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Disclosure

Obama's Cap Sparks Disclosure

WASHINGTON — State and local governments issuing new muni bonds are disclosing that President Obama’s proposed 28% cap on tax-exempt interest for higher-income taxpayers, if enacted, could lower the value of the bonds or impair their marketability.

The disclosures surfaced within days after the president announced the American Jobs Act of 2011, which would bar wealthy investors from using tax-exempt bond interest and other tax exclusions, expenditures and deductions to reduce their income-tax rates below 28%.

The restriction would apply to single taxpayers with incomes of $200,000 or greater and married couples with incomes of $250,000 or more. It would take effect for taxable years beginning on or after Jan. 1, 2013.

Most issuers, large and small, have disclosed warnings about the proposal in their preliminary official statements for new issues in the primary market, including California, Massachusetts, Minnesota and Roanoke, Texas. The language varies, but tends to cover similar points, bond attorneys said, such as a reference to the jobs bill and its possible impact on the tax exemption for municipal securities.

“It got everybody’s attention very quickly,” said Roger Davis, a partner at Orrick, Herrington & Sutcliffe LLP in San Francisco.

Bond attorneys said disclosure practices vary from firm to firm, but within a day or two of the president’s announcement, a consensus practice emerged among bond counsel that issuers make a specific disclosure about the president’s proposal, rather than rely on generic disclosure typically contained in official statements that say future tax legislation, regulation and court decisions could affect the bonds.

By last Thursday, bond attorneys said, the vast majority of new-issue primary market deals contained some form of additional disclosure about the president’s proposal.

The push for the additional disclosure came from bankers, bankers’ in-house counsel, bank compliance officers and financial advisors, several sources said.

A dealer group said underwriters sought a reference to the president’s proposal, rather than the standard generic disclosure, because the bill originated from the president — someone to whom they had to pay attention.

“Even if the pundits say it might not pass, my understanding was the feeling was that for disclosure purposes it should be referenced,” said William Daly, senior vice president of government relations for Bond Dealers of America.

California prepared a supplement to its Sept. 9 POS on a $2.58 billion GO and GO-refunding deal on which Orrick, Herrington & Sutcliffe LLP served as the state’s bond counsel and co-disclosure counsel. The one-paragraph supplement, titled “Tax Matters,” refers to the president’s jobs bill and notes such legislative proposals could “affect the market price for, or marketability of” the bonds.

Tom Dresslar, spokesman for California Treasurer Bill Lockyer, said his boss“strongly supports” the American Jobs Act, which has the potential for “over a million jobs” for the state.

He added however, that the Lockyer “has a nit to pick” with the president about restricting the muni bond tax exemption.

“The question is not so much would the proposal, if it became law, increase borrowing costs — I think folks agree it would,” Dresslar said. “I think it just depends on how much.”

Analysts in the California treasurer’s office estimate the president’s proposal could raise borrowing costs for the state by between $2.7 billion to $7.7 billion on the life of bonds authorized but unsold, depending on yields and whether the Bush tax cuts expire.

Dresslar said he did not know if the disclosure of the proposal in bond documents had any impact on price. He noted that yields on the GO bond sale were substantially lower than in the state’s last sale, in November.

Separately, Massachusetts’ Sept. 14 notice of sale and preliminary official statement for a $475 million GO issue mentions the Obama proposal and stated it would prevent investors from “realizing the full current benefit” of the tax exemption on such interest and “may also affect the value of the bonds.” 

“Bond buyers know there’s uncertainty regarding tax policy,” said Massachusetts Treasurer Steven Grossman. “We felt it was important to mention events in Washington, even though a lot of it might be back-ended.”

“Certainly the number of basis points will affect new bonds and also the old bonds which they hold,” he said. “It’s still a wild card.”

Grossman said he asked advisors whether the proposal and disclosure would affect the commonwealth’s bonds, and was told there wouldn’t be an impact yet. “But we felt the need to let people know, as a matter of disclosure,” he added.

Small issuers have scrambled to bolster their new-issue disclosure as well.

The Dierks School District No. 2 of Howard County, Ark., added disclosure language to its OS for a $2.2 million refunding deal scheduled to price Tuesday, according to Robert B. Beach, an attorney with Friday Eldredge & Clark LLP.

“We’re trying to see what the industry is doing and I’m sure [the language] will change,” Beach said.

Similarly, Roanoke filed a supplement, dated Sept. 15, to the official statement on a $4.95 million transaction slated to close on or about Sept. 15.

The supplement said the jobs act could limit the value for certain individual taxpayers of certain deductions and exclusions, including the exemption for tax-exempt interest. It noted the likelihood of the bill’s enactment “cannot be predicted,” and said prospective investors should consult their tax advisors.

Roanoke’s disclosure was actually “mislabelled” on EMMA as an adverse tax disclosure, but it is a supplement to the OS, said Jeff H. Gulbas, an associate with McCall, Parkhurst & Horton LLP in Dallas, bond counsel for the deal. “We’re seeing it pretty much across the board that issuers are amending their offering documents to put the market on notice” about the jobs bill, he said.

When the jobs bill was introduced, there was debate among bond counsel, financial advisors and issuers about whether or not to include any warnings about the legislation’s tax effects. But underwriters “eliminated the debate” and requested disclosure language to be included in bond documents, he said.

“Probably, the market will figure out whether or not this needs to continue to be in there in the coming weeks or not,” Gulbas said.

Patrick Temple-West, Randall Jensen and Paul Burton contributed reporting to this story.

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