NEW YORK (Bloomberg) — Bond insurance sold by MBIA Inc., Ambac Financial Group Inc. and Bermuda-based Security Capital Assurance Ltd. is backfiring on counties, universities and hospitals across the US, more than doubling some borrowing costs.

Park Nicollet Health Services in Minneapolis may pay an extra $5 million to $6 million this year, about a quarter of its operating profit, because interest on $375 million in floating-rate debt doubled in the last six weeks, said chief financial officer David Cooke. The rate on $98 million insured by Ambac climbed to six percent on January 30 from 3.06 percent on January 2.

"We'll have to reduce our capital expenditure programme, which means less equipment, less modernisation of facilities," Cooke said in an interview. The hospital paid Ambac to "count on that AAA insurance for 30 years. Now it's going away on us."

Investors are shunning insured bonds after three of the biggest guarantors, owned by Ambac, Security Capital and FGIC Corp., were stripped of at least one AAA credit rating amid losses on debt tied to sub-prime mortgages. Interest costs on floating-rate bonds sold by more than 100 governments, hospitals and colleges rose as much as seven percentage points since the beginning of January even as the Federal Reserve lowered its benchmark rate for US borrowing by 1.25 percentage points.

Park Nicollet is among tax-exempt borrowers seeking to restructure their debt to supplement or strip out the insurance that was supposed to reassure investors and lower their costs. The Bay Area Toll Authority in Oakland, California, and the Billings Clinic in Billings, Montana, shelved plans to borrow.

"The market's in a state of turmoil," said Bryan Mayhew, chief financial officer for the toll authority, which manages the San Francisco Bay Bridge and six other state-owned toll bridges.

Tax-exempt money-market funds can't hold debt rated lower than AA-, and downgrades to insurers are enough in some instances to make the bonds it backs ineligible.

State and local government debt is tainted even though Moody's Investors Service says the default rate on municipal bonds is 0.1 percent.

Insurers are losing the top ratings because of the structured securities they began guaranteeing decades after they first offered protection against municipal defaults. The toxin is debt tied to sub-prime mortgage borrowers; a surge in delinquencies has triggered about $146 billion in write-downs and losses at banks and securities firms since the start of 2007.

New York-based Ambac is the second-biggest bond insurer after Armonk, New York-based MBIA, while FGIC and Security Capital are fourth and sixth, respectively. The four guarantee about $1.1 trillion of fixed- and floating-rate municipal bonds, or 42 percent of the outstanding state and local government debt, according to data compiled by Bloomberg.

Fitch Ratings downgraded the financial strength ranking of Ambac's main insurance units two levels to AA January 18, and the primary subsidiaries of New York-based FGIC were cut to AA at both Fitch and Standard & Poor's later in the month.

Units of Security Capital, started by Bermuda-based XL Capital Ltd., were dropped by Fitch five grades to A on January 24 and downgraded by Moody's six levels to A3 on February 7. The three rating companies have MBIA's subsidiaries under review for possible cuts and say there may be more downgrades for the others. Financial strength ratings gauge an insurer's claims- paying ability.

Michael Gormley, a spokesman for Security Capital's XL Capital Assurance Inc., said officials are "sympathetic" to the difficulties facing issuers that insured variable-rate bonds with the company. "We are exploring different alternatives with our clients to address the issues they face due to the currently volatile market," Gormley said in an e-mailed statement.

Ambac spokesman Peter Poillon declined to comment. MBIA spokesman Michael Sitrick didn't return a phone call and e-mail. FGIC's Brian Moore didn't either.

Governments and nonprofits that didn't insure their variable-rate debt are benefiting from five months of Fed easing.

The University of Pittsburgh Medical Center, a Pittsburgh- based network of hospitals, in March 2004 issued uninsured floating-rate bonds with a AA- rating, two grades above Park Nicollet. The rate on $80 million of its seven-day debt was reset at 1.68 percent on Febuary 6, down from 3.42 percent on December 26.

Interest costs on insured variable-rate debt are rising as investors invoke their right to sell the debt back. Issuers enter into so-called standby purchase agreements with banks to ensure there are funds available to buy it.

For insured auction-rate securities, which are due in 30 years or more, the increases are even more pronounced. The rates are reset by periodic bidding, and investors are concerned that the dealers who hold the auctions may not support the market with their own offers, as they have in the past.

On January 22, the first trading session after the Ambac downgrade, two auctions run by Lehman Brothers Holdings Inc. failed, triggering automatic resets at the maximum proscribed in the bond terms. Debt issued by electric utility Nevada Power reset at 6.757 percent, up from 6 percent, while Georgetown University debt went to 6.604 percent from 5.25 percent. Since then, rates on both issues fell after successful auctions. Kerrie Cohen, a spokeswoman for New York-based Lehman, didn't return a phone call seeking comment.

Rates on $40 million of Worcester Polytechnic Institute's XL Capital Assurance-insured auction-rate securities rose to as much as 6.25 percent on January 22 from 3.9 percent at the beginning of the year. The bonds are rated A+ without insurance. Tufts University in Medford, Massachusetts, rated one step higher than Worcester at AA-, is currently paying 4.5 percent on $93 million of uninsured auction-rate debt.

In Jefferson County, Alabama, the rate on $221.3 million of auction-rate sewer bonds issued in 2002 and insured by XL Capital Assurance soared to 10 percent on February 6 from 3.06 percent on January 9.