WASHINGTON — Securities and Exchange Commission chairwoman Mary Schapiro told House members Tuesday that her agency is pursuing a number of municipal securities investigations across the country.
In testimony before the House Appropriations Committee’s financial services subcommittee, she also said SEC officials would like to talk to lawmakers about increasing the commission’s authority over muni disclosure after it implements the bulk of the initiatives mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act.
Schapiro summarized the SEC’s current initiatives related to municipal securities, including enforcement, field hearings and disclosure.
Her testimony comes amid continuing uncertainty about the fiscal 2012 budget for the SEC, which has been operating under a continuing resolution since late last year. Last week, Schapiro testified before the Senate Banking Committee in support of President Obama’s budget, which would boost the SEC’s funding to $1.4 billion for fiscal 2012 from its fiscal 2010 budget of $1.12 billion. House Republicans have proposed a continuing resolution that would reduce the SEC’s budget to only $1.095 billion, a 2% decrease from the fiscal 2010 level.
In response to a question from Rep. Jo Ann Emerson, R-Mo., the panel chair, about the SEC’s efforts to monitor the municipal securities market, Schapiro noted the commission has a group dedicated to muni enforcement, headquartered in its Philadelphia regional office. Last year, the SEC brought a high-profile case against New Jersey over failing to disclose to investors that it was underfunding its two largest pension plans.
The SEC also has a number of muni enforcement investigations around the country, Schapiro said.
She noted that the commission lacks authority under the federal securities laws to directly regulate disclosure by municipal issuers. During her tenure as chairman, she said, the SEC has bolstered its efforts to regulate issuer disclosure indirectly, through its jurisdiction over broker-dealers.
But, she noted, “We’re sort of reaching the limits of our authority to do that.”
Finally, Schapiro said the two field hearings held by the SEC last year, as part of an ongoing review of the muni market, have been enormously helpful in the commission’s efforts to understand how to protect investors in the almost $3 trillion municipal securities market.
The remaining field hearings, once slated to be held in four locations across the country, have been suspended because the agency lacks a travel budget, Schapiro said.
The SEC hopes to resume the field hearings later this year, if it obtains sufficient budget authority from Congress, she said.
In a separate hearing before the House Oversight and Government Reform Committee’s panel on TARP, financial services, and bailouts of public and private programs, lawmakers again grappled with whether unfunded pension liabilities could trigger severe fiscal stress for state and local governments.
The hearing, called “State and Municipal Debt: The Coming Crisis, Part II?,” featured five witnesses, including two from rating agencies, and was a follow-up to a hearing held last month.
In his testimony, Robert Kurtter, a managing director in the U.S. public finance group at Moody’s Investors Service, said many state and local governments faced severe economic stress in the ongoing downturn, but they also have strong incentives to meet their municipal bond obligations.
“While many states and local governments are facing revenue and spending challenges, we believe it is very unlikely that any states will default on their bonds in the next 12-18 months and we expect only a relatively small increase in bond defaults by Moody’s rated local governments,” he said.
Robin Prunty, managing director and analytical manager for Standard & Poor’s state ratings group, said the fiscal challenges facing state and local governments will force them to make tough policy decisions but will not likely lead to defaults in the majority of cases.
Meanwhile, the Center on Budget and Policy Priorities issued a report Tuesday warning that if the pension-reporting bill introduced last month by three Republicans is enacted, it could spook the muni market and lead to higher borrowing rates for issuers.
The Public Employee Pension Transparency Act, introduced Feb. 9 by Reps. Devin Nunes and Darrell Issa from California and Paul Ryan from Wisconsin, would require state and local governments to determine their pension liabilities using a so-called riskless rate based on the Treasury bond rate and report them to the federal government. Issuers who failed to comply with the requirements would lose their ability to issue tax-exempt bonds, tax-credit bonds or direct-pay bonds.
But in the CBPP’s report, Iris Lav, a senior adviser, said the bill “would effectively short-circuit and override” the Governmental Accounting Standards Board’s efforts to standardize pension reporting.
If enacted, it would create “unsound policy to substitute heavy-handed and unnecessary federal intrusion for the GASB standards,” she said.
Lav said the bill “could sow public confusion” because it would lead the public and policymakers to believe states and localities must deposit more money in their pension plans each year than is needed.
In addition, it “would fail to accomplish its stated objective” of allowing investors to compare pension plans on an apples-to-apples basis because it would set standards for only two of a wide array of variables used to calculate pension fund liabilities.
Finally the bill would create “a new federal bureaucracy” to gather, process, and verify the information for the nation’s 2,550 state and local pension plans and enforce penalties, Lav said.
Spokesmen for Nunes and Issa did not comment on the CBPP critique of the bill.