A Move to Floating NAV Would Boost Issuance Costs, Groups Warn

WASHINGTON — State and local governments will face higher debt-issuance costs if regulators require money market funds to move to floating net-asset values, issuer groups warned Thursday.

The two-page letter, signed by 12 groups representing state and local governments, was addressed to Rep. Scott Garrett, R-N.J., who chairs the House Financial Service Committee’s capital markets panel, and Rep. Maxine Waters of California, the panel’s top Democrat.

Creating a marketplace where the NAV changes from fixed to floating would make money market funds far less attractive to investors, thereby limiting their ability to purchase municipal securities, the groups said.

“Losing this vital investing power could lead to higher debt issuance costs for many state and local governments across the country,” they wrote.

The missive comes as the panel is slated to convene a hearing Friday on the state of the mutual fund industry. Muni market participants, including some in the groups who signed the letter, have raised concerns that regulatory changes inspired by the financial crisis could force them into less stable, more expensive financial products and deprive them of a key cash-management tool.

“It’s one of our main avenues for investing our short-term operating cash that we’re using to pay our bills with,” said Kathryn Hewitt, the treasurer of Harford County, Md. “Having that fluctuation would be untenable for us.”

Last month, the Securities and Exchange Commission and other regulatory officials weighed recommendations for money market funds made last October by the President’s Working Group on the Financial Markets. The working group suggested several reform options, including requiring money market funds to shift to a floating NAV from the current stable $1-per-share NAV.

In the letter, the groups — which included the Government Finance Officers Association, the National Association of State Treasurers, the National League of Cities, and the U.S. Conference of Mayors — said switching to a floating NAV would reduce investor demand for muni securities and deprive state and local governments of much-needed capital.

Money market funds represent the largest investors in short-term munis, they said, with 56% of all outstanding bonds totaling roughly $352 billion, according to figures attributed to the Investment Company Institute, a mutual fund group.

In addition, the groups wrote, many state and local governments have specific policies requiring them to use money market funds for short-term investments, due to the stability of a fixed-rate NAV.

“Investors have said they won't use a fund, and in many cases can’t use a fund, that has a floating value,” said Mike McNamee, senior director of public communications for ICI.

For reprint and licensing requests for this article, click here.
Washington
MORE FROM BOND BUYER