WASHINGTON – The tax exemption of municipal bonds, issue price, political subdivisions and disclosure top the agenda of the National Association of Bond Lawyers for the coming year, according to Cliff Gerber, who becomes NABL president on Oct. 19.
Gerber, a partner with Norton Rose Fulbright in San Francisco, becomes president at NABL's annual meeting in Chicago, which coincides with its Bond Attorneys' Workshop. He succeeds Ken Artin, a shareholder at Bryant Miller Olive.
Gerber, a NABL director for the past six years, said his experience, which stretches back to before the Tax Reform Act of 1986, and his ability to build consensus are among his biggest strengths -- and may be needed with a new presidential administration and tax reform on the horizon.
"The biggest challenge may be the continued viability of the tax exemption and whether there are any impairments to [the tax exemption]," Gerber said in an interview with The Bond Buyer. The tax exemption of municipal bonds is the key to financing infrastructure for state and local governments, he said.
Both presidential candidates have put forth tax plans, as well as infrastructure and other initiatives that may require revenue offsets for increased spending. Tax expenditures, which include tax-exempt bond interest, are always vulnerable.
Gerber said NABL will continue to monitor any efforts to eliminate or restrict the tax exemption for munis, such as the 28% cap on the value of the muni exemption proposed by President Obama in his last several budgets.
When asked what Donald Trump and Hillary Clinton's tax reform plans would mean for munis, Gerber said it is "too soon for me to know that." HE did weigh in on Clinton's proposed renewal and expansion of Build America Bonds, the taxable direct-pay bonds that would be administered in part by a newly created national infrastructure bank. A total of $181 billion of BABs was issued before the program expired at the end of 2010 and many of them are still outstanding.
"I personally thought, in 2009 and 2010, they really got traction and really were a great thing for the market," he said. "They expanded the universe of buyers and also took away a lot of the steepness of the yield curve."
Issue Price, Political Subdivisions
Gerber said he hopes the final regulations for issue price will be published by the end of 2016 with an exception for competitive sales.
"I'm hopeful that the [Internal Revenue Service] and Treasury will have favorably addressed our comments and the many other comments written," Gerber said. "I am very hopeful that the final regs will include a special exception for competitive sales. We spent a lot of time thinking about that particular issue."
The IRS re-proposed rules on issue price last year after an initial proposal in 2013 met with sharp opposition from muni groups, including NABL.
Although NABL saw the re-proposed rules as an improvement to the original proposed rules, it was still concerned that they would adversely affect competitive sales, which lower borrowing costs for issuers. The re-proposed rules would establish that the issue price is the price at which the first 10% of each maturity of bonds is sold to the public. If 10% is not sold on the sale date, the issue price is the initial offering price. This would be contingent on the lead underwriter certifying 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.
Issue price helps determine the yield on bonds, whether an issuer is complying with arbitrage rebate or yield restriction requirements, and whether federal subsidy payments for direct-pay bonds are appropriate.
Gerber said he doesn't expect any near term movement forward with the proposed rules for political subdivisions. "A lot of folks in our community felt they were flawed and need a lot of rethinking," he said. "We're not suggesting the IRS or Treasury need to go back to the drawing board, but there were some significant concerns raised about those regs."
Currently, entities are political subdivisions that can issue tax-exempt bonds if they have the right to exercise a substantial amount of at least one of the three sovereign powers of eminent domain, taxation, or policing.
The proposed rules would add two new requirements: that entities must serve a governmental purpose "with no more than an incidental private benefit" and that they be governmentally controlled.
NABL has said the rules would infringe upon states' rights and jeopardize the tax-exempt status of millions of dollars of municipal bonds. It has said there is no need to introduce a new definition.
Gerber said he doesn't have a good feel for what the IRS will do to those proposed rules or when it will take action, but NABL will be tracking them closely.
The rules, proposed in February, came after IRS audits revealed that political subdivisions are vulnerable to control by private entities.
NABL will continue to contribute to improvements in continuing disclosure during Gerber's tenure. The group's members are "uniquely positioned to have an important voice in the debate," he said. "Our members represent all sides of the transaction.. We have different perspectives from the entities that might have a single [view] on a particular issue."
Though some market participants may think of NABL as primarily lawyers who are bond counsel, Gerber said many of the group's members frequently act as underwriter's counsel and disclosure counsel.
The role of disclosure counsel has increased over the last decade, he said, with an even larger emphasis added as the Securities and Exchange Commission's Municipalities Continuing Disclosure Cooperation initiative has unfolded. MCDC has led market participants to concentrate more on their due diligence as well as what they do and don't include in disclosures, he said.
The MCDC initiative promised underwriters and issuers would receive lenient settlement terms if they self-reported instances over the last five years where issuers falsely said in offering documents that they were in compliance with their continuing disclosure agreements. The commission has settled with 72 underwriters that paid a combined $18 million in penalties as well as 71 issuers from 45 states so far. It is unclear if more issuer settlements will be forthcoming.
Gerber said NABL's work in the disclosure area will come from a legal perspective and will likely include a combination of papers and interfacing with industry groups to hear their concerns.
"One thing we have successfully done and will continue to do is maintain a dialogue with industry groups and … advocate for certain positions that we think are appropriate," he said.
One area in particular he said NABL would like to focus is bank loan disclosure.
"We certainly want to be part of the debate and help be part of a solution as to where that ultimately goes," Gerber said.
TEFRA, Management Contracts
Another proposal Gerber hopes to see finished during his tenure is the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA), which was written in temporary form just as he was entering the muni industry. Treasury and IRS released rules in a temporary form in 1983, then proposed regulations in 2008 that have never been finalized, even though they were well received by market participants.
NABL has long called for ways to clarify the public approval requirements for private activity bonds (PABs) under TEFRA, most recently in June of last year.
Gerber spearheaded a short paper at that time reiterating some of those comments, as well as adding new recommendations. He told The Bond Buyer this month that he is "hearing that progress is being made" with the TEFRA regulations.
"I would be delighted to see those regs finalized and released," he said.
To be tax-exempt, PABs must be approved by the issuer and, in some cases, by the governmental entity that has jurisdiction over the area in which the bond-financed facility is to be located. The bonds can be approved by voter referendum or by elected officials after a public hearing is held following reasonable public notice.
NABL has called the public approval requirement "burdensome" and recommended that regulators broaden the allowance for PAB proceeds to be used for working capital without the public notice specifically mentioning that purpose.
Another "hot issue," according to Gerber, is Revenue Procedure 2016-44 released by the IRS on August 22, which extends the terms of long-term management contracts to up to 30 years from the previous 15-year limit. The revenue procedure also removes the formulaic fixed fee requirements for manager compensation to allow for more incentive compensation.
Though the safe harbors were released to more easily facilitate public-private partnerships for infrastructure projects and were well received by market participants, several bond lawyers have questioned their effect on separate billing arrangements as well as the retesting of the economic life of a management contract, and implications for certain contracts under Rev. Proc. 97-13, the guidance it supersedes.
Gerber said he expects the guidance to be "very much discussed" during the Bond Attorneys' Workshop, which runs from Oct. 19-21 at the Fairmont Chicago hotel.
A Career in Public Finance
Gerber is no stranger to the municipal bond market. He has been in immersed in tax since 1979.
A native of New York City who was raised in Massapequa on Long Island, Gerber earned a degree from the State University of New York at Albany in 1976. After graduating, he went to Hofstra University School of Law, where he served as editor of the school's law review.
In September 1979, he began working in the tax department of Arthur Young in New York City, a predecessor of Ernst Young, back when it was one of "the big eight rather than the big four," he said.
Gerber helped prepare individual and corporate tax returns for the firm, and although he was in the tax department, he was also "on loan" to the audit department, where he helped reconcile bank statements and accounts receivable and payable.
While at Arthur Young, he enrolled in New York University School of Law's night program before eventually transferring to its full-time program and graduating with an LL.M. in taxation in 1982.
He also passed the CPA exam in New York in 1980.
While he was in his last semester at NYU, he accepted a job in Brown & Wood's New York office and started in the fall of 1982. Four years later, an opportunity arose to transfer to the firm's San Francisco office. Brown & Wood eventually merged with Sidley & Austin in 2001 and Sidley Austin's public finance division was acquired by Norton Rose Fulbright in June. Gerber said he continues to work in the same "tightknit" West Coast office he started in three decades ago.
"In some sense, I've been doing the same tax-exempt bond work on the tax side since 1986 with my colleagues," Gerber said.
His work has focused on giving tax advice to healthcare systems in regards to tax-exempt bond issues, as well as city issuances of water, wastewater and electric revenue bonds. He also has worked extensively in connection with airport and port financings, California school districts, and college and university bond issues and has handled numerous IRS tax-exempt bond audits.
The best part of what he does, he said, is the "satisfaction from being able to tell people that we built this new city hall, we improved this bridge or refinanced this hospital."
"I have a lot of pride and get a lot of satisfaction from seeing the result of the work," he said.
On top of serving on NABL's Board of Directors since 2010, he also served on the board of directors of the American College of Bond Counsel, and served as its treasurer from 2008-2011. For three years, he chaired the tax-exempt financing committee of the American Bar Association's Section of Taxation.
Bill Daly, the director of governmental affairs for NABL, said that Gerber's extensive experience both at NABL and the ABA have made him well-respected throughout the muni world.
"To get to this position at NABL, people go through a long process," Daly said. "They serve on panels, work on papers, chair the various committees and conferences we have, and then serve for many years on the board of NABL. Cliff's done all of that."
When he's not advising municipalities on their infrastructure financings or investors in low-income housing tax credit transactions, Gerber said he enjoys exercising, swimming, reading and honing his musical talents.