TORONTO – Municipal issuers and bond lawyers, among others, are hoping the Treasury Department and the Internal Revenue Service make allowances for competitive sales of municipal bonds in rules on issue price rules, which could be finalized as early as this summer.
Members of GFOA's governmental debt management committee discussed the rules on Saturday and Sunday at the organization's annual conference in Toronto.
During Sunday's panel, National Association of Bond Lawyers director of governmental affairs Bill Daly called the re-proposed issue price rules "considerably better," and said they make improvements to the current law, but added that there are still problems with them. Both NABL and GFOA have submitted written comments to Treasury, he said.
"We had more technical or lawyer-y concerns," Daly said. "We think they're fixable. They're just not quite there yet."
The IRS first proposed issue price rules in 2013 and then re-proposed them in 2015 after vehement opposition from muni groups and other officials.
Daly called the rules proposed in 2013 "awful," adding that they got "completely trashed" before Treasury re-proposed them last year.
Several groups, including GFOA, are concerned that the proposed rules would adversely impact competitive sales and have called for relief for these transactions. Competitive deals help keep borrowing costs for issuers at a minimum, Daly argued. Also there is less of an opportunity for pricing abuses to occur in these transactions.
Issue price is important because it is used to help determine the yield on bonds and whether an issuer is complying with arbitrage rebate or yield restriction requirements, as well as whether federal subsidy payments for direct-pay bonds such as Build America Bonds are appropriate.
Under the re-proposed issue price rules, the issue price is the price at which the first 10% of each maturity of bonds that is actually sold to the public. If 10% isn't sold on the sale date, the issue price is the initial offering price as long as the lead underwriter certifies to the issuer that no underwriter filled an order from the public after the sale date and before the issue date at a higher price. An exception can be made for market movements.
Daly said it is possible final regulations could come before the congressional summer recess starts in July. If not then, it will be next year because rules and legislation slow down before the presidential election.
"We may or may not see final regulations on issue price this year," he said.
Sunday's panel also included Emily Brock, director of the GFOA's federal liaison center, and Susan Gaffney, the executive director of the National Association of Municipal Advisors.
Brock, who also led the debt committee hearing Saturday, said the introduction of the final rule could come this summer. There is still time for GFOA members to air their concerns over how the re-proposed rules might hamper competitive sales, she said. Muni market groups have been pushing the IRS to write safe harbors or special rules within the issue price rules for competitive sales.
Brock said GFOA has continued to have conversations with the IRS and Treasury regarding issue price.
Jim McIntire, the Washington state treasurer and president of the National Association of State Treasurers, also opposes the issue price rules and said competitive sales keep borrowing costs at a minimum.
Bond Dealers of Americas, showing the same concerns, late last year recommended the rules be reworked to state that if 25% of bonds are sold after a competitive underwriting at initial offering price, then that would establish each maturity's issue price.
The National Association of State Treasurers has also called for the inclusion of a safe harbor provision in competitive deals.
Treasury associate tax legislative counsel John Cross has said department officials are open to providing relief from issue price rules for competitive deals.
At the debt committee meeting on Saturday, Brock also addressed the possibility of comprehensive tax reform, which she thought may come sooner than many experts have predicted.
"We have to either prepare ourselves for [possible action before the July/August congressional] recess or prepare ourselves for what's coming around in 2017 because it's going to be a racing start," Brock said.
GFOA, Brock said, has partnered with sister organizations such as the National Conference of State Legislatures and the National Governors Association to stress the importance of tax exemption of munis in connection with tax reform – an effort she called "by far our most unifying voice." The groups have made their concerns known to lawmakers, including those in the House Ways and Means Committee.
Brock lauded the now-17-member bipartisan municipal finance caucus launched by Reps. Randy Hultgren, R-Ill., and Dutch Ruppersberger, D-Md., which is working to protect the tax-exempt status of municipal debt as lawmakers work to reduce individual rates and close loopholes.
Hultgren's message that the U.S. municipal securities market has helped create thousands of successful infrastructure projects is one that GFOA hopes to stress to lawmakers as tax reform takes shape, Brock added.
"He's communicating with us as issuers, and we need to tell them what tax exemption has provided," Brock said. "The libraries, the bridges the roads - that tax exemption helped to build."
