municipal bond research at Evercore Wealth Management.

The Republican attorneys general from 23 red states sent a letter to rating agencies in April questioning how the agencies review energy-dependent economies and the potential for natural disasters in their ratings.

They also threatened legal consequences if the rating agencies don't change their practices.

The letter from the Republican AGs to Fitch, Moody's and S&P and top Securities and Exchange Commission officials accused the agencies of downgrades "based on highly speculative ESG predictions and goals" that "violated stated methodologies and reflected undisclosed material conflicts of interest, implicating SEC rules and state consumer protection laws." It also noted ripple effects reduce fossil fuel production and related government revenue.

"These downgrades were based on speculative ESG assumptions that never materialized," Oklahoma Attorney General Gentner Drummond said in astatement in April.

Oklahoma, which collects an oil and gas gross production tax, has received one-notch upgrades from all three rating agencies since 2024. When Fitchlifted Oklahoma's issuer rating to AA-plus in March, it noted "the state's still sizable concentration in natural resource development industries, which constrains longer-term revenue growth prospects and contributes to elevated revenue volatility."

The Republican AGs' letter cited four state outlook revisions to negative from stable that occurred in 2019 and 2021, as well as ESG/fossil fuel-related concerns raised in more recent state rating reports.

"What I have been reading from the rating agencies is that they are just pointing out that certain state economies ? it could be Oklahoma or North Dakota ? have a dependence in their economic base on extracting minerals that are either oil or gas," Cure said. "There is revenue volatility if you are depending on a natural resources tax."

"I don't view it differently from an economy dependent on tourism or industrial concentration like the auto industry," Cure said. "Your beta is higher."

The same dispute has been going on withindividual banksin terms of whether they are coming down on one side or another on support for fossil fuels or guns, Cure said.

"There is certain politicization that I am sure rating agencies don't want to deal with on these issues," Cure said. "I am not sure how worried the rating agencies are about these threats, because they are (global companies)."

One concern: issuers might rely more on rating agencies that don't take environmental concerns into consideration, he said.

"It is interesting how the states are pushing this when the rating agencies are only looking at the implications on these economies," Cure said.

He added, a change in administration can result in big fluctuations in policy, for instance, encourage more wind energy or discourage it or open up more mining or oil or coal.

There is a lot more volatility around energy use in general than there was in the past, partly based on the economy and fluctuations in the fuel prices, he said.

But the rating agencies want to keep their focus on analytics and avoid those conversations, he said.

"What I tell clients and people here is that the programs you used to take for granted ? from the federal or state government ? you can no longer do that," Cure said. "We are talking about energy policy, but it could also apply to Medicaid or FEMA."

For instance, he said, with transportation there is no longer a guarantee that basic funding will be there, when there previously would be minor changes around the priorities from one federal administration to the next.

"Now it can change a lot," he said.