SAN ANTONIO — Government officials are sweating the risk that they will lose the tax-exemption for muni bonds, worrying that the market for tax-credit bonds — an alternative to tax-exempts posed by some members of Congress — won’t work as well.
During a panel discussion on muni “hot topics” held at the Government Finance Officers Association’s conference here, market participants said tax-credit bonds are inferior to tax-exempt bonds. Government officials agreed, saying that to ward off the tax-credit talk, GFOA members need to do a better job framing their argument in favor of municipals.
Tax-exempt bonds offer issuers “the most flexibility with the least interference” from the federal government, said Frank Hoadley, Wisconsin’s capital finance director.
The most effective message issuers can take to members of Congress will be political rather than intellectual — a “blunt-force 'This is what we want,’ ” Hoadley said.
Richard Larkin, senior vice president at Herbert J. Sims & Co., said the push to defend tax exemption must come from state and local government officials. He said he will be working with the Bond Dealers of America to help educate members of Congress about the need to preserve the tax-exempt status of munis.
Sens. Ron Wyden, D-Ore. and Dan Coats, R-Ind., have introduced tax reform legislation that would require issuers to issue tax-credit rather than tax-exempt bonds. Wyden believes tax-credit bonds are a more efficient way to deliver federal support for municipal projects, while tax-exempt bonds serve as a tax shelter for wealthy individuals.
Charles Almond, a partner with Vinson & Elkins LLP in Houston who has lobbied Congress, said the finance officers need to show they are the ones who can make the best financing decisions for the country’s infrastructure — not members of Congress. That message “can be turned into a fairly pithy sound bite,” he said.
Larkin said investors find tax-credit bonds “are just too damn complicated.” Issuers have a hard time selling them to retail investors, he said. Another problem with tax-credit bonds that has yet to be sorted out involves mutual funds, according to Larkin. He asked how a mutual fund would allocate a tax credit to its shareholders.
The panelists also discussed municipal market oversight and disclosure issues.
Hoadley said the Tower Amendment — which bars the Securities and Exchange Commission and Municipal Securities Rulemaking Board from requiring issuers to submit disclosure documents to them before selling muni securities — serves as “a symbolic centerpiece” against the federal government stepping further into muni regulation.
The law, which also bars the MSRB from collecting issuer documents post-issuance, “stands in the way” of the SEC requiring more disclosure from issuers, Hoadley said, adding that for now the effort to eliminate Tower “is no longer as important” to SEC officials.
But the SEC’s settlement last year with New Jersey over its pension disclosure practices serves as “de facto regulation” of disclosure in the muni market, Larkin said. The case indicates that issuers should beef up their disclosure practices voluntarily, he said.
Both Hoadley and Larkin said issuers can provide more information to the public, possibly including quarterly updates.
Hoadley said issuers are still in the early stages of moving toward greater disclosure. That process does not necessarily mean more work for finance officers, he said, adding they can provide for investors the information they are already giving to their government’s elected leaders.
The threat to munis’ tax-exempt status had some GFOA members worried after the panel discussion. Members expressed concerns about their ability to access capital if Congress eliminates it.
Deven Mitchell, debt manager for the Alaska, said the risk to governments’ tax-exempt credit status is one of his top concerns.
Dan Huge, chief financial officer for the Indiana Convention Center and a member of GFOA’s debt committee, agreed. “I would say the most important [issue] is that we keep our tax-exempt status,” he said after the panel.
