DENVER — Almost one year after Meredith Whitney forecast widespread defaults by state and local governments, a new threat looms over the municipal securities market: the Governmental Accounting Standards Board, a market expert said here Thursday.

“This is the number-one thing,” said Thomas Doe, founder and chief executive officer of Municipal Market Advisors in Concord, Mass.

Doe made the remarks at the national fixed-income conference sponsored by the Bond Dealers of America as GASB is weighing proposed changes to accounting rules for public-sector pensions. The accounting standard setter, which is currently fielding comments on proposed reforms, is expected to release final rules next year.

Currently, public sector pensions value their unfunded liabilities using a historic rate of return, typically 7% to 8%. One of the reforms GASB has considered includes a requirement that public sector pensions use a lower rate of return, keyed to U.S. Treasuries, of roughly 3% to 4%.

If public pensions were required to use the lower discount rate, their unfunded liabilities will look much larger, potentially creating headline risk that could drive retail investors away from munis.

“This is going to be a big deal,” Doe said.

As for another potential muni threat, tax reform initiatives on Capitol Hill that could reduce or eliminate the federal tax exemption for munis, Doe sounded cautiously optimistic.

In his view, state governors have rallied to defend the tax exemption, citing it as key to their ability to gain access to the capital markets.

He stressed, though, that issuers have to lead the defense.

“It’s got to be issuer-driven,” Doe said. “I think that’s the best thing we have going for our market.”

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