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D.C. Folks Don't Get Munis

LAS VEGAS — Speakers at a municipal analysts’ conference here Wednesday urged the muni bond community to educate lawmakers and regulators about the importance of tax-free financing, noting that few officials in Washington, D.C., understand the role muni bonds play in financing critical state and local infrastructure projects.

“There is a complete lack of appreciation in Washington relative to what municipal bonds really do,” said Ben Watkins, Florida’s director of bond finance.

Watkins was among five panelists who discussed challenges to tax-exemption for municipal bonds on the first day of the National Federation of Municipal Analysts annual meeting.

Among those challenges is a proposal in President Obama’s fiscal 2013 budget to cap at 28% the tax benefit high-income taxpayers receive from muni bond interest and proposals by deficit-reduction groups to deny tax-exemption for all or some new municipal bonds.

“It’s kind of like talking to my dog,” Watkins said of his conversations with folks in Washington. “If [there’s] not a piece of legislation that needs to be resolved this week, they look at you like, why are you here?”

Watkins said folks in Washington often don’t realize that municipal bonds finance “bricks and sticks” infrastructure projects. Lawmakers often get information from young staffers who have little understanding of the muni market, he said.

“We’ve really got a challenge on educating the people in Washington about tax-exempt bonds and what they do and how they work,” he said.

Another panelist, National Association of Bond Lawyers’ president Kristin Franceschi, said many lawmakers wrongly believe that municipalities issue debt for the same reasons as the federal government — to finance deficits.

“[They] don’t really get that most bonds … are to finance a project … and that it’s not the same business as in Washington,” she said.

Franceschi said congressional tax studies lump tax-exempt bond interest with other tax breaks, like employer health insurance exclusions and charity, mortgage and property tax deductions. Muni bond tax-exemptions total $258 billion over five years. By comparison, she said, employer health care exclusions totaled $725 billion and home mortgage exclusions totaled $464 billion.

“We think that we are likely to get thrown in the hopper unless there is an active movement on the part of issuers and beneficiaries of bonds,” she said.

Cadmus Hicks, managing director of Nuveen Investments, said tax-savings estimates are based on impractical assumptions, calculating revenue costs on the basis of the bonds being taxable instead of tax-exempt.

Real savings “would be limited to the amount of issuance you have in the next several years,” he said.

The panelists’ comments followed a speech by Mary Miller, assistant secretary for financial markets at the Treasury Department.

Miller said she expects to see a “lively debate” about Obama’s tax proposals. She noted the president’s budget includes measures designed to support infrastructure projects, such as an expansion of the Build America Bond program and a national infrastructure bank, which could help finance large public projects.

Miller also said the Treasury supports standardized reporting of pension disclosures, noting that the Government Accounting Standards Board is currently writing best practices for pension disclosure.

“Improved disclosure will ultimately help promote better funding and risk management practices by state and local governments for their retirement and health care obligations,” she said.

On money market funds, Miller said the Securities and Exchange Commission and the Financial Stability Oversight Council are working on ways to improve their stability “while preserving the usefulness of these funds for investors and issuers, including those in the municipal market.”

NFMA executive director Lisa Good said the conference is the largest in the group’s history, drawing 360 to 370 ­attendees, roughly 10% more than last year.

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