Muni Groups Not Backing Away from PABs Despite Recent Criticism

Municipal market groups do not see diminished support for private-activity bonds despite recent concerns about the use of them raised by House tax committee members, a former federal muni regulator and a state treasurer.

“We protect the full exemption,” said Toby Rittner, president and chief executive officer of the Council of Development Finance Agencies who also serves on the executive board for the Municipal Bonds for America. “The coalition is not going to break apart.”

The MBFA, a coalition of dealers, issuers and other muni market participants that was launched last fall, as well as state and local groups, have been aggressively lobbying lawmakers and staffers on Capitol Hill to educate them about municipal bonds and the important role they play in financing infrastructure projects.

They are urging the lawmakers to oppose proposals from the Obama administration and Congress to curtail or eliminate tax exemption as a way to raise revenue to help reduce the federal deficit.

At a Tuesday House Ways and Means Committee hearing, which examined how tax reform would affect state and local governments, lawmakers voiced concerns about the use of private activity bonds and pledged to reexamine them.

Citing a recent New York Times article, committee chairman Rep. Dave Camp, R-Mich., asked the witnesses if it was appropriate that federally subsidized borrowing helped build the offices of Goldman Sachs and the Bank of America tower in Manhattan and if there are any tax law provisions Congress should change as it relates to muni bond financing of private activities.

That New York Times article raised questions about using tax-exempt private activity bonds to fund private projects is the best use of a federal subsidy.

One of the hearing’s witnesses, former Municipal Securities Rulemaking Board chairman Kit Taylor, said he fully supports tax-exempt bonds but questioned the use of private-activity bonds.

“I certainly believe that if you are going to give a benefit, and that’s a decision the Committee has to make, to the state and local government sector, limit it to true public purposes,” Taylor said. “I do not see any reason to give any kind of public benefit to private corporations or private decision makers. I would probably go very strongly in favor of very sharply limiting even the public purposes that are out there. Limit it to roads, sewers and those things that local governments and state governments do, not stuff that can be substituted by a private corporation.”

While John Buckley, former counsel for the committee’s Democrats, defended both general obligation and private-activity bonds, he said that if lawmakers want to look at any one thing in the municipal bond market, they should reexamine PABs.

However Buckley and other market participants noted that the examples used in the New York Times article were primarily from one-time disaster relief bonds and have no bearing to the overall usage of PABs.

On the same day across town at the annual National Association of State Treasurers legislative meeting, the former president of thate group, Nevada Treasurer Kate Marshall urged members to reconsider their support of PABs if it would help protect the majority of tax-exempt bonds. Other NAST members said the group’s policy is to support muni financing in general.

While there appears to be increased calls for lawmakers to reexamine PABs, representatives of nonprofit and housing groups say those who use PABs should be ready and willing to make their case.

“Our story is that ours are public purpose bonds that are issued on behalf of charities, which are recognized under federal and state law, and we provide public services that often even the government isn’t able to provide,” said Chuck Samuels, counsel for the National Association of Health and Educational Facilities Finance Authorities.

“The technical rubric that 501c3 bonds are in a section known as private activity bonds doesn’t end the discussion. It only begins the discussion, which is: what is the purpose of the financing and why is it public purpose,” Samuels said, adding that he hopes the muni bond community sticks together on defending tax exemption.

John Murphy, executive director of the National Association of Local Housing Finance Agencies, became very concerned for PABs after listening to the tax hearing and reading the New York Times article.

Murphy argues that housing PABs rules were already tightened in the 80s with purchase price limits and income limits for single-family housing bonds. Further limitations on PABs, especially in the housing sector, would “certainly damage those projects that serve low-income people,” he said.

Other market observers, while concerned about the current discussion of PABs, are not rattled.

Greg Minchak, manager of media relations with the National League of Cities, said there is no real proposal on the table and it’s “a lot of people talking about stuff.”

“Its too early to suggest there is some sort of split in the coalition,” Minchak said, whose group is a member of the MBFA.

“There are still some folks — members and their staff — that need some general education on bonds,” Minchak said. “Once they learn about these things and where it can go, hopefully there will be a decision made why this is useful and we need to continue supporting it.”

Rittner agreed with Minchak that right now the discussion to potentially further limit PABs is grandstanding.

“I can’t imagine any member of Congress is going to tell a city that they can no longer finance schools and hospitals and day care centers, all the things that are eligible for this financing,” he said. “From our perspective, it’s a lot of talk right now but there is no markup” or vote.

Rittner explained that PABs are not just for private businesses and that the coalition has to better explain their public purpose, and economic and job creation benefits. “We did this exact same fight in the 80s,” he said.

Rittner said members of the MBFA exchange at least 50 emails a day about meetings on the Hill with members and their staff. Right now, there is an effort to obtain regular White House meetings. The CDFA has a scheduled meeting with the Obama administration in April, he said.



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