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Treasurers Lobbying Against Floating NAVs for MMFs, Limits on Tax-Exempt Bonds

Leaders of the National Association of State Treasurers are meeting with regulatory officials and members of Congress this week, urging them to oppose a major money market fund reform proposal and any alteration to the tax-exempt status of municipal bonds.

“Our emphasis is on the unintended consequences,” said NAST president and Virginia Treasurer Manju Ganeriwala. She said the Securities and Exchange Commission’s proposal to require most money market funds to use a floating net asset value rather than the current stable $1 per share would be harmful to state and local governments who use MMFs for short-term financing.

The proposal would allow funds investing in federal government securities, as well as “retail” funds that limit redemptions to $1 million per day or less, to use a stable NAV. The SEC also proposed gates and fees designed to prevent investors from causing a “run” on MMFs by pulling out of them in a scenario similar to one that occurred during the financial crisis in 2008, but they could be adopted separately from the floating NAV requirement.

“We believe it would add very burdensome administrative requirements,” Ganeriwala said of the SEC’s floating NAV proposal. She added that the gates and fees part of the proposal would not stop a run on MMFs, and that previous reforms enacted in 2010 are sufficient.

Many state and local finance professionals are prohibited by their own laws from investing money in a fund that uses a floating value, Ganeriwala said. Some states, including Virginia, run local government investment pools in which municipalities voluntarily invest their daily cash flows while maintaining the ability to quickly redeem shares.

“We are concerned that local governments would withdraw their money if we had to go to a floating value,” she said.

“These funds are rated by rating agencies and operated like money market funds, only their only clients are the local governments,” said Nancy Kopp, NAST’s legislative director and Maryland’s Treasurer. “Our concern is the SEC actions, directed toward making money market funds even more transparent, comparable, etc., would indirectly force us to give up the local government investment pools. We simply couldn’t run them effectively,” she said. “And then the question is: ‘Where are these small governments and agencies going to put their cash flow investments?’”

Kopp said she prefers to see states continue to provide this investment service, because the alternative of municipalities using banks to meet their investment needs would be less transparent.

Ganeriwala said that although the LGIPs are not directly regulated by the SEC, changes to rules governing MMFs would affect them because the Governmental Accounting Standards Board dictates that MMF-like funds be administered by MMF rules.

“We are indirectly affected,” she said. “Their proposal could indirectly and adversely affect us because we are indirectly linked by GASB.”

Proponents of the floating NAV, like SEC Commissioner Dan Gallagher, have argued that local governments could choose to use federal government funds. But Ganeriwala said many states, like her own, run triple-A rated prime funds that would still be subject to a floating NAV and would face crippling administrative costs.

“It would be too complex and burdensome,” she said. “Cost-prohibitive.”

In addition to urging the SEC to oppose a floating net-asset value for money-market funds, NAST leaders also are asking Congress to preserve tax-exemption for municipal bonds.

President Obama’s fiscal 2014 budget proposed capping the value of tax exemption for municipal bonds at 28%. The top Democrat and Republican on the Senate Finance Committee have called for a “blank slate” approach to tax reform and have asked their colleagues to submit proposals explaining which tax breaks should remain in the code. Some lawmakers contend tax exempt bonds favor the wealthy. But Kopp said that NAST is trying to educate Congress and the public about the role that municipal bonds play in building facilities and financing infrastructure and that restricting them would increase costs for state and local governments as well as taxpayers.

“In Maryland, more than 60% of our general obligation bonds go to schools, to build schools and university facilities. That’s how we do it,” Kopp said. If tax exemption is curbed or removed, states could build fewer schools, or taxpayers could pay more money for schools. But state and local tax sources — like property tax and, in some sense, sales tax — are more regressive than income tax, she said.

“Our argument is those who would do away with the tax exemption because it is not progressive actually would be putting the burden more on the middle-class taxpayers, and not removing it,” Kopp said.

Ganeriwala said that because sequestration led the Treasury cut its federal subsidy payments for Build America Bonds, she is not sure if issuers would support a reinstatement of the program. “By injecting this uncertainty, it’s further sending signal to the market, to investors. They’re going to demand high premium for risk, for future risks,” she said.

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