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Budget & Finance

Philadelphia Mayor Slams Washington, Treasury Official Defends AFF Bonds

PHILADELPHIA — Philadelphia Mayor Michael Nutter castigated Washington Tuesday for balancing the federal budget on the backs of local governments and proposing to curb the municipal bond tax exemption.

“Fiscal stress rolls downhill and usually ends up at our doorstep,” Nutter said at a forum sponsored by the State Budget Crisis Task Force here at the National Constitution Center. “This is not a sustainable model for cities.”

Philadelphia has already made significant cuts in its budget especially in the areas of housing and community development, Nutter said, adding more layoffs are expected this summer. Homeowners facing foreclosure will not receive housing counseling to help them stay in their homes and the city will see more blight due to local government layoffs, he said.

“We have already been to the fiscal cliff,” Nutter said. “We made our cuts. We have cut back services and we raised people’s taxes at the same time. We are now trying to come back. Please don’t stand in the way.”

Nutter touched on the federal government’s role in relationship to cities, using the example of the Obama Administration’s proposed 28% cap on municipal bonds. He made clear that he and other local elected leaders are staunchly against limiting the tax advantage of municipal bonds.

If a 28% cap were implemented, the impact on Philadelphia’s 2013 borrowings would be $124 million over the life of the bonds, or $5.4 million per year, or roughly equal to 40 police officers, Nutter said.

Nutter expressed concern that the conversation with federal officials over capping tax exemption at 28% has been ad hoc. The U.S. Conference of Mayors had a conversation with federal officials in January and then again in the spring. Nutter emphasized that the White House and some members of Congress have been extremely responsive to their requests for information about the proposal.

However, “during the lead up to this proposal and now during the congressional deliberations there has been no regular roundtable or formal structure to provide input or data from local governments into this important issue,” Nutter said. “So there is clearly a need for some sort of system, process that provides input for all of us especially at the local level.”

Speaking at the same forum, Mary Miller, undersecretary of domestic finance at the Treasury Department, attempted to reassure local leaders that the Obama administration is willing to work with state and local governments on the challenges of the sequestration cuts and infrastructure spending among other things.

“As the private sector has recovered, we need to begin pulling back the federal safety net so that we can restore our own fiscal situation,” Miller said, emphasizing that federal deficits as a ratio of gross domestic product need to continue falling.

Miller said that as the Obama administration pursues a plan to restore fiscal balance, the America Fast Forward bonds program is one such attempt to help state and local governments invest in infrastructure in an efficient method. “That is something we are very much behind,” she said.

The AFF bond program was introduced in Obama’s fiscal 2014 budget. AFF bonds, similar to the now-expired taxable Build America Bonds would have a 28% subsidy interest rate.

When asked about the status of the 28% cap proposal in the context of any comprehensive deficit reform, Miller skirted the question. “The 28% limitation on the deduction of tax exempt interest is folded into a broader group of sacred cows,” Miller said. “Everything is on the table. We need to make some tough choices.”

Miller said the administration is very interested in finding the most efficient way to fund infrastructure.

“I guess the tax-exempt approach, which we have historically used in the market, is not the most efficient way to help issuers,” she said. Specifically, Miller said there is an inefficiency with the benefit the issuer receives versus the investor in traditional tax-exempt financing. This inefficiency drove some of the rationale behind BABs.

As the administration pushes the AFF bond program, it is taking into consideration the impact the sequester cuts had on BABs, which resulted in an 8.7% interest rate subsidy reduction payment. Miller said the reduced subsidy payment to BAB issuers was not the intent of the program.

Don Boyd, co-executive director at the State Budget Crisis Task Force, agreed with Miller that there are more efficient ways to subsidize state and local government investment in infrastructure than the traditional tax exemption for bond interest.

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