- Commercial Bank Underwriting of Revenue Bonds (1973)
- Taxable Bond Option (1977)
- Application of a Minimum Income Tax to Municipal Securities (1982)
- Mortgage Revenue Bonds (1983)
- Federal Tax Policy (1985)
- Investment of Proceeds of State and Local Government Tax-Exempt Securities (1988)
- Reciprocal Tax Immunity (1988)
- Restrictions on Tax-Exempt Bonds to Achieve Objectives Unrelated to the Proposed Restrictions (1990)
- Selection of Municipal Finance Professionals (1994)
- Need for Guidance on Federal Securities Law Matters (1996)
- Communicating with Beneficial Owners of Defaulted Municipal Securities (1997)
- Preserving the Tax-Exempt Status of Municipal Bonds (2003)
- Disclosure and Federal Regulation of the Market for Municipal Securities (2003)
- Federal Tax Policy and Preserving the Tax-Exempt Status of Municipal Bonds (2005)
- Non-Governmental Bonds (2007)
- Federal Home Loan Banks as Providers of Tax-Exempt Letters of Credit (2008)
- Patenting of Public Finance Tax Strategies and Techniques (2008)
- Uniform Credit Rating Scales (2009)
- Federal Assistance to the Municipal Bond Market (2009)
- Regulation of Municipal Securities Finance Professionals (2009)
- Opposition to Giving SEC Authority Over the Content, Timing and Frequency of State and Local Government Financial Statements and Disclosure Documents (2012)
The Executive Board of the Government Finance Officers Association of the United States and Canada at its November 10, 1973, meeting unanimously supported the recommendations of the GFOA Committee on Debt Administration in favor of allowing commercial banks to underwrite revenue bonds. The Board also indicated clearly that it does not support industrial revenue bonds.
Recommendations of Committee on Debt Administration:
- "In order to promote competition and to lower the costs of borrowing for state and local government obligations, and because revenue bonds comprise a substantial portion of the borrowing of state and local governments,
- "Now Therefore be it resolved that the GFOA supports legislation to permit commercial banks to underwrite the revenue bond obligations of state and local governments."
Adopted: 1973 - back to top
Taxable Bond Option
WHEREAS, the Government Finance Officers Association both has defended and sought to strengthen the present system of tax exemption of interest on municipal bonds, the attributes of which are contained in its policy of May 28, 1969 which required:
- Conformity to the Constitution, preserving the Federal system by protecting state and local governments from Federal compulsion.
- Freedom from Federal controls of policy decisions which are properly the sole province of state and local governments.
- A saving in the cost of borrowing-without which the present urban crisis would become more aggravated by requiring increased property, sales and other local taxes, and a reduction in essential services.
- Freedom from the uncertainties of the recurrent annual federal appropriation process to obtain state and municipal capital needs or any portion of their interest costs.
- Protection of and freedom of access to viable capital markets of their own choice without reliance on a dominant Federal financial institution.
- Expedition in their borrowing, free of the delay of Federal clearances which can make them miss their optimum interest market timing and can force them into increased capital costs as construction costs continue to rise; and
WHEREAS, the Association restated and readopted the above longstanding policy by resolution adopted May 5, 1976, and stated its belief that then pending proposed legislation to provide a taxable bond option for state and local government issuers did not conform with this policy; and
WHEREAS, it appears that the resolution adopted May 5, 1976, has been misinterpreted by some as an acceptance by the Government Finance Officers Association of the concept of the taxable bond option, when no such acceptance was intended; and
WHEREAS, the Government Finance Officers Association wishes to clarify its position on this matter;
THEREFORE, BE IT RESOLVED that the Government Finance Officers Association states its policy towards the taxable bond option as follows:
- The Government Finance Officers Association does not support the taxable bond option.
- The Government Finance Officers Association's Executive Board through its Committee on Governmental Debt and Fiscal Policy, is authorized to and directed to continue to review this matter and report back to the membership any recommendations for further policy as may be appropriate.
Adopted: April 20, 1977
Application of a Minimum Income Tax to Municipal Securities
The Government Finance Officers Association (GFOA) reaffirms the policy adopted at the 1969 Annual Conference in opposition to a minimum income tax that will, either directly or indirectly, adversely affect municipal securities.
Under a recent Administration proposal for a new and expanded corporate minimum income tax, a preference item would be added which would include in the minimum income tax base the interest on indebtedness which is used to purchase or carry tax-exempt securities. The effect of including this preference item would be to partially diasallow the interest cost deductions which commercial banks now incur by subjecting those interest costs to a 15 percent minimum income tax. According to GFOA research, this change would greatly reduce commercial bank demand for municipal securities and will have severe adverse impacts on an already weakened bond market.
The GFOA is not taking a position on a minimum income tax, but is opposed to minimum income tax features which would adversely affect the municipal securities issued by state and local governments.
Adopted: May 25, 1982 - back to top
The Government Finance Officers Association (GFOA) recognizes that the primary concern of state and local governments is the continued ability to provide its citizenry basic essential services. In order for state and local governments to insure the continuation of these services, we must retain access to the tax-exempt bond market at reasonable interest rates.
The GFOA recognizes that single-family Mortgage Revenue Bonds can and have played an important role in providing home mortgage financing at a time when the cost and availability of mortgage financing caused severe problems in the housing market. Mortgage Revenue Bonds can be used in urban or community development by assisting individuals with low to moderate incomes who otherwise could not afford to enter the housing market.
The Government Finance Officers Association is concerned with the effects of the growing volume of single-family Mortgage Revenue Bonds and recommends that
- the total volume be reduced by state and local governments, and
- Congressional legislation extending the exemption of single-family mortgage revenue bonds through December 31, 1986, be enacted subject to the following additional conditions:
- The use of single-family Mortgage Revenue Bonds should relate to the adequacy of affordable mortgage money available and the level of housing starts.
- The use of single-family Mortgage Revenue Bonds should be targeted to low-and moderate-income individuals and community development and/or urban revitalization projects, and restricted to the area median price of housing. Limitations on these projects should be general in nature allowing flexibility for state and local governments designing programs which best meet their needs.
In addition, we recognize that the federal government has historically played a key role in assisting and supporting the housing market. The Government Finance Officers Association urges the U.S. Congress and the Administration to undertake a study of alternatives to Mortgage Revenue Bonds such as the development of a tax credit or other methods to aid low-and moderate-income first-time homebuyers during periods of high interest rates.
Adopted: June 14, 1983 - back to top
The Government Finance Officers Association has reviewed the various proposals to reform the existing federal tax system and has concerns about the impact these proposals may have on the ability of states and local governments to continue to finance their projects with general obligation and revenue bonds for essential government services and to raise revenues. The GFOA urges the Congress and the Administration to recognize that states and local governments are not special interest groups, but are an integral part of the nation's total governmental structure of which the federal government is the other part. Both parts serve the same constituents and must be supported by those same constituents. Therefore, federal policy changes that increase the cost of state and local government will result in reduced services and increased state and local taxes and user charges. In that light, the Association urges consideration of the following statements, which are consistent with all previous policy positions taken by this Association, in any modification of the federal income tax structure:
TAXATION OF INTEREST ON STATE AND LOCAL OBLIGATIONS -- A basic tenet of the federal system of government is the constitutional doctrine of reciprocal immunity. Therefore, the federal government cannot tax the interest on obligations issued by states and local governments and states and local governments cannot tax the interest on federal government obligations. No federal tax should be imposed, either directly or indirectly, on the interest paid on state and local government obligations issued to provide services to the public. Examples of direct or indirect taxation are the imposition of the individual minimum tax on the interest on state and local obligations and the inclusion of tax-exempt interest in the income base of social security recipients.
The use of the term "subsidy" in connection with tax exemption should be discontinued. This term distorts the role of states and local governments in the federal system of government because it treats the interest exclusion as if it were granted merely by Congressional grace rather than as a Constitutional right.
BONDS FOR PRIVATE USERS -- The Association opposes the unrestricted issuance of tax-exempt "conduit" bonds and other bonds that are for the primary benefit of private users. The Association has supported restrictions on these types of financings because of their impact on the cost of borrowing for public purposes, but it believes arbitrary volume caps are not an appropriate way to deal with the issue.
As long as small-issue industrial development bonds, pollution control bonds and other forms of tax-exempt financings for private users continue, suitable restrictions should be imposed in order to limit these forms of financing to specifically defined areas and purposes.
REDEFINITION OF "INDUSTRIAL DEVELOPMENT BOND" -- The present statutory definition of "industrial development bonds" includes not only bonds issued by states and local governments for private industrial development, but also bonds issued to provide essential government services such as airports and water and sewer facilities. The Association supports a redefinition of the term "industrial development bond" to exclude bonds issued for public-purpose projects to remove from those bonds restrictions that are designed to affect financings for private users.
MARKET FOR MUNICIPAL OBLIGATIONS -- The Association opposes changes in the treatment of tax-exempt interest by minimum tax provisions which will diminish institutional buyers' willingness to purchase and carry municipal bonds. The demand for tax-exempt obligations by banks and other financial institutions has decreased because of the reduced profitability of these institutions, the expansion of competing ways to reduce taxable income, and tax law changes affecting the interest expense deduction taken by banks and other financial institutions related to the purchasing and carrying of tax-exempt obligations. Historically banks and other financial institutions have been major investors in municipal bonds.
ARBITRAGE -- The investment of bonds proceeds at market rates for a reasonable period of time pending their application for the purposes of the bond issue is efficient financial management. Arbitrage is the term used to describe the interest earned on invested bond proceeds in excess of the interest being paid on the bonds. It reduces the cost of public projects by reducing the total amount of bonds outstanding for a project. State and local governments should not be penalized for practicing good financial management by being required to "rebate" such investment earnings on the proceeds of tax-exempt bonds to the U.S. Treasury or by the imposition of other restrictions.
CONSULTATION WITH STATE AND LOCAL OFFICIALS -- Proposed legislation and regulations which have substantial adverse impacts on states and local governments in general and the municipal bond market in particular have emanated from the Congress and Administration with growing frequency. Some examples include restrictions on governmental leasing, tax legislation with retroactive effective dates and state-by-state volume caps on municipal bonds.
To afford a better opportunity to solve perceived problems with the minimum disruption of federal/state/local relations, Congress is urged to hold public hearings after the introduction of all tax legislation. Treasury Department officials are urged to have meaningful discussion with state and local officials about problems that are believed to exist before proposing regulations.
Accordingly, the Government Finance Officers Association opposes provisions in pending tax reform proposals, including the U.S. Treasury Department's tax reform proposal, that are inconsistent with the above statements.
Adopted: May 28, 1985 - back to top
The Government Finance Officers Association (GFOA) has had a long-standing policy opposed to the issuance of tax-exempt obligations by state and local governments for the sole or primary purpose of investing the proceeds in taxable securities to yield a profit. Changes in the municipal bond market, including those resulting from the 1986 Tax Reform Act, make it appropriate that this policy should be extended to reflect these changes.
The GFOA is opposed to the issuance of tax-exempt securities by state or local governments for the sole or primary purpose of investing the proceeds in higher yielding obligations, whether taxable or tax-exempt, in order to make a profit from the investment.
Adopted: May 3, 1988
The principles of federalism which have historically included the exemption from federal taxation of interest on state and local government obligations must be preserved and enhanced by the Congress and the President of the United States. This is even more essential because of the United States Supreme Court's decision in South Carolina v. Baker.
By restricting the doctrine of reciprocal tax immunity, the Court has substantially eroded Constitutional barriers to the taxation of interest on state and local government obligations. The Court, in reaffirming its 1985 decision of Garcia v. San Antonio Metropolitan Transit Authority, also greatly expanded the responsibility of Congress to protect, and its power to destroy, essential state and local government activities.
The financing of state and local government projects through the issuance of tax-exempt debt is critical to the ability of state and local governments to meet infrastructure and other public service needs of their citizens. It is the longstanding policy of the Government Finance Officers Association (GFOA) that state and local government obligations issued for public purposes must remain immune from federal taxation.
Inasmuch as the power to tax remains the power to destroy, Congress and the President must recognize that when the federal government interferes through taxation with sovereign activities, it destroys the ability of state and local governments to be meaningful partners contributing to the vitality of the economy. Tax immunity must also remain the reciprocal in order to maintain the delicate balance of power between the states and the federal government.
GFOA, in concert with others, will spearhead an effort through legislative, judicial and other means, including the exploration of the appropriateness of callling upon the Congress to propose a constitutional amendment, to assure that the national government does not interfere with traditional methods of state and local government financing.
Adopted: May 3, 1988 - back to top
Restrictions on Tax-Exempt Bonds to Achieve Objectives Unrelated to the Proposed Restrictions
In recent years, federal legislation has been proposed to restrict the issuance of tax-exempt bonds so as to accomplish objectives that are totally unrelated to the proposed restrictions. Examples of recent proposals imposing unrelated restrictions are
- a bill to deny the use of tax-exempt bonds to finance construction projects if one percent or more of the project's cost is used to pay for services performed by Japanese individuals or businesses, and
- a bill to reduce the private-activity bond volume cap to zero for states that do not comply with a federal law requiring state assistance in paying medicare expenses for the elderly poor.
Tax-exempt municipal bonds are the basic tool used by the states, cities, counties and towns to fund the capital improvements necessary to provide utilities, roads and bridges, airports, health care, education, housing and other public services.
The Government Finance Officers Association has long recognized the federal government's interest in preventing abusive tax-exempt bond transactions. However, the imposition of restrictions on tax-exempt bonds whose sole purpose is to achieve objectives totally unrelated to the proposed restrictions is an inappropriate use of federal regulatory power. Such restrictions would serve only to jeopardize state and local projects and increase project costs.
Therefore, the Government Finance Officers Association opposes restrictions on the issuance of tax-exempt bonds that seek to further objectives unrelated to the proposed financings regardless of the merits of those objectives.
Adopted: May 1, 1990 - back to top
The selection of investment bankers, bond lawyers and other finance professionals should be merit-based, and not influenced by political contributions. Finance officers are concerned about any improper linkage, whether perceived or actual, between political contributions and the selection of municipal finance professionals. Even the appearance of such linkages erodes the confidence of the taxpayers and ratepayers of involved state and local governments.
In response to recent assertions of questionable practices in the municipal securities market, the Government Finance Officers Association (GFOA) supports municipal securities market reforms that are narrowly directed to specific abuses and are developed on a consensual basis by all affected market participants. To facilitate this process, the Securities and Exchange Commission (SEC) should make the results of its investigations into market practices available in order to better identify and substantiate the nature and extent of market problems.
Furthermore, the GFOA vigorously supports the use of an open, merit-based process for the selection of underwriters for those bond issues that are not sold by the competitive-bid process. Similarly, other municipal finance professionals also should be selected on merit.
The current proposal developed by the Municipal Securities Rulemaking Board (MSRB) relating to political contributions and prohibitions on municipal securities business (MSRB Rule G-37) addresses this concern in the wrong way by effectively banning legitimate political contributions. The proposed Rule presents numerous other problems, such as
- the erroneous assumption that any linkage between a political contribution and the selection of underwriters is primarily an investor protection issue, rather than a taxpayer, ratepayer or voter concern;
- the implication that a political contribution is in and of itself improper, regardless of the amount or frequency of such contributions;
- the overly broad application of the Rule, which covers most contributions, regardless of size and type, and even those that would clearly not influence the selection process;
- the way in which the Rule disadvantages small, regional, and women- and minority-owned firms;
- the way in which the Rule disadvantages incumbent state and local officials running for a federal office;
- the fact that the Rule only applies to broker/dealers and not to other municipal finance professionals; and
- the possible violation of individuals' constitutional rights to participate in the political process and our system of democracy.
GFOA believes that the reporting of campaign contributions is one of the most effective ways to deal with perceived or actual improper linkages between campaign contributions and the awarding of municipal securities business. Furthermore, GFOA believes that the reporting of contributions made to elected officials and candidates for public office is best regulated at the state and local levels of government, but recognizes that improvements may be needed to ensure that sufficient information is conveniently available on a timely basis.
GFOA does not support the suggestion that political contributions should be reported through issuers' official statements, because this erroneously treats the problem as an investor-protection issue. If the municipal market regulatory agencies determine that new campaign contribution reporting requirements are necessary, then the burden of disclosing such contributions should be on the contributors, and the information collected should be made available through a central repository.
In the absence of any crisis of confidence in the market, GFOA urges the SEC to hold in abeyance proposed Rule G-37 to ban dealers from making contributions to certain officials, and to work with all market participants to propose workable and equitable reforms in the reporting of political contributions.
Adopted: June 7, 1994 - back to top
Under the principles of the antifraud provisions of the federal securities laws, it is important for state and local governments and their officials when providing information to the municipal bond market (1) not to make false or misleading statements of material facts and (2) not to omit any material facts that could cause the statements being made to be misleading. Enforcement of the federal securities laws is an important function of the Securities and Exchange Commission (SEC), which provides investor protection and ensures the integrity of the municipal securities market.
The Government Finance Officers Association (GFOA) recognizes that enforcement actions are an effective means to focus attention on compliance with the federal securities laws, as well as to protect state and local governments from fraud committed against them by other market participants. However, the recent enforcement actions of the SEC have raised legitimate concerns among many issuers as to the standards applicable to public officials in securities law enforcement, standards that by and large have been developed in the very different context of private corporations selling stocks and corporate bonds.
GFOA urges the SEC to recognize and acknowledge the unique status and special characteristics of state and local government bodies and their officials, to provide appropriate guidance to conscientious public officials and to work with GFOA and other industry groups in promoting statements of good practice that will provide practical guidance to state and local officials.
In particular, GFOA believes that the application of the antifraud provisions should recognize that any legal standard for reckless behavior must reflect the special characteristics of state and local governments generally, the nature of the political process and political speech, and the vast distinctions among such governments in terms of organization, resources and access to information and expertise. Public officials exercising ordinary care should be able to carry out their duties without fear that they will be held liable for misstatements and omissions where reasonable reliance on experts is consistent with both sound public policy and the general principles of the securities laws.
GFOA applauds the SEC's recent outreach and educational efforts with municipal market participants, but it urges the Commission to do more to promote a clear understanding among public officials of their responsibilities and to help them recognize areas where governmental and individual liability can arise. GFOA appreciates that no statement of standards can ever give precise guidance of required behavior in every circumstance, but it believes the Commission can do more to provide meaningful guidance to issuers and their officials. GFOA urges the SEC to enter into a process of continuing dialogue with market participants to promote both better disclosure and the development of reasonable practices and standards of care that will provide practical guidance to government officials, especially on the question of reasonable reliance upon finance professionals and others.
Adopted: May 21, 1996 - back to top
The Tax Equity and Fiscal Responsibility Act of 1982 required the registration of ownership of newly issued municipal bonds and resulted in the effective elimination of bearer municipal bonds and resulted in the effective elimination of bearer municipal bonds and the physical delivery of new municipal securities issues. Many issuers adopted book-entry systems of registration and directed the registrar for an issue to register the entire issue in the name of a securities depository. Under most legal documents, notices are only required to be given to registered owners. As a result, many notices only go to nominees and do not reach the beneficial owners of the securities.
The impact of book-entry systems on the process of communicating with beneficial owners has recently come into light. Beneficial owners of defaulted securities have not received important notices from issuers, registrars, paying agents or trustees that relate to the defaulted securities, such as the initial notice that a default has occurred, notices ordered to be sent to beneficial owners as a result of court proceedings, and notices detailing developments in the case, including bond calls and tenders.
The Government Finance Officers Association (GFOA) supports a joint effort by organizations representing municipal market participants to develop and implement uniform practices that will serve as standards for proper action to be taken by market participants to assure that important default notices are actually received by intended recipients. However, the decision to initiate communication to bondholders shall be at the discretion of the issuer and the joint statement of uniform practices should state that these practices are not intended to create new disclosure obligations for issuers. These practices, which should be implemented as soon as possible, should address
- the need for bond documents to take into account the existence of book-entry systems of bond registration and the registration of securities in a single nominee name;
- the responsibilities of all nominees, regardless of their position in the chain of ownership, to identify communications directed to them, transmit notices as required, and assist issuers or their agents in providing the names and addresses of beneficial owners;
- procedures for the payment of reasonable costs associated with the transmission of notices that are incurred by issuers, conduit borrowers, registrars, and other market participants and procedures for prior notification to the issuer if costs will be incurred on its behalf;
- procedures for requesting information about beneficial owners from depositories and their participants, including methods for obtaining securities position listings from depositories and lists of nonobjecting holders of securities, and procedures for the provision of notices
- the development of record dates for various types of notices;
- the forms of notices;
- the information recommended to be included in an official statement regarding the book-entry system, including the procedures beneficial owners can take to augment their receipt of notices;
- methods for improving the dissemination of notices through various national and state repositories and other systems, including the Municipal Securities Rulemaking Board's Continuing Disclosure Information System;
- methods for improving operational procedures of depositories to facilitate the identification and dissemination of notices; and
- methods available to depositories and their participants to ensure that their participants and nominees holding through their participants agree to follow these standards.
GFOA notes that these procedures may be appropriate for other notices to bondholders.
GFOA believes that the Securities and Exchange Commission has authority to take appropriate action to encourage an improved system of bondholder communications consistent with its regulatory responsibilities for the national system for clearance and settlement of securities transactions. However, GFOA prefers a voluntary effort by market participants to provide an effective system of communications with beneficial owners of municipal securities that involves a sharing of responsibility for improvements by all market participants.
Adopted: June 3, 1997 - back to top
Preserving the Tax-Exempt Status of Municipal Bonds
The Government Finance Officers Association of the United States and Canada, has consistently defended the exemption of municipal bond interest from Federal and applicable state income taxation. This historic exemption from taxation of interest on state and local government bonds reinforces our nation's federal system and provides major advantages to communities across America, including:
- Lower costs to fund government infrastructures and services. Hindrance of state and local governments ability to fund vital public infrastructures and services through tax-exempt financing would require other methods of finance (increased property, sales, and other local taxes), and/or a reduction in essential services;
- Tax-exempt financing grant state and local government freedom from the uncertainties of the annual Congressional appropriations process in funding capital needs or any portion of their interest costs; and
- Efficient access to capital markets.
Although the primary beneficiaries of a particular bond issuance are the citizens of the issuing community, the nation as a whole has a vital interest in maintaining adequate public facilities to support a dynamic economy. The national interest is well served by keeping state and local government borrowing costs low, thereby providing an incentive for public investment in infrastructures and other facilities.
The GFOA opposes any federal legislation that dimishes the value or impairs the use of tax-exempt bonds. Federal law should not undermine the municipal securities marketplace, nor threaten the tax-exempt status of these investment instruments. The GFOA supports federal legislation that preseves the benefits of tax-exempt financing to state and local governments.
Adopted: May 20, 2003 - back to top
In the overall goal to improve issuer disclosure practices, the Government Finance Officers Association recognizes that the increase in the variety and types of state and local government issuers and obligations as well as the changing market for these obligations makes it desirable periodically to review Association policies, the first of which was adopted in 1974, on the disclosure of information and the role of the federal government and others in the disclosure process.
After such review, the Association reiterates its longstanding policy that any federal government involvement in state and local government disclosure practices should reflect the balance of power between states and the national government under our system of federalism. There should be no further direct or indirect federal involvement in state and local government disclosure practices beyond that which is required to fulfill the federal government's investor protection and antifraud responsibilities. Furthermore, there is and should remain a distinction between the federal government's role in these areas with respect to private, corporate entities and public, governmental issuers of securities.
In particular, the Municipal Securities Rulemaking Board (MSRB) should not be authorized to regulate state and local government issuers, either directly or indirectly. Nor should the Securities and Exchange Commission (SEC) seek to regulate the market access of state and local governments in the pursuit of financing their governmental purposes.
The Association's Disclosure Guidelines for State and Local Government Securities, which include guidelines for new offerings and continuing disclosure as well as procedural statements, contain recommendations that are widely followed by state and local governments and their advisors. The Guidelines, together with the activities of the Governmental Accounting Standards Board (GASB) in establishing standards of accounting and financial reporting for general purpose financial statements, have contributed to significant improvements in state and local government financial practices over the last three decades.
It is widely acknowledged that state and local governments comply with public meeting rules, Freedom of Information Act requests and other applicable state requirements and that the form and content of information already available to constituents with respect to state and local government obligations meet the needs of the securities market. Accordingly, it is the policy of the Association that neither the Securities and Exchange Commission nor any other federal government agency or organization sponsored by the federal government should adopt or expand any rule or regulation with respect to the form and content of information provided by state and local governments with respect to their securities.
It is the policy of the Association that a broad, national and efficient market in which to raise capital funds for public projects is vital to state and local governments. To that end, the Association supports efforts to enhance the timeliness of distribution and general availability of information in both the primary and secondary markets for municipal securities. The Association has historically and continuously demonstrated leadership on behalf of states and local governments as it has worked with GASB and others in the creation and evolution of reporting standards. This historical support includes the creation and evolution of the SEC Rule 15c2-12 directed Nationally Recognized Municipal Securities Information Repositories (NRMSIR) system for the collection and storage of disclosure information and for more efficient dissemination of information to the securities market.
Consistent with the Association's leadership on behalf of state and local governments, the Association supports evolution of the centralized collection, storage and dissemination of disclosure information provided by state and local governments in the following areas:
- All relevant information should be collected in various forms and formats and made available to all investors (institutions and retail alike) through a range of media.
- Information should be easily accessible and accuracy in reproducing information must be ensured.
- The costs of information storage and dissemination should be paid by market participants and should not be subsidized directly or indirectly either by the federal government or state and local governments.
- The collection, storage and dissemination of information by private vendors should be encouraged to be innovative, efficient and reduce costs.
Further, in keeping with the Association's leadership and to intercept direct and possibly unfavorable SEC action, the Association, along with other market participants, should continue to discuss more efficient methods for governmental issuers to use when filing their secondary market disclosure, as required under SEC Rule 15c2-12. A system that allows for electronic filing of documents to one location, versus physically mailing these documents to several separate entities, will be more cost effective to issuers, and will allow the marketplace to gather and use information in an easier format.
This new system should allow governmental issuers to have:
- A return receipt for submitted documents;
- Confidence that their submissions are accurately filed and equally available to the market, including retail investors;
- A tickler system that reminds governmental issuers when their annual filings are due;
- Access to capture their CUSIP (Committee on Uniform Security Identification Procedures) numbers, free of charge, and to use a uniform cover sheet with their filings;
- For a period of time or for a fee, the ability to submit their documents in paper form for a third party to convert into an electronic file;
- Cost sharing among participants, with minimal new cost to governmental issuers;
- Ongoing Association and issuer community input regarding the start-up and ongoing mechanics of such a system to ensure that the system is to assist governmental issuers with their filing needs; and
- No change to SEC Rule 15c-12 or other SEC or federal action that would impose greater disclosure requirements than what currently exist or than those required to ensure electronic filing by governmental issuers, and to permit and facilitate issuer filings at a single filing location. SEC actions, even to promote these two objectives, should be in a form as narrow as possible, avoiding changes to SEC Rule 15c2-12 whenever possible
Adopted: May 20, 2003 - back to top
Background. The Government Finance Officers Association has consistently defended the exemptlion of municipal bond interest from Federal and applicable state income taxation. This historic exemption from taxation of interest on state and local government bonds reinforces our nation's federal system and provides major advantages to communities across America, including:
- Lower costs to fund government infrastructure and services. Hindrance of state and local governments’ ability to fund vital public infrastructure and services through tax-exempt financing would require other methods of raising revenues to offset increased financing costs, (increased property, sales, and other local taxes), and/or a reduction in essential services;
- Tax-exempt financing grants state and local governments freedom from the uncertainties of the annual Congressional appropriations process in funding capital needs or any portion of their interest costs; and
- Efficient access to capital markets without delay or interference from the Federal government.
- Although the primary beneficiaries of a particular bond issuance are the citizens of the issuing community, the nation as a whole has a vital interest in maintaining adequate and safe public facilities to support a dynamic economy. The national interest is well served by keeping state and local government borrowing costs low, thereby providing an incentive for public investment in infrastructure.
- GFOA has opposed efforts that curtail the use and attractiveness of tax-exempt bonds. Congress has enacted measures, most notably in the late 1960s and in 1986 that placed severe restrictions on the use of tax-exempt bonds, and these laws continue to apply today. Additionally, many IRS regulations have been adopted that cause enormous administrative, and thus costly, burdens to those entities issuing tax-exempt debt.
Additionally, GFOA supports the following basic principles concerning federal tax laws and proposals that relate to tax-exempt financing:
- No federal tax should be imposed, either directly or indirectly, on the interest paid on state and local government obligations issued to provide services to the public. Examples of direct or indirect taxation are the imposition of the individual minimum tax on the interest on state and local obligations and the inclusion of tax-exempt interest in the income base of social security recipients.
- The GFOA opposes any federal legislation that diminishes the value or impairs the use of tax-exempt bonds. Federal law should not undermine the municipal securities marketplace, nor threaten the tax-exempt status of these investment instruments in any direct or indirect manner.
- The investment of bond proceeds at market rates for a reasonable period of time pending their application for the purposes of the bond issue is efficient financial management. Arbitrage is the term used to describe the interest earned on invested bond proceeds in excess of the interest being paid on the bonds. It reduces the cost of public projects by reducing the total amount of bonds outstanding for a project. State and local governments should not be penalized for practicing good financial management by being required to "rebate" such investment earnings on the proceeds of tax-exempt bonds to the U.S. Treasury or by the imposition of other restrictions. While current law dictates that local and state governments may not earn more interest on their bond proceeds than the interest rate of the bonds, we believe greater flexibility should be adopted, as arbitrage regulations are far too complicated and cumbersome, and increase debt issuance and administrative costs.
- The GFOA has long recognized the federal government's interest in preventing abusive tax-exempt bond transactions. However, the imposition of restrictions on tax-exempt bonds whose sole purpose is to achieve objectives totally unrelated to the proposed restrictions is an inappropriate use of federal regulatory power. Such restrictions would serve only to jeopardize state and local projects and increase project costs.
- Tax credit bond initiatives should be used to enhance the ability for local and state governmental entities to attract new capital, but should not be a replacement for nor be used in a manner that diminishes the value of tax-exempt bonds.
- Regulatory and enforcement action must take into account the costs incurred by local and state governments in complying with such actions.
The GFOA, in concert with other local and state government associations has long fought for changes in the Tax Code. We support the following initiatives, and encourage Congress and the Department of the Treasury to embrace these proposals when determining the content of tax reform measures as well as proposing new regulations or altering current regulations:
- remove or modify restrictions affecting the issuance of municipal bonds that are overly burdensome and costly such as the arbitrage rebate requirement, and do not make changes to the Treasury’s State and Local Government Securities (SLGS) program that would hinder its use and efficiency;
- recognize a new type of public-purpose, tax-exempt bond or eliminate current law restrictions on tax-exempt financing to permit and encourage public-private partnerships. Treasury should look to provide for greater flexibility of the 10% private use rule, to encourage public/private partnerships. Additionally, private activity restrictions should be relaxed for public use facilities (e.g., airports);
- create incentives for individuals and institutional investors to purchase municipal bonds;
- modify existing federal tax policies related to the alternative minimum tax;
- modify the bank interest deduction to attract a broader base of traditional investors--individuals, banks and corporations--to the municipal bond market;
- modify federal tax policies that impede the development and functioning of state bond banks and bond pools and other state credit assistance programs;
- ensure that federal government enforcement actions with respect to tax-exempt bonds are conducted fairly and are directed at the responsible party. Additionally, either through regulatory or legislative means, an independent system should exist for Issuers to access when they are in disagreement with decisions made by federal governmental entities (e.g., IRS, SEC), and
- allow for an additional advance refunding of bonds.
We believe that the federal government should work in partnership with state and local governments to achieve mutually beneficial outcomes, with minimum disruption to these entities and the tax-exempt bond marketplace. We continue to urge Congress, the US Department of the Treasury, and the Internal Revenue Service to engage in meaningful discussions with state and local officials about proposals and concerns they have in the tax-exempt bond marketplace, and always urge public hearings to be held on matters that impact local and state governments.
Adopted by GFOA membership, June 28, 2005. - back to top
(Replaces the 1968 policy - Industrial Development Bonds and the 1981 policy - Tax-Exempt, Small-Issue, Conduit Industrial Revenue Bonds)
Tax-exempt bonds are the primary source of funds for the traditional capital needs of state and local governments. The tax-exemption provides significant cost savings to state and local governments
through low interest rates related to the debt issued to fund those capital needs.
The GFOA defends the issuance of tax-exempt bonds when they are used for essential public purposes, including economic development efforts to address serious economic need.
For over 40 years, the GFOA has frequently expressed concern with the effect that a substantial increase in the supply of tax-exempt bonds for private use could have on interest rates that state and local governments must pay to finance government services such as transportation, education, and public utilities. While noting that various tax acts have imposed many restrictions on the kinds of private activity for which tax-exempt bonds may be issued, the GFOA still believes that the permitted use of tax-exempt bonds requires careful review.
The GFOA generally opposes the issuance of tax-exempt bonds that exclusively benefit private businesses. To the extent that tax-exempt financing is made available to private users, suitable restrictions remain necessary in order to limit these financings to essential public purposes.
The GFOA does support utilizing the tax exemption as part of a jurisdiction’s economic development strategy only as long as the issuance of tax-exempt bonds is used in conjunction with an economic plan that is developed in response to serious economic need determined by the issuer.
The GFOA opposes defining bonds that provide essential governmental services such as education, health care, airports, ports, water and sewer facilities, etc., as private activity bonds. These types of financings should be correctly categorized as governmental bonds. In addition, the private activity bond rules should not prevent state and local governments from taking advantage of the benefits of public/private partnerships.
Approved by GFOA membership: June 12, 2007. - back to top
Federal Home Loan Banks as Providers of Tax-Exempt Letters of Credit
Letters of credit (LOC) can be used to reduce the borrowing costs for state and local governmental issuers. LOC providers, typically banks and other large financial institutions, extend their financial strength to the issuer for a fee. This enables the issuer to achieve lower borrowing costs than if it offered securities through its own credit. LOCs can be particularly helpful as a source of liquidity for small issuers who do not have high bond ratings or large bond issuances. LOCs are also useful to issuers of every size as a mechanism to diversify access to the credit markets through large, well known institutions in order to place low cost variable rate securities such as variable rate demand bonds (VRDB) or commercial paper (CP).
The FHLB System is a government sponsored enterprise (GSE) consisting of twelve cooperatively owned nstitutions that are regulated by the Federal Housing Finance Board. Ownership of the individual FHLBs consists exclusively of banks, savings institutions, credit unions, and insurance companies. FHLB debt is not explicitly guaranteed by the federal government.
In 1984 Congress banned so-called “federal guarantees” of tax-exempt bonds but exempted a number of government sponsored enterprises (GSEs) who could issue LOCs including Fannie Mae, Freddie Mac and others. At that time, the FHLBs did not attempt to have themselves added to the exempt list for several reasons. First, these banks were not issuing many LOCs for tax-exempt bond transactions.1 Second, they did not believe that this type of transaction would be considered a federal guarantee since the federal government does not back the FHLB.
After banks who were members of the Federal Home Loan Bank System began issuing letters of credit, the IRS ruled that these letters of credit were considered federal guarantees. Thus, the FHLBs had to cease issuing LOCs, (and some transactions had to be reconfigured) in order to avoid jeopardizing the tax-exempt status of the bonds.
The Government Finance Officers Association supports legislation that would add the Federal Home Loan Banks System to the list of exempted government sponsored enterprises, thus allowing the Federal Home Loan Banks members banks to offer letters of credit to all tax-exempt bond issuers. More options in the guarantor market are beneficial for issuers and investors alike.
Recommended for approval by the GFOA’s Executive Board, February 22, 2008.
Approved by GFOA’s membership, June 17, 2008. - back to top
1 FHLB may offer letters of credits for taxable bonds and housing agencies return
In recent years, the U.S. Patent and Trademark Office has issued patents for various types of tax strategies. This phenomenon began after the U.S. Court of Appeals for the Federal Circuit issued its 1998 decision in State Street Bank & Trust Company v. Signature Financial Group Inc., holding that “business methods” were patentable.
The granting of a tax strategy patent means that no other party may use that tax strategy in a transaction without the permission of the patent holder, which often is granted only if a fee or “royalty” is paid to the patent holder for the use of the strategy. Use of the strategy without permission may result in the patent holder bringing an infringement action seeking damages or enjoining the use of the strategy.
In public finance, governments issue debt based on the parameters allowed in the U.S. tax code, securities laws, etc. If tax patents are issued on municipal bond strategies, issuers would have to safeguard themselves and call upon (and pay) counsel to perform extensive patent research, and possibly pay a royalty for issuing debt in a similar fashion to a patented transaction.
There is also concern that if patents become part of the public finance landscape, development of innovation and efficiencies created by evolving or developing financing techniques will be stifled.
The Government Finance Officers Association (GFOA) supports legislation that would prohibit the patenting of tax strategies or financing techniques. Without such legislation, state and local governments may be subject to greater issuance costs, possible penalties and patent litigation exposures, and could be precluded from executing their own transactions.
Recommended for approval by the GFOA’s Executive Board, February 22, 2008.
Approved by the GFOA’s membership, June 17, 2008. - back to top
Uniform Credit Rating Scales
Historically rating agencies have used different standards for rating municipal securities and corporate securities, resulting in ratings that lack uniformity. While the credit rating agencies acknowledge that the default rate of municipal securities of a given rating is a fraction of comparably rated corporate securities, in most cases municipal securities are rated lower than comparable corporate securities. Additionally, many municipal securities are backed by the full faith, credit and taxing power of the government, a trait not found in corporate securities.
The lack of uniformity between the two rating scales contributes to additional costs for bond insurance and excludes some municipal bonds from eligibility as money market mutual fund investments (under SEC Rule 2a7), which ultimately increases costs for taxpayers. Also, the lack of uniformity creates problems for crossover taxable investors (e.g., many retail investors, international investors and pension funds) to invest freely in the municipal bond market. A uniform rating scale system would better reflect the true risks of securities by recognizing the levels of financial management and transparency.
It is the position of the Government Finance Officers Association (GFOA) that ratings on municipal and corporate securities should be made on a uniform basis.
Passed by the GFOA’s Executive Board, June 23, 2008.
Approved by the GFOA’s membership, June 30, 2009. - back to top
For more than a year, the municipal bond market has suffered from unprecedented disruption due to the turmoil in the financial industry, the downgrading of the major financial guarantors, the dislocation between the Treasury market and all other credit markets and the freezing of the credit markets. This disruption is not related to the
soundness of the municipal securities themselves, or state and local governments. However, the disruption has caused difficulty for governments to access the market for new issuances or to restructure and refinance current debt.
The Government Finance Officers Association (GFOA) supports legislative and regulatory efforts that are focused on extending direct assistance to help state and local governments better access the municipal securities market. These include measures that would provide clear authority to the federal government to enhance market access and liquidity for state and local government issuers. As the federal government develops remedies for the municipal market, state and local governments need to be a partner in these discussions.
Recommended by the GFOA’s Executive Board, February 27, 2009.
Approved by the GFOA’s membership, June 30, 2009. - back to top
Due to the dynamic changes that have occurred in the municipal securities market since the Municipal Securities Rulemaking Board was created in 1975 to regulate broker/dealers, and due to the various federal and state investigations into the practices of municipal securities finance professionals, Congress is considering the need to regulate municipal securities finance professionals (e.g., swap advisors, investment brokers and
Such legislation is sought to ensure that there is a clear understanding of current regulations, that there are no gaps in regulations affecting municipal securities finance professionals, and that appropriate enforcement mechanisms are in place for municipal securities finance professionals.
The GFOA supports legislation to regulate municipal securities finance professionals. Additionally, if the governing body is the MSRB or another Self Regulatory organization, the composition of its board should include significant public representation.
Recommended for approval by the GFOA’s Executive Board, June 29, 2009.
Approved by the GFOA’s membership, June 30, 2009. - back to top
Opposition to Giving SEC Authority Over the Content, Timing and Frequency of State and Local Government Financial Statements and Disclosure Documents
In July 2012, the Securities and Exchange Commission (SEC) released its Report on the Municipal Securities Market, which lists various legislative and regulatory recommendations that would give the SEC greater authority over the municipal securities market.
Over the years, the Government Finance Officers Association (GFOA) has consistently and diligently worked with our members to encourage the development of comprehensive disclosure policies and practices to address perceived shortcomings relating to municipal disclosure. However, the GFOA has opposed, and continues to oppose, efforts by the SEC to expand its authority to regulate governmental accounting, financial statements and disclosure materials.
In its report, the SEC makes numerous proposals that would expand its current authority and supersede the authority, especially related to the development and oversight of governmental accounting standards that rests with the states. Furthermore, efforts to impose federally dictated content, timing and frequency of financial statements and disclosure materials, would breach the threshold of federalism and give the federal government unnecessary authority over state and local governments.
The GFOA reiterates its opposition to allowing the federal government to have authority, either by legislative or regulatory means, in the following areas:
1. The SEC should not set standards or interfere with the authority of an independent standard setting body to set standards related to a government’s financial information.
The authority to set standards related to the content of financial statements rests with the states that delegated that authority to the independent standard setter, the Governmental Accounting Standards Board. Any attempt by the SEC to replace state authority, directly or indirectly, will be vigorously opposed. While the GFOA recommends that governments complete their comprehensive annual financial report (CAFR) within six months of the end of its fiscal year, no completion timeline should be forced on governments through federal regulations.
2. The SEC should neither directly or indirectly impose standards related to municipal securities issuer’s disclosure documents, including, but not limited to, those relating to the timing, frequency, or content of those materials.
The GFOA opposes efforts to any – but especially unrealistic and unachievable – timeframes on issuers to complete their annual financial information that must be submitted to EMMA pursuant to its continuing disclosure agreement.
For a variety of reasons governments need to establish their own procedures for the content, timing and frequency of their disclosure materials. The GFOA opposes any efforts to rush issuers into meeting artificial deadlines that will only serve to give investors and the public less reliable information, or to dictate the type of information that should be included in these documents.
3. The SEC should not mandate that all governments follow GAAP, as established by GASB.
Some governments, including many smaller ones, do not follow GAAP, but do follow accounting standards under “Other Comprehensive Basis of Accounting” (OCBOA). The SEC’s proposals ignore the fact that OCBOA is recognized by the American Institute of Certified Public Accountants (AICPA) as an accepted form of accounting eligible for “clean” audit opinions under Generally Accepted Auditing Standards (GAAS) and should be recognized as such. Forcing all governments to use GAAP accounting will simply be an unfunded mandate on governments who can afford it the least, and create significant disruption to their government’s accounting practices. Furthermore, the AICPA not only recognizes the standards set by GASB, it is the official body that accepts them. The SEC does not need to make such a distinction that is already accepted in practice.
4. The SEC should not set standards related to the development, use and submission of interim financial information.
Financial information that goes beyond what a government states it will provide to the marketplace in its continuing disclosure agreement, is a determination that should be made by the issuing government, and not the federal government.
Governments produce extensive information throughout the year that is available in the public domain, including information related to its financial position and its budget status. GFOA’s Best Practices encourage governments to post this already prepared information on their web site, and include a link to this information on the EMMA web site.
The SEC’s recommendations also acknowledge best practice initiatives from marketplace participants. The GFOA continues to encourage its members to implement GFOA Best Practices, industry initiatives to develop and promote disclosure best practices, and continued interaction between regulators and market participants to highlight the importance of thorough disclosure practices.
Recommendations to alleviate liability risks that exist when a government includes projections and forward looking information in its financial documents is part of the SEC’s recommendations and is supported by the GFOA. Many governments have had counsel advise them against the posting of their financial information in the public domain due to the perceived liability risks. Having the SEC state that no such liability exists would help issuers and investors access timely financial documents.
The GFOA also supports the SEC’s recommendation for corporate-like disclosure standards on tax-exempt bonds issued for the private sector. Entities that use bond proceeds to benefit a private sector business, should be treated by the SEC as if the company itself had issued the bonds, and therefore would have to comply with corporate disclosure regulations. Finally, the GFOA is especially pleased with the SEC’s recommendation to address currently opaque price transparency practices.
Approved by the GFOA’s Executive Board, October, 2012. - back to top