GFOA Releases Alert to Governments on SEC MCDC Initiative
Following three rounds of settlements with underwriters and broker dealers under the Securities and Exchange Commission’s (SEC) 2014 Municipalities Continuing Disclosure Cooperation (MCDC) Initiative, the SEC’s Enforcement Division has begun reaching out to government debt issuers who participated in the program. As issuers receive calls and settlement proposals from the SEC in the coming weeks, the GFOA wants to alert members who participated in the initiative that they may have very little time to agree to settlement terms once those terms are offered by the SEC’s Enforcement Division. To assist issuers prepare, the GFOA developed this alert, which is available on the GFOA homepage.
U.S. House Approves Bill to Classify Muni Securities as High Quality Liquid Assets
On February 1 the House voted 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, which 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.
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% since 2009.
The GFOA has been leading advocacy efforts to support this legislation and sincerely thanks Representatives Luke Messer (R-IN) and Carolyn Maloney (D-NY) for their leadership in advancing this important bill, as well as all of our members who sent letters to their federal elected leaders urging support for this bill. Our attention now turns to the Senate, where we are working with a group of bipartisan Senators to introduce a Senate companion bill to HR 2209. Stay tuned.
GFOA Unveils Bank-Qualified Debt Resource Center
This week the GFOA unveiled a new resource center to help local governments support HR 2229, the Municipal Bond Market Support Act of 2015, legislation to increase the bank-qualified debt limit from $10 million to $30 million. 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 those municipalities issuing $10 million or less in a calendar year with access to lower-cost borrowing.
Selling bank-qualified bonds directly to banks decreases debt issuance costs for governments by an estimated 25−40 basis points (bps) for a couple of reasons: (1) smaller, less-frequent issuers do not have to pay higher yields to investors due to investor unfamiliarity with the issuer’s jurisdiction, and (2) bank-qualified debt issuers do not have to pay transaction costs associated with traditional bond sales. A 25−40 bps cost savings on a 15-year, $10 million bond at current interest rates ranges from $232,000 to $370,000. This is a substantial savings!
Why should you support increasing the cap on bank qualified bonds?
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.
The GFOA is urging members to write to their member of Congress today and ask that they cosponsor HR 2229. A draft letter has been developed for your use which is available here.
State and Local Governments Lose Long-Fought Battle Against Federal Preemption
Despite strong sustained opposition from GFOA and local government associations, Senate leaders announced a legislative “deal” that would compromise local governments’ ability to deliver essential services to our communities. Under the deal that occurred on February 10, Senators dropped their objections to the inclusion of the Permanent Internet Tax Freedom Act (ITFA) in the Trade Facilitation and Trade Enforcement Act conference report (HR 644) and approved the legislation in exchange for a commitment from Senate majority leadership to provide floor time for a discussion on the Marketplace Fairness Act (MFA) later this year.
This deal permanently removes local tax policy control on telecommunications services in exchange for mere consideration of MFA, with no guarantee as to the outcome.
Although this deal is new, ITFA has long legislative history. For nearly 15 years, the GFOA has pressed Congress to lift the temporary moratorium on states and their local governments to raise revenue that would supplement the costs borne by local governments, including expanding infrastructure used to facilitate the expansion of broadband fiber. The ITFA moratorium that was originally intended to protect the then-nascent internet industry of 1997 is now not only permanent, but also over four years lifts the clause that protects seven states’ grandfathered ability to collect these revenues. Once enacted this year, this legislation will essentially exempt an entire, and enormously fast-growing and prosperous sector of the economy – the telecommunications and cable industries – from state and local taxation.
Turning our sights to the other side of the bargain, it is now more important than ever to communicate with members of Congress the considerable importance of passing MFA. Although there is no indication of when MFA will be called up for discussion on the floor of the Senate, the GFOA’s Federal Liaison Center will continue to urge Congress to support any efforts to advance legislation that would finally bring federal law into the digital age by enabling state and local governments to collect sales taxes on online purchases that are already owed. To help you with this outreach, please feel free to visit and use materials on the Marketplace Fairness Act Resource Center.