WASHINGTON — A group of lawyers is urging the Treasury Department to modify its procedures for state and local government series securities so the department does not have to completely halt SLGS sales every time the federal government nears its congressionally-mandated debt limit.
"We believe it might be possible to modify the current procedures so as to mitigate or eliminate the costs to issuers while at the same time meeting the needs of the Treasury as it manages the public debt," National Association of Bond Lawyers' president Allen K. Robertson told Treasury officials in a one-page letter.
The letter accompanied a four-page paper containing background and recommendations from a NABL task force, whose members include: David Cholst, with Chapman and Cutler in Chicago; Matthias Edrich, from Kutak Rock; in Denver, Kimberly Betterton with Ballard Spahr in Baltimore; and Richard Moore from Orrick, Herrington & Sutcliffe in San Francisco.
The recommendations stem from a "SLGS Forum" that the Treasury's Bureau of Fiscal Services held on Aug. 8 in Louisville, Ky. where there seemed to be some consensus that SLGS procedures could be modified.
SLGS, created by the Treasury in 1972 and modified over the years, help state and local governments comply with tax rules that restrict the yields on investments of proceeds of tax-exempt bonds. They can be specially tailored in terms of maturities are most often used purchased by issuers for advance refunding escrows who want to ensure their investment yield does not exceed their bond yield. Many issuers prefer SLGS to open-market Treasuries, which can only be purchased through a competitive bidding process that can be costly, complex, and raise tax issues, as well as result in negative yields, the paper pointed noted.
Apart from advance refunding escrows, some issuers may prefer to buy SLGS for project, debt service, or reserve funds because of their convenience, safety and simplicity. Bond documents may call on banks assisting issuers to purchase SLGS on scheduled reinvestment dates, possibly over multi-year periods, meaning the SLGS are rolled over at specific dates.
Generally, subscriptions for $10 million or less of SLGS must be submitted to the Bureau of Fiscal Service five calendar days before delivery. Subscriptions for $10 million or more of SLGS must be submitted seven calendar days before delivery.
But when the federal government comes close to reaching or exceeding the statutory federal debt limit, the Treasury takes several "extraordinary measures," which usually include temporarily halting SLGS sales. The Treasury has done this 10 times in the past, most recently from Feb. 7 to Feb.18 this year, according to the department.
This causes problems for issuers that may have trouble getting bids for open-market Treasuries and will face increase costs. It also can cause dilemmas for issuers whose bond documents require SLGS be purchased or rolled over on certain dates.
As a result of the discussions at the SLGS Forum, NABL is recommending that when the debt limit nears and Treasury begins taking extraordinary measures, it only suspend subscriptions for purchases of more than $10 million of SLGS. Treasury should also increase the number of days to 10 instead of five for advance notices of a subscriptions, the paper said.
If necessary, the Treasury could limit the maturities of SLGS sold during periods of extraordinary measures to seven years or shorter, the paper said. It could also allow sales of 0% SLGS.
"Because of the difficulties related to alternative investments, many local governments would buy SLGS with a 0% yield if they were available (and higher-yielding SLGS were not available)," the paper said, adding "This would also solve most 0% SLGS Roll problems," it said.
These recommendations are not mutually exclusive and should all be considered, the NABL lawyers said.
"We encourage you to consider this proposal and believe that any relief from the complete suspension of new subscriptions for SLGS would generally be well-received among states and local governments," they said.
