WASHINGTON — Hurricane Sandy may put muni bonds back in the congressional spotlight.
Executives at groups representing municipal issuers say they have garnered support in recent days for a "Hurricane Sandy Recovery Bond" program that would allow states and municipalities to rebuild storm-damaged infrastructure with tax-exempt financing.
The storm may also demonstrate to lawmakers the importance of tax-exempt financing and promote opposition to proposals that threaten munis' tax exemption, sources say.
"Whenever there is a serious disaster, Congress understands the importance of tax exempt bonds," said Toby Rittner, president and CEO of the Council of Development Finance Agencies. "You can't take them away from state and local government, and [then] like them when there's a disaster."
The public has "no mood" for proposals that would hinder state and local governments from accessing tax-exempt financing, said John Mousseau, managing director and portfolio manager at investment advisory firm Cumberland Advisors.
"The talk about trying to tax municipal bonds, or put caps on tax advantages, that can wait until another day," said Mousseau, who co-authored a paper about the effects of Hurricane Sandy on the municipal market. "The storm and the necessary intervention on the part of the federal government will get Congress to act, and [will] stop the acrimony in Congress to municipal bonds."
Threats to the industry include a 28% cap on the value of tax-exempt financing for wealthy taxpayers, which President Obama proposed in his 2013 budget.
In addition, the 2010 Bowles-Simpson deficit reduction plan recommended eliminating the tax-exemption for new munis, and a 2010 report from the Bipartisan Policy Center called for eliminating the tax exemption for private activity bonds.
Rittner said lawmakers and officials in states like New York, New Jersey and Connecticut, which absorbed the brunt of the storm, can help the muni bond community "emphasize how important this type of financing is."
Rittner said those officials, as well as bond lawyers and underwriters, have also expressed support for a "Hurricane Sandy Recovery Bond" program.
Rittner said the program could be similar to that created by the Gulf Opportunity Zone Act of 2005, which let issuers in Alabama, Louisiana and Mississippi issue tax-exempt private activity bonds to rebuild residential, commercial and public utility property damaged by Hurricane Katrina.
The act also allowed governments to issue bonds for a second advanced refunding.
Hurricane Sandy bonds could be used to rebuild or repair commercial real estate, rail lines, wharves, docks, electric equipment and transmission lines, Rittner said. They could also pay for new flood walls, redundant electric grids, flood mitigation projects and efforts to protect the city from future floods.
Rittner has said an allocation of up to $20 billion may be needed.
Hurricane Sandy has been estimated to have caused up to $50 billion in economic damage, according to a report released Nov. 1 by Eqecat Inc., a firm that evaluates damage caused by disasters.
Alan Rubin, a government relations strategist who specializes in natural disasters at law firm Cozen O'Connor, said costs could be even higher. He noted that New York Gov. Andrew Cuomo pegged New York's costs at $33 billion. Add another $25 billion for New Jersey and between $5 billion and $10 billion for Connecticut, said Rubin.
The Federal Emergency Management Agency will likely cover some of the recovery costs, noted Rubin, who helped design a "catastrophic relief" fund to help rebuild Florida following Hurricane Andrew in 1992.
He said disaster-relief bond programs can give governments fast access to money and help connect struggling communities with financial partners and construction firms.
Insiders expect Hurricane Sandy bonds will receive wide support in Congress and are likely to be passed before the current congressional session ends Jan. 3.
"It's really hard to object to this," Rubin said. "Folks are talking about it right now."
Sen. Charles Schumer, whose office did not respond to a call for comment, would likely sponsor such a bill, Rubin said. House sponsorship come from a number of members who represent coastal districts in the affected states.
Congress could also create a Build America Bond-type program for hurricane-stricken zones, said Mousseau. He said the program could be funded through a regional bond bank.
BABs were created under the American Recovery and Reinvestment Act and expired in 2010. Issuers of the bonds, which were taxable, received subsidies from the Treasury Department equal to 35% of interest costs.
Regardless of which program Congress supports, Mousseau said states must be allowed to manage their recovery. "You donct need the federal [government] telling the mayor of Hoboken what needs to be fixed," he said.
Matt Fabian, managing director at Municipal Market Advisors, questioned the benefits of federal programs.
Access to low-interest financing is already readily available, he said. And government programs typically come with a host of terms and conditions "that could extend federal control over the sector."
He also warned that a BAB-type program could "undermine" the market's effort to maintain the tax exemption.
"Democrats already see Build America Bonds as a good supplement to a diminished tax-exempt market," he said. "If issuers go to Congress and [argue] that the tax exemption is insufficient ... it could add momentum [to efforts that would] limit or eliminate the tax exemption."