Washington, DC Update – October 2015

House to Take Up Legislation Classifying Muni Securities as High Quality Liquid Assets

On October 28 the House Financial Services Committee will markup HR 2209, bipartisan legislation that would require federal regulators to classify all investment grade 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 new 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

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.  

The GFOA is urging our members to send letters to their congressional delegations and House Financial Services Committee leaders urging support for this bill.  A draft letter has been developed for your use which is available here.  Please reach out to your House members today and urge them to support HR 2209. 

GFOA Issues Policy Statement on the 40% Excise Tax on Health Plan Premiums

Governments continue to work resourcefully within constrained budgets to provide benefit plans that will attract and retain a quality workforce in order to compete against private sector wages and salaries. At the same time, state and local governments are also committed to working with federal policy makers to develop and support national health care reform initiatives that expand access to quality care and control the growth of health care costs. However, the 40% excise tax tied to the Patient Protection and Affordable Care Act has many state and local governments, as well as other major US employers, considering the costs of compliance as the 2018 implementation draws near.

The non-deductible excise tax on employer-sponsored health coverage that provides “high-cost benefits,” also known as the Cadillac tax, is a 40% excise tax on health plan premiums that cost more than $10,200 for individual plans and $27,500 for family coverage annually.  The amounts are the total premiums, which is generally paid in part by the employer and in part by the employee, as well as employee contributions to health savings accounts or flexible spending accounts, which many state and local governments use to complement employee health benefits plans. Despite an age and gender adjustment for employers with higher percentages of older workers and women, there is no adjustment for regional differences in health spending, which tend to drive health-care costs. Although the tax would nominally be levied on insurers, governments are concerned that it would be passed on to employers and, ultimately, to workers in the form of more expensive health care, and will increase as healthcare costs rise higher than inflation.

Also problematic is the federal government’s projected revenue stream from the excise tax. Early this year, the Congressional Budget Office (CBO) estimated revenue generated from this excise tax at $87 Billion. Twenty-five percent of this figure is accounted for by revenue received from the excise tax, while the rest ─ three-quarters, or $65 Billion ─ is generated from revenue received from increases in taxable wages. To reiterate, the CBO assumes that employers will decrease benefits and increase wages simultaneously.

For the reasons discussed above, the GFOA Executive Board took action at the September 25, 2015, meeting in Chicago and ratified the “GFOA Policy Statement on the 40% Excise Tax on Health Plan Premiums.” The Policy Statement commits the GFOA to working with federal policy makers to find adequate and appropriate funding to ensure the sustainability of expanded health care coverage resulting from the Affordable Care Act. In so doing, GFOA supports legislative efforts to repeal the 40% Excise Tax on Health Plan Premiums as well as alternative approaches that would mitigate the effect of the excise tax on state and local governments while preserving the authority of state and local governments to design and maintain health insurance arrangements that are tailored to the specific needs of the employers.

In the 114th Congress, several legislative efforts are gaining momentum. Two bills have been introduced and are now supported by a majority of the House members. Rep. Courtney’s (D-CT-2) Middle Class Health Benefits Tax Repeal Act of 2015 (HR 2050) and Rep. Frank Guinta’s (R-N.H.-1) Ax the Tax on Middle Class Americans’ Health Plans Act (HR 879)together have attracted the bi-partisan support of House cosponsors as of mid-September. HR 2050 has 160 cosponsors and HR 879 has 106 cosponsors. Eliminating the 7 duplicate cosponsors, there are 259 supporters of the repeal in the House. This number is just shy of the 290 needed for a veto-proof majority in the House, which is a significant milestone. 

On the Senate side in mid-September, Senator Heller (R-NV) and Senator Heinrich (D-NM) introduced the Middle Class Health Benefits Tax Repeal Act of 2015 which has 16 almost exclusively Republican cosponsors, while Senator Brown’s (D-OH) excise tax repeal legislation has 12 almost exclusively Democrat cosponsors. The challenge for all legislative efforts going forward will be to find adequate funding to support the successful efforts of the Patient Protection and Affordable Care Act and GFOA will be working with federal lawmakers in the coming weeks to inform them of the unique circumstances of state and local employers.

GFOA will be organizing advocacy materials for our members to use in engaging your federal elected leaders on the Cadillac tax, which will be available on our Federal Government Relations page in the coming weeks. 

GFOA Executive Board Approves New Best Practices

On September 25, 2015, GFOA’s Executive Board approved five new best practices and seven revised best practices, providing recommendations to government finance officers in the areas of accounting, budgeting, retirement benefits administration, capital planning, and debt issuance.

  • Understanding Your Continuing Disclosure Responsibilities. The Committee on Governmental Debt Management updated this best practice to alert issuers to the increasing attention of federal policy makers and investor advocacy organizations on improving disclosure for government bond issuers. The updated best practice emphasizing specific areas for issuers to make improvements is based on the SEC’s 2014 Municipalities Continuing Disclosure Cooperation Initiative (MCDC), as well as separate SEC enforcement cases, such as the 2013 case against the City of Harrisburg, PA, and the 2014 Allen Park, MI, case. The GFOA is firmly committed to helping issuers understand and meet their federal continuing disclosure obligations, and have updated this best practice to further that effort. 
  • Using Technology for Disclosure. Beyond updating this best practice to increase issuer awareness of federal regulatory efforts to improve issuer disclosure, the Debt Committee also wanted to alert issuers to improved uses of not only issuer websites but new features on the Municipal Securities Rulemaking Board’s (MSRB) Electronic Municipal Market Access (EMMA) system, which enable issuers to improve the flow of disclosure information to investors. Updates were also made to this best practice to advise issuers on concerns about using other digital communication platforms (such as social media) to transmit disclosure information to investors. 
  • Using Credit Rating Agencies. The Debt Committee developed this new best practice to provide guidance to governments about how to select and manage credit rating agencies. The best practice was organized to help finance officers navigate the ever changing landscape of credit rating methodologies, and alert governments to the key factors they should consider in hiring one or multiple rating agencies, the types of debt issues that may benefit from obtaining a credit rating, what an issuer should be prepared to do to maintain a credit rating, and guidance on terminating a relationship with a rating agency.
  • Defined Contribution Plan Fiduciary Responsibility. Recognizing many governments offer defined contribution retirement plans as a supplement to a defined benefit plan, or in some cases, as the sole employee retirement plan, this new best practice developed by the Committee on Retirement and Benefits Administration (CORBA) provides thorough guidance on a clear and well-documented governance structure to guide plan administrators, sponsoring entities, and governing bodies as they provide sound fiduciary guidance of the defined contribution retirement plan. 
  • Informing and Educating Employees about Retirement Benefit Adequacy. CORBA developed this new best practice to provide guidance to public-sector employers and plan administrators who have a responsibility to inform and educate employees about future retirement income in the context of the many variables that may compromise retirement benefit adequacy.
  • Adopting Financial Policies. The Committee on Governmental Budgeting and Fiscal Policy (Budget Committee) rewrote this best practice, which was last updated in 2001. The document recommends that governments formally adopt financial policies, and that emphasizes steps to consider when making effective financial policies include scope, development, design, presentation, and review. 
  • Determining the Appropriate Level of Unrestricted Fund Balance in the General Fund. This best practice is the result of the Budget Committee’s efforts to combine the existing Determining the Appropriate Level of Unrestricted Fund Balance in the General Fund and Replenishing General Fund Balance best practices. In the new version of the document, the GFOA recommends that governments establish a formal policy on the level of unrestricted fund balance that should be maintained in the general fund for GAAP and budgetary purposes. The Budget Committee recommends that such a guideline should be set by the appropriate policy body and articulate a framework and process for how the government would increase or decrease the level of unrestricted fund balance over a specific time period.
  • The Impact of Capital Projects on the Operating Budget. The Budget Committee prepared this new best practice following committee discussion about the analysis of operating impacts from capital, and the consensus opinion that such analysis is often deficient in practice. This is an indicator that practitioners are failing to understand the need, not effectively making the argument within their jurisdictions to include it, or lacking the tools and methodologies for calculating or showing the costs. To assist practitioners, this best practice recommends that governments discuss and quantify the operating impact of capital projects in their budget documents, and ensure that the impacts are identified on an individual project basis.  
  • Assessing Risk and Uncertainty in Economic Development Projects. GFOA’s Committee on Economic Development and Capital Planning (CEDCP) updated this best practice to better enumerate the steps in the risk assessment. The best practice recommends that governments recognize and evaluate risks related to participation in an economic development project before authorizing participation, and recommends that a project should not be undertaken if risks are determined to not be acceptable and cannot be mitigated.
  • Monitoring Economic Development Performance. CEDCP updated this best practice to bring greater emphasis on comparing the results of the project with the goals in order to provide more insight on the quality of the decision to authorize the project and to enable organizational learning from the decision. The best practice recommends that governments monitor economic development projects and program performance to ensure objectives established in an economic development policy are accomplished. The best practice notes that the finance officer plays a central, functional role in these efforts. 
  • Establishing a Comprehensive Framework for Internal Control. The Committee on Accounting, Auditing, and Financial Reporting (CAAFR) updated this best practice to reflect changes made to the Committee of Sponsoring Organizations’ (COSO) Internal Control—Integrated Framework from 1992. The COSO document, the most widely recognized source of guidance on internal control, was updated and expanded in 2013, and the GFOA recommends that state and local governments adopt the COSO’s Internal Control—Integrated Framework (2013) as the conceptual basis for designing, implementing, operating, and evaluating internal control. CAAFR also updated its Framework for Entity-wide Grants Internal Control best practice to be consistent with the expanded COSO publication. 

 

GFOA Releases White Paper on Green Bonds

Green bond issuance has generated significant recent attention as this market continues to expand. In 2014, there were 35 issuers of green bonds worldwide, totaling $36.6 billion in par amount, which is more than three times the 2013 volume of $10 billion. In the first quarter of calendar 2015, the global volume reported by the World Bank was $8 million. Green bond issuance by U.S. state and local governments represents less than 10% of these amounts. While green bond issuance has remained flat so far in calendar 2015, market growth is expected to continue as investors look for environmentally focused investment opportunities and issuers look toward projects that share the same sensibilities. 

This month the GFOA released a white paper on green bonds as a primer and to help issuers understand the general characteristics, costs, risks, and benefits of entering into a such transactions. The paper, developed by the Committee on Governmental Debt Management, provides considerations for issuers contemplating the use of green bonds, such as project eligibility, use of proceeds, securing an independent opinion affirming the “green” qualifications of such projects, reporting obligations, and pricing.  The new white paper is available here.