WASHINGTON — Municipal bond and city interests are spending the final hours before the fiscal cliff deadline watching and waiting, remaining hopeful that lawmakers will agree on a slimmed-down last-minute deal not including any threats to the muni interest tax exemption.

"We're not making calls aggressively today," said Mike Nicholas, chief executive officer at Bond Dealers of America. "We've been working the issue really hard, but I'm not sure how much you can do today."

Nicholas said any last-minute deal would likely be a much simpler one than the "grand bargain" being discussed for the past several months. BDA is continuing to advocate buying more time for discussion with a short-term extension deal, while building an industry coalition to help protect the tax-free status of muni bonds, Nicholas said.

Susan Collet, BDA senior vice president of government relations, added that changes to the muni exemption are likely too complicated to work into any eleventh-hour deal, which will likely focus heavily on preventing across-the-board tax increases.

"Those aren't going to fit into this slimmed-down deal," she said.

While there are reports that Vice President Joe Biden and Senate Minority Leader Mitch McConnell, R-Ky., have had productive talks over what income level to place the cutoff for the automatic tax increases triggered by the cliff, there remains the thorny issue of the sequestration cuts to deal with. The Office of Management and Budget said in a report earlier this year that 7.6%, or $322 million, would be cut from $4.2 billion in authorized subsidy payments to issuers of BABs and other direct-pay bonds in fiscal 2013.

Senate Majority Leader Harry Reid, D-Nev., said on the Senate floor Monday morning that there was still no deal in place and that the Senate is not prepared to vote on any measures to stave off the cliff just yet.

"This is a terrible sign this morning, that Reid has had to go to the floor and say 'we're not there yet,'" Collet said.

Michael Decker, co-head of municipal securities at the Securities Industry and Financial Markets Association, issued a final hopeful statement Monday,

"We're hopeful that Congress can develop consensus around a plan to forestall the fiscal cliff and we urge negotiators to avoid imposing any tax on otherwise tax-exempt municipal bond interest," Decker said.

Lars Etzkorn, program director for the National League of Cities, agreed that fundamental changes to the muni market were highly unlikely in a last-minute deal, but said the negotiations are very secretive and until a deal is done it is impossible to know for certain what it will or will not include.

"Hopefully we don't go to bed tonight not knowing," he said. "We're waiting, like the rest of the world, like anyone who has concerns."

Etzkorn added that his group remains cautiously optimistic about a deal getting done before the midnight deadline.

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