Making the Case for Tax-Exemption

WASHINGTON — Conduit issuers and borrowers are stepping up their efforts to counter calls in Washington for the elimination of tax-exemption for municipal bonds.

The Council of Development Finance Agencies, which represents a broad constituency including economic development authorities, small government borrowers and some banks, sent a letter to members of Congress last week reinforcing the message that tax-exempt bonds are an important tool for stimulating job creation and economic growth.

“We strongly urge Congress to tread cautiously in considering elimination or replacement of tax exemption for municipal bonds,” Toby Rittner, president and chief executive officer of the CDFA, said in a 12-page letter dated June 29. “This is no time to experiment with local economic development.”

The tax exemption for all municipal debt has come under fire from liberals and conservatives in Washington. Conduit issuers are especially concerned, sensing that they could lose the ability to sell tax-exempt bonds in a political compromise that preserves tax-free munis for states, cities and counties.

President Obama’s National Commission on Fiscal Responsibility and Reform, which has been widely heralded as a bipartisan effort, proposed an end to tax exemption as part of overall tax reform.

State and local government groups have accelerated their outreach and education efforts on Capitol Hill. They are concerned the tax exemption for municipal bonds could be lost as part of deficit-reduction efforts.

But municipal bond issuers in the non-government universe are especially anxious.

Specifically, this segment of the tax-exempt market is worried that private-activity bonds — debt sold through conduits for economic development — could be the most vulnerable.

Some CDFA members said they are concerned that this is a possible scenario in Congress.

This sentiment echoes comments made by Wisconsin capital finance director Frank Hoadley, who in May said Congress may face “a difficult choice between conduit financing continuing as tax-exempt at the risk of being able to retain tax-exempt funding for governmental-purpose bonds.”

As part of its lobbying strategy, the Illinois Finance Authority, which was the 19-largest issuer nationally of long-term debt through the first six months of this year with $837.7 million sold, according to Thomson Reuters, is digging through its catalog of past deals to find some that will resonate with lawmakers.

The IFA will be taking an inventory of its bond sales to find “success stories” — deals that benefited small, family-owned companies, especially any that were founded by first- or second-generation immigrants, according to Rich Frampton, IFA vice president and a CDFA board member.

“Tax-exempt bonds, particularly the conduit, non-governmental bonds, are really kind of obscure,” he said. “We can cite a number of success stories that are really under the radar.”

Other CDFA members are supporting the outreach effort.

The Massachusetts Development Finance Agency, which issued $3.5 billion in the fiscal year ending June 30, is planning to work with members of Congress “in advocating for tax-exempt bonds,” a spokesperson for the agency said Friday.

The CDFA is also concerned the tax-exempt bonds might be replaced by another security that’s designed to help issuers but lacks precedent in the market.

The council said it does “not dispute that there may be other effective tax tools to spur local economic development.” But the group said that tinkering with new financing tools, with a “theoretically superior tax policy,” may not be workable for issuers.

“We would be penny-wise and pound-foolish to eliminate tax-exempt bonds in favor of structures that may not work or may even establish future barriers to capital,” the CDFA letter said.

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