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Threat to Tax-Exemption Front and Center at Muni Summit

FEB 25, 2013 2:56pm ET
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FORT LAUDERDALE, Fla. — The tax exemption on municipal bond interest will not survive tax reform efforts in Washington, D.C., without a grass-roots effort from issuers, according to market experts at the fifth National Municipal Bond Summit here on Monday.

It is important that issuers communicate to Congress that losing munis will translate into increased borrowing costs and burden taxpayers, they said.

Many members of Congress "don't understand the bond market," said Annie Russo, senior director of government and political affairs with the Airports Council International-North America.

The key message is how important munis are for airports and infrastructure, Russo said while speaking on a panel about why tax-exempt income must survive tax reform.

At a time when issuers are already underinvesting in new projects, losing the benefits of tax-exempt bonds will only mean that fewer projects get done, said Cadmus Hicks, managing director at Nuveen Asset Management.

Engaging municipalities in the discussion before Congress is important because industry associations can only do so much to get the point across, said Vince Sampson, president of the Education Finance Council.

"The advantage of the tax-exempt market touches so many lives," he said, adding that issuers need to communicate messages such as "kids going to school affordably."

Martin Vogtsberger, managing director at Fifth Third Securities Inc., said his firm has focused on the issuer, and dispelling the myth that municipal bonds are only for the wealthiest.

The real benefactors need a stronger voice, he said. "It's getting down to getting involved."

Russ Bey, a long-time retail bond investor from Ocean, N.J., expressed frustration at the conference about the lack of information flowing from his brokers about the tax exemption threat.

"They call me on new issues [for sale], but they have not notified me about the threat," said Bey, who said his family has invested in municipal bonds for about 40 years because they are "safe, safe, safe."

After he learned about the pending threat, Bey said he contacted a bond attorney to help him write a letter to fight proposed changes, and to impress officials with the fact that losing tax-exempt munis will impede infrastructure replacement and job creation.

"That works," he said, adding that his efforts have had positive response from some officials who understand the issues.

George Friedlander, managing director and senior municipal strategist at Citi, said 57% of bondholders in the household sector are owned by individuals 65 or older, which is one example of misunderstanding about how the market works and who benefits.

Friedlander also said he was shocked at the assumptions underlying proposals to cap the tax exemption on munis, and that the tax-exempt market is vastly more efficient than it has been portrayed.

He also said that proposals to make the tax cap retroactive are still a threat. Though the muni industry has made significant progress convincing Congress that retroactivity is a "bad idea," Some members want to fight against tax exemption entirely.

"We are at the mercy of Congress," Friedlander said.

Tax reform and potentially sequestration have created an unbelievable amount of uncertainty that is bad for the municipal market, Christopher Mier, managing director at Loop Capital Markets said when the conference began on Sunday. Those factors and others create a negative fiscal drag on credit "that will be with us for a long, long time," Mier said, calling the situation an "incredible mixed bag."

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