The midterm elections will shape the momentum and possibilities for the public finance agenda for the remainder of this year.
A few legislative vehicles remain in play that could provide opportunities to advance municipal bond priorities over the next several weeks. But opportunities are diminishing amid a tight legislative calendar as lawmakers begin campaigning in earnest for the midterm elections.
The post-election lame duck session will offer the next big opportunity for muni lobbyists.
Meanwhile, with the likely turnover of one or both houses could come a slate of lawmakers unfamiliar with public finance and fresh threats to the tax exemption for municipal bonds, advocates said.
“It’s a tumultuous time,” said Emily Brock, lobbyist for the Government Finance Officers Association.
The House has about four legislative weeks and the Senate five weeks before the midterm elections. All 435 House seats and 34 Senate seats are set to be contested.
Midterm elections are traditionally referendums on presidential performance and with Biden’s approval rating sitting around an anemic 40%, many assume Republicans will take control of at least the House — they need only five seats to do so — and possibly the Senate as well.
If Republicans take control, House Minority Leader Kevin McCarthy, R-Calif., is expected to become Speaker and House Minority Whip Steve Scalise, R-La., would become House Majority Leader.
Congress over the next few weeks will be consumed with several big-ticket priorities, some of which offer an opportunity for muni priorities, including aid for Ukraine, COVID funding, a bipartisan climate agreement and a slimmed-down Build Back Better bill.
An early version of the $2 trillion Build Back Better bill embraced muni priorities, including the restoration of tax-exempt advance refunding, a direct-pay bond program, an expansion of the eligible uses of private activity bonds and the expansion of bank-qualified debt. The
The entire package fizzled out in December amid opposition from Sen. Joe Manchin, D-W.Va. But its resurrection remains possible, with Manchin as recently as last week meeting with Senate Majority Leader Chuck Schumer on a slimmed-down version that he billed as an inflation-fighter.
Schumer and other top Democrats have said they would like to see a BBB framework by Memorial Day.
“We’d be naïve on the one hand to assume it’s viable but negligent to assume it’s not,” said Charles Samuels of Mintz Levin, counsel to the National Association of Health & Educational Facilities Finance Authorities and a top Washington public finance advocate. The chances of a resurrected bill are slim and even slimmer are the chances of muni provisions being included, Samuels said.
“But our job as Washington advocates is to take advantage of any opportunities, no matter how slim," he said.
"The good news is, since all the possible provisions of that bill have been debated about 500 times, if there’s a political willingness to put it together, they can do it quickly,” Samuels added.
Issuer groups like the National Association of Counties are also continuing to press for measures that impact muni finance, including the cap on state and local tax deductions, said NACo’s Government Affairs director Eryn Hurley.
“We’re very aligned with the GFOA,” Hurley said. “We’re always supportive of reinstating advance refunding and increasing the cap on small bond issuers as well,” she said. “For NACo, the state and local tax deduction of course is front of mind as well,” she said.
Raising the cap on SALT deductions proved to be a sticking point in the Senate’s Build Back Better debate. In March, a pair of House Democrats
“There are so many competing priorities right now,” Hurley said. “We’re working with folks on the bipartisan SALT caucus to see what the potential avenues are.”
Manchin last week convened a group of lawmakers to work on a bipartisan climate energy deal that as of now doesn’t seem to have much room for muni priorities.
An aid package for Ukraine is a major congressional item with significant bipartisan support but may face opposition if Democrats pair it with COVID funding, an issue that was recently derailed over an unrelated immigration dispute.
A
“That’s still alive and has a chance to move,” she said, noting it has significant bipartisan support. Several issuer groups, including the National Governors Association, have urged Congress to pass the bill.
Congress is holding hearings on agencies' FY23 budget requests, and top appropriators said last week they hope to reach an agreement on spending levels soon. But budgets can be tough to pass in election years, and Republicans may have incentive to stall the process if they think they will control one or both chambers come January.
No matter who controls Congress next year, regulatory mandates on issues like disclosure and ESG could be subject to congressional oversight and hearings.
If the public finance agenda fails to find a legislative home before the election, the next best chance will come during a post-election lame duck session, said Brett Bolton, vice president of federal legislative and regulatory policy at the Bond Dealers of America.
If Republicans are poised to take over, “that provides an opportunity for a pretty robust lame duck session,” Bolton said. “For the past several months I’ve had multiple conversations about muni provisions, especially advanced refunding, and there’s a real opportunity there, and that’s what I’ve been laser focused on.”
House Ways and Means Committee Chair Rep. Richard Neal, for example, who has long supported tax-exempt advance refunding, may renew his push before he is forced to put down the gavel.
Outside legislation, public finance advocates said the chief post-election priority will be educating new lawmakers and staff about municipal finance as well as forging connections with the new chairs of the industry’s most important committees, which include House Ways and Means, the Senate Finance Committee and House Financial Services Committee.
It’s still early to say who would take over as committee chairs in the event of Republican control, though Patrick McHenry, R-N.C., said last week he would seek the chair of the House Financial Services Committee.
Rep. Vern Buchanan, R-Fla., is considered a frontrunner for the chair of the House Ways and Means Committee, according to Politico, which also named Rep. Adrian Smith, R-Neb. and Rep. Jason Smith, R-Mo.
Idaho Republican Sen. Mike Crapo, if re-elected, could chair the Senate Finance Committee.
As muni lobbyists schedule fly-ins and meetings, lurking in the background, as always, will be the threat to eliminate the tax exemption on municipal bonds.
Efforts to trim or eliminate the tax-exemption have come from both sides of the aisle in the past. Critics argue tax-exempt bonds mostly benefit the wealthy, while market participants say they are needed to lower the financing cost of infrastructure.
“We always have to be on guard about the tax exemption,” Samuels said. “We cannot assume any party or ideology is automatically supportive; that would be a big mistake."
The White House’s apparent lack of support for public finance is one of the reasons why its agenda was stripped from the BBB, Samuels noted.
Brock recalled that the Obama Administration proposed capping the tax exemption to raise money.
“There are opportunities and threats from both sides, and they may not be ill intended, it just may take a lot of education on our parts so they understand,” Brock said. “If there’s one unifying thing, it’s the tax exemption of municipal bonds.”
