Washington, DC Update – August 2016

August Recess is Here! Are you Ready?

Throughout the month of August your congressional delegation typically puts business on hold in Washington D.C. and heads home. The “August Recess” is designed to give members of Congress and their staff some time to reorient, so it’s one of the very best times for constituents to meet with their members of Congress. Your advocacy during this period of time means the most because it allows Congressional members to come face-to-face with the impact of federal preemption legislation, especially because of the deep fiscal impacts this has on municipal bond issuers within their districts. In the next several weeks, please consider meeting with your Senator or Representative and discussing the key 2016 issues below.

What are our issues?

Bank-Qualified Debt Legislation

Bank-qualified bonds were created in 1986 to encourage banks to invest in tax-exempt bonds from smaller, less-frequent municipal bond issuers, and to provide municipalities with access to the lower cost borrowing that they need in order to provide services and invest in schools, roads, bridges and other projects.  Governments issuing $10 million or less in bonds per calendar year can designate those bonds as bank-qualified, which allows them to by-pass the traditional underwriting system and sell their tax-exempt bonds directly to local banks. But since bank-qualified bonds were created in 1986, the program’s $10 million cap has not kept pace with inflation or the cost of labor, land and materials associated with most public infrastructure projects. Increasing the cap to $30 million not only brings the program into the modern age but also enables governments to increase the amount of bank-qualified bonds they can issue and realize corresponding cost savings.  For example, a 25–40 bps cost savings on a 15-year, $30 million bond at current interest rates ranges from $696,000 to $1.1 million. Below are the exact messages we encourage members to convey to their Congressional representatives:

      • Senator, SUPPORT & COSPONSOR S3257, the Municipal Bond Market Support Act of 2016
      • Representative, SUPPORT & COSPONSOR HR2229, Municipal Bond Market Support Act of 2015

Preservation of the Tax Exemption on Municipal Bonds

On November 8, 2016, voters across the United States will not only elect a new president, but also fill 34 Senate seats and all 435 House seats. On the brink of a tumultuous election season, Congress has begun preparing for the next president’s term. Moving into the 115th Congress, elected officials are thinking about which proposals will make a significant impact in the post-election season. Now is the time for state and local governments to make sure Congress understands the issues that are of crucial importance to their communities—such as preserving the tax exemption on municipal bonds. The tax exemption on municipal bonds is an essential tool for jurisdictions across the United States for the creation and maintenance of infrastructure. Below is recommended language that members may use to communicate with your Congressional representatives:

      • Senator and Representative: 1) It is essential for my jurisdiction that you preserve this critical public financing tool to promote job creation and improve the nation’s infrastructure; and 2) we request that you ensure that state and local governments retain the authority to set their own tax policies. 

What can I do?

Step #1: Figure out where your Congressional member will be during August. It is not uncommon for your member to travel around the district while home. Be sure to ask to set an appointment with him or her, preferably when you can get to sit down in a relaxed setting. Here is a link that will direct you to your Senators’ and Representative’s local contact information.

Step #2: Draft an Op-Ed and send it to your local newspaper. Your local paper is an extremely powerful mode of communication to your representative. An Op-Ed articulating your position on current legislation will be widely distributed for your entire district to read. In our suite of advocacy materials available on gfoa.org, we have information that can help you craft a general message, but make sure to emphasize the infrastructure unique to your jurisdiction.

Step #3: If you schedule an appointment with your member or his or her staff, or if you plan to see your member at a local event, glance at the talking points available here for Bank-Qualified Debt and here for the preservation of the tax exemption, and feel free to add in as many district-specific descriptive details as possible.

Please let Emily Brock, director of the Federal Liaison Center, know if you need any additional information when the Op-Ed goes to print and if you do have a discussion with your member. We look forward to working with you during the August Recess.

S&P Releases MCDC Settlement Commentary

On August 15, 2016, S&P released commentary discussing the potential impacts to muni credit from a continuing-disclosure settlement. The commentary explains that the credit rating agency does “not expect the settlements themselves to translate into rating downgrades if settling issuers respond with proactive approaches to addressing any identified deficiencies in their disclosure practices.” The commentary also describes how the second-round issuer settlements will be focused on management practices and the capabilities of the management team, as opposed to the underwriter settlements issued in the first round which required external oversight and civil penalties. As management practices are a part of the broader rating criteria, S&P acknowledged that the issuer settlement will be taken as a part of the credit analysis and thus do not expect significant volatility if there are disclosure deficiencies identified. See the commentary here.

Senate-side High Quality Liquid Assets Legislation

On February 1, 2016, the House of Representatives voted unanimously to approve HR 2209, bipartisan legislation that would require federal regulators to classify all investment-grade, liquid and readily marketable municipal securities as High Quality Liquid Assets (HQLA).  This important legislation is necessary to amend the Liquidity Coverage Ratio rule approved by federal regulators last fall. The rule classifies foreign sovereign debt securities as HQLA while excluding investment grade municipal securities in any of the acceptable investment categories for banks to meet new liquidity standards!

Some members of the Senate Banking Committee are seriously considering the introduction of companion legislation to HR 2209. GFOA is urging members to send letters to Senate members asking them to sign on as cosponsors of the bill, ESPECIALLY those from the following jurisdictions.  A draft letter has been developed for your use, which is available here.

Richard Shelby Chairman (R-AL)

Mike Crapo  (R-ID)

Bob Corker (R-TN)

David Vitter (R-LA)

Patrick J. Toomey (R-PA)

Mark Kirk (R-IL)

Dean Heller (R-NV)

Tim Scott (R-SC)

Ben Sasse (R-NE)

Tom Cotton (R-AR)

Mike Rounds (R-SD)

Jerry Moran (R-KS)

Sherrod Brown Ranking Member (D-OH)

Jack Reed (D-RI)

Charles E. Schumer (D-NY)

Robert Menendez (D-NJ)

Jon Tester (D-MT)

Mark R. Warner (D-VA)

Jeff Merkley (D-OR)

Elizabeth Warren (D-MA)

Heidi Heitkamp (D-ND)

Joe Donnelly (D-IN)





In September of 2014 the Federal Deposit Insurance Corporation (FDIC), the Board of Governors of the Federal Reserve System and the Office of the Comptroller of the Currency (OCC) approved a rule establishing minimum liquidity requirements for large banking organizations. The liquidity coverage ratio rule was designed to ensure that large banks maintain liquid assets that can easily be converted to cash during times of national economic crisis. The rule identifies High Quality Liquid Assets (HQLA) to meet this requirement, but fails to include municipal securities in any of the acceptable investment categories (despite including foreign sovereign debt!). 

Following approval of the new rule, the GFOA and our state and local association partners have urged the Federal Reserve, FDIC and OCC to amend the rule to classify investment-grade, liquid and readily marketable municipal securities as HQLA. On May 21, 2015, the Federal Reserve Board issued a proposed rule that would designate certain investment grade municipal securities as HQLA. While the GFOA is extremely grateful for the Federal Reserve’s recognition of the liquidity features of municipal securities, we have some concerns with the proposal, which we raised in our comment letter. Such concerns include the proposal’s failure to include revenue bonds as HQLA, and the limit on the total amount of general obligation (GO) securities that a financial institution can hold of no more than 5 percent of the institution’s total amount of HQLA.

Meanwhile the FDIC and OCC refuse to modify the rule for municipal securities. In the absence of cooperation from these agencies, the GFOA is working with bipartisan champions in Congress to change the rule through legislation (HR 2209) and preserve low-cost infrastructure financing for state and local governments and public sector entities.
Not classifying municipal securities as HQLA will increase borrowing costs for state and local governments to finance public infrastructure projects, as banks will likely demand higher interest rates on yields on the purchase of municipal bonds during times of national economic stress, or even forgo the purchase of municipal securities. The resulting cost impacts for state and local governments could be significant, with bank holdings of municipal securities and loans having increased by 86 percent since 2009.