WASHINGTON - Rep. Gerald Connolly, D-Va., pledged to be an "unwavering advocate" on behalf of municipal issuers Friday and said he would work with other lawmakers to draft legislation or prod federal agencies to provide assistance to the muni market with the aim of luring investors back to it.
The freshman congressman and former chairman of gilt-edged Fairfax County, Va., told issuer officials gathered here for the Government Finance Officers Association's winter meeting that he will seek some form of federal backstop or guarantee for municipal paper.
One of the options bandied about during the meeting, and embraced by Connolly, was to create a new entity that would be an insurer of last resort for munis. Also discussed was the idea of creating a mutual bond insurance company modeled on a proposal floated by the National League of Cities late last year that would be capitalized initially by the federal government but owned and operated by governmental issuers.
"Of all the crises facing the federal government right now - the liquidity crisis, the auto crisis, the fiscal crisis, the trade crisis and everything else - this is one that actually lends itself to a relatively inexpensive and simple fix," he said, referring to the general freezing of issuer access to the credit markets.
"There are lots of different ways it can be done. I'm frankly agnostic about which way to do it, but I do believe that the federal government has to do something to try to restore confidence in the municipal market [and] revive it quickly."
Speaking to The Bond Buyer, Connolly said that he likes the idea "of the federal government taking over the role of what essentially is the collapsed private insurance market for municipal bonds."
Connolly, who has a close relationship with House Financial Services Committee chairman Barney Frank, D-Mass., said he will push for hearings on the muni market later this year. He is not a member of financial services, but sits on the Committee on Oversight and Government Reform, which has a broad reach and has held a series of hearings on the financial crisis.
Meanwhile, members of the GFOA committee on governmental debt management who met after Connolly spoke, discussed the idea of a new mutual insurance company, with many favoring a non-profit insurer that would be owned by states and local governments and would obtain an initial capitalization from the federal government. Issuer officials stressed the idea is still in its formative stages and many of the details are yet to be worked out.
Ben Watkins, director of Florida's bond finance division, later told The Bond Buyer, "I think it's a great concept whose time has come. This would be a great way, at a fraction of the cost, for Congress to support and facilitate market access for a broad array of issuers who are having difficulty accessing credit and also facilitate liquidity as well."
Pat Born, the chief financial officer of Minneapolis, said it is unclear whether a mutual insurance company is the best idea to help the muni market, but he said the goal should be "allowing access to issuers as easily and as efficiently as we had a year ago," before the monoline bond insurers began to lose their triple-A ratings.
"The [remaining] private bond insurers are not currently able to support the needs of the market like they did at one point," he said.
Meanwhile, two officials from the mutual fund company, the Vanguard Group, Inc. - senior counsel Laura Merianos and Ruth Levine, a principal and senior analyst - pressed members of the GFOA debt committee to provide updated bond-related information in primary-market bond documents as well as in annual financial disclosures.
Levine said that issuers selling bonds just before the release of their comprehensive annual financial report or a few months before the end of their fiscal years should include in bond offering statements a basic "gloss" of their financial performance.
"The more relevant information about where you are in the current time, particularly at such an unsettled time in the market ... is just helpful in terms of you being able to access me as an investor," she said. "Because if I have a choice between three sets of documents, and they're pretty much fungible from a fund management point of view, then I'm going to allocate my time, which is also a scarce resource, towards the document and disclosure that is best. "
In addition, Levine said that the annual financial documents provided in connection with continuing disclosure agreements should indicate whether the issuer was able to spend the proceeds from a bond sale and if not, whether they restricted the investment yield of those proceeds.
Levine said such additional disclosures would be helpful in determining if there's any risk of the bonds becoming taxable, but the idea drew a skeptical reaction from members of the debt committee, which historically have opposed calls for additional regulatory burdens on issuers.
Watkins said he promises in all of the bond covenants that he signs to do everything necessary to maintain the tax-exempt status of the bonds and that if the bonds become taxable, it's his responsibility to make the investor financially whole.
"Is that enough for you or are you not comforted by that or is that not uniform?" he asked.
Levine said such covenants are uniform "and we're comforted to the degree that you can be comforted." But when combined with a relative lack of transparency or delayed transparency in the municipal market, the lack of such details "is problematic," she said.
In a nod to GFOA's conservative view on calls for changes to municipal disclosure, though, Levine noted that calls for changes to muni disclosure "are political in a way that the corporate market is not political, but we need to at least inch it forward a little bit, which is what this would do."
