2007 Headlines from The Bond Buyer...
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December2007
Legislation: Senate Approves Compromise Bill Providing AMT Relief for One Year
Posted on Monday, December 10, 2007
Source: Bond Buyer
By Alison L. McConnell
Legislation: No CREBs From House
Posted on Wednesday, December 19, 2007
Source: Bond Buyer
By Humberto Sanchez
Finance Committee Members Propose Extra Private-Activity Cap Expansion
Posted on Thursday, December 20, 2007
Source: Bond Buyer
By Peter Schroeder
Legislation: House Approves $555B Omnibus Spending Package for 2008
Posted on Thursday, December 20, 2007
Source: Bond Buyer
By Humberto Sanchez
Private-Activity Bonds: PAB Cap Boosted To $28.48B
Posted on Thursday, December 27, 2007
Source: Bond Buyer
By Andrew Ackerman
OutLook 2008: Congress to Return With Full Agenda
Posted on Wednesday, December 26, 2007
Source: Bond Buyer
By Alison L. McConnell
Legislation: Senate Approves Compromise Bill Providing AMT Relief for One Year
Posted on Monday, December 10, 2007
Source: Bond Buyer
By Alison L. McConnell
In a bipartisan vote of 88 to 5, the Senate late Thursday passed compromise legislation that would provide one-year relief from the alternative minimum tax, without extensions of public finance provisions or revenue-raisers that would pay for the bill.
Action on the AMT thus swung back to the House, which was not in session Friday. Ways and Means Committee chairman Charles Rangel, D-N.Y., at press time was working behind the scenes to add offsets to the bill, which would require the Senate to overcome deeply ingrained Republican opposition to revenue-raisers counterbalancing AMT relief. The legislation no longer includes a set of "extender" measures that would renew the qualified zone academy bond program and the optional deduction for state and local sales taxes for another two years.
Exemption levels for the alternative minimum tax, which applies to interest earned on private-activity bonds and some governmental and 501(c)(3) bonds, were not indexed to inflation when the tax was created in 1969. Since then, Congress has passed a series of "patches" to keep the tax from applying to most middle-income taxpayers. More than 20 million additional taxpayers will become subject to the AMT for the 2007 tax year if a patch is not enacted this month.
This year, action on the AMT has been complicated by the Democrat's pay-as-you-go rules, which require new provisions to be paid for by revenue-raising measures such as new taxes. Republican leaders say AMT relief should not be offset because the tax was never intended to apply to so many taxpayers.
As the patch debate has dragged on, Treasury Department and Internal Revenue Service officials have repeatedly warned that late action will wreak havoc on filings for the 2007 tax year.
Treasury Secretary Henry Paulson, on Friday reiterated those concerns, urging the House to enact the Senate-passed patch.
"I thank the Senate for passing a bill that prevents 21 million Americans from paying the alternative minimum tax this year, and that does not raise other taxes," Paulson said. "It is imperative that the House approve this and send it to the president without delay. We are only weeks away from the time when taxpayers can typically file their returns and will expect millions of dollars in refund checks quickly. The longer it takes to put this AMT patch into the law, the greater the delay in the filing season and those refunds."
But House Democratic leaders so far have not shown any willingness to consider a patch without offsets, which was the key hang up in the Senate. The House passed a fully offset bill earlier this year.
Rangel said late Thursday that he applauded Senate Majority Leader Harry Reid, D-Nev., and Finance Committee chairman Max Baucus, D-Mont., for "their attempts to bring responsible AMT legislation before the Senate for an up or down vote."
Rangel said he was drafting amendments to the Senate patch to address the political opposition in that chamber, and said the House will consider those amendments to "give the Senate another chance to do the right thing and pass responsible AMT relief." He also acknowledged last week that the tax extenders may not get approved by the end of the year.
Meanwhile, Senate Democratic leaders failed Friday to obtain the necessary 60 votes for cloture to limit debate on the energy bill that the House approved Thursday, raising the possibility that the measure will not make it out of Congress before the lawmakers go home for Christmas.
The bill would authorize the issuance of $5.5 billion of taxable, tax-credit bonds, which provide holders with income tax credits in lieu of tax-exempt interest payments. But Senate Republicans and President Bush, who has threatened to veto the bill, are opposed to provisions that would roll back $13 billion in subsidies for the oil and gas industry.
Lynn Hume contributed to this story.
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Legislation: No CREBs From House
Posted on Wednesday, December 19, 2007
Source: Bond Buyer
By Humberto Sanchez
The House yesterday sent President Bush energy legislation after dropping tax provisions supported by municipal utility operators that would have authorized the issuance of $2 billion of taxable tax-credit bonds.
"It is unfortunate that the tax package was not added to the bill," said Joe Nipper, senior vice president for government relations with the American Public Power Association, which lobbies Congress on behalf of the municipal power industry.
Nipper said that APPA will continue to push for the bond provisions, which were part of a tax package that was dropped from the broader energy bill after it failed to win support in the Senate last week.
"We think that Congress will find a way next year to approve that tax package in some fashion because the programs in the package are vital to our ability to address climate change," Nipper said.
Under the energy tax package, public power providers, electric cooperatives, and states and localities would have been authorized to issue up to $2 billion of a new type of clean renewable energy bond. CREBs were created in 2005 and Congress has authorized $1.2 billion of them to date. The bonds, which would provide the holder with an income tax credit in lieu of tax-exempt interest payments, would have differed from previous CREB authorizations, which were divided between governmental entities and electric cooperatives with no separate category for public power utilities.
House approval of the measure, which would raise fuel-economy standards for automobiles and light trucks and mandate increased use of biofuels, including ethanol, came after the Senate passed the bill last week. The House passed the bill by a 314-to-100 vote. The Senate approved the bill by an 86-to-8 vote after stripping out the tax package. Bush is expected to sign the bill.
Meanwhile, a mammoth 3,500-page, $516 billion fiscal 2008 omnibus-spending package the Senate began debating yesterday includes a $360 million cut to a wastewater infrastructure loan program.
The wastewater state revolving loan fund program would receive $638 million under the package, less than the $1 billion the program obtained in fiscal 2007 and $1 million above the amount called for in the president's 2008 budget request. The wastewater SRFs provide low interest loans to local governments and operators of sewer and wastewater facilities to build and maintain infrastructure. The SRFs are funded each fiscal year by Environmental Protection Agency grants, and several states leverage their programs by issuing tax-exempt bonds. A similar SFR program for drinking water would receive $842 million under the bill, the same amount proposed by Bush and slightly more than the $837 million it received in 2007.
The omnibus legislation includes funding for all but defense-related federal programs. The Senate had not approved it at press time but was expected to later in the evening. The Senate was also expected to add $70 billion to the measure that would fund the wars in Afghanistan and Iraq. Currently, the bill, which was passed by the House Monday evening, only contains $31 billion for military operations in Afghanistan. The change would require that the bill go back to the House for approval before being sent to Bush, who has said he would sign it with the addition of the Iraq funding.
Action on the omnibus bill comes after Bush had threatened to veto any of the appropriations bills that would spend more than he recommended in his fiscal 2008 budget proposal. After failing to reach a compromise with the president, House and Senate Democratic leaders decided to draft a massive spending bill that hewed close to Bush's spending cap in order to finish their work. The fiscal year ended Sept. 30 and Congress has enacted temporary funding legislation three times, and the latest stopgap expires midnight Friday.
"It is time to govern," Sen. Robert Byrd, D-W.Va., chairman of the Appropriations Committee, said during debate on the bill, adding that the White House has underfunded most domestic programs. "Working together across the aisle we have cut $17.5 billion [from the omnibus]. As a result, domestic programs receive only a 3% increase. I am not pleased with this outcome, but I urge all senators to support the consolidated bill."
For transportation, the omnibus bill included $40.2 billion for highway construction and $9.4 billion for transit programs. The funding for road building would be $1.1 billion above the amount provided in 2007 and $631 million above the president's proposal, according to the House Appropriations Committee. House and Senate appropriators originally wanted to provide $9.65 billion for transit programs, but the figure was scaled back to help get down to the Bush's spending cap.
Federal highway and transit construction funds are generated from the federal gas tax. The revenues are collected into a pool, known as the highway trust fund, and are distributed to states annually based on a formula. States sometimes use the revenue to back tax-exempt bonds issued to finance transportation projects.
The bill also included $3.5 billion for the Federal Aviation Administration's airport improvement program, which provides grants to airports to fund improvement projects. The AIP funding is equal to what was provided in 2007 and $765 million above the Bush request. AIP grants are sometimes used to back tax-exempt bonds, but more often augment other funding sources, such as other state and local grants.
Amtrak would receive $1.3 billion under the compromise bill, which would be $31 million over the 2007 amount, and $394 million over the president's funding recommendation.
For housing programs, the bill would provide $16.4 billion for tenant-based Section 8, which includes $14.7 million for Section 8 contract renewals. The $16.4 billion figure is $400 million over the White House-requested figure of $16 billion, which included $14.4 billion for contract renewals. Congress provided $15.9 billion for fiscal 2007, including $14.4 billion for renewals.
The Department of Housing and Urban Development's Section 8 program helps the poor, elderly, and disabled pay for rental housing. State and local housing finance agencies sometimes use Section 8 vouchers and contracts to help back bonds issued to finance the construction of multifamily housing projects.
HUD's community development block grant program would receive $3.6 billion under the bill. The figure is $117 million over what was provided in 2007 and $822 million more than sought by Bush. The CDBG program provides grants to state and local governments to help fund economic development projects.
The bill would also provide $609.9 million in federal funds to the District of Columbia. The figure is more than the $597 requested by Bush and the $590 million provided for 2007.
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Finance Committee Members Propose Extra Private-Activity Cap Expansion
Posted on Thursday, December 20, 2007
Source: Bond Buyer
By Peter Schroeder
Three Senate Finance Committee members this week proposed that Congress expand upon the Bush administration's proposal to increase the private-activity bond volume cap to allow state and local housing finance agencies to issue tax-exempt bonds to fund subprime mortgage refinancings.
The administration has told lawmakers it wants a $15 billion increase in the cap spread over a three-year period that is specifically devoted to subprime mortgage refinancing, according to market sources.
But Sen. Charles Schumer, D-N.Y., said in a speech yesterday before the Brookings Institution that he plans to soon propose legislation to provide a higher increase in the cap and to allow tax-exempt private-activity bonds to be used for multifamily housing as well.
Schumer's proposal would provide a $20 billion expansion of the cap over the first two years, during which time the funds would be available for new single and multifamily housing as well as refinancings. After the first two years, the bill would increase the volume cap by $3 billion each year on a permanent basis and would limit the use of the bonds to new mortgages.
Schumer's proposal came one day after Sen. John Kerry, D-Mass., and Sen. Gordon Smith, R-Ore., introduced a bill that would change the administration's proposed cap increase to provide more immediate funds and to allow them to be more broadly used. The Kerry-Smith bill would provide all $15 billion of new cap in 2008, but would allow it to be carried over into future years, and would allow the bonds to be used both for first-time homebuyer mortgages and any single-family refinancings.
In addition, the bill would exempt all bonds issued after Dec. 31 of this year and before Jan. 1 of 2011 from the alternative-minimum tax. The administration's plan would only exempt bonds used for subprime mortgage refinancings from the AMT.
Barbara Thompson, executive director for the National Council of State Housing Agencies, praised both bills.
"We applaud both efforts and thank Sens. Schumer, Kerry and Smith for their leadership. They clearly understand that a housing bond cap increase is necessary not only to address the subprime crisis, but also to respond to states' persistent and ever-growing affordable housing needs," she said.
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Legislation: House Approves $555B Omnibus Spending Package for 2008
Posted on Thursday, December 20, 2007
Source: Bond Buyer
By Humberto Sanchez
The House yesterday approved a massive $555 billion fiscal 2008 omnibus spending package that would fund all non-defense federal programs, including $40.2 billion for highway construction and $9.4 billion for transit programs.
House action on the bill, which passed by a vote of 272 to 142, followed Senate approval of the legislation late Tuesday night by a 76 to 17 vote after adding $70 billion for the wars in Iraq and Afghanistan. The bill now goes to President Bush for his signature.
Enactment of the omnibus bill would mark the end of a bitter battle between congressional Democrats and the Bush administration over domestic spending. Democrats had initially sought to spend $22 billion over the total funding level included in Bush's fiscal 2008 budget proposal.
Bush subsequently threatened to veto any of appropriations bills that would spend more than his spending cap. After the White House rebuffed Democrats' attempts to negotiate, the lawmakers eventually agreed to reduce spending down to Bush's limit.
The hefty 3,500-page omnibus would provide $609.9 million in federal funds to the District of Columbia. The measure also eliminated a roughly $92,000 pay raise for chief financial officer Natwar Gandhi that the mayor and the District Council agreed to earlier this year in order to keep Gandhi from being hired away by Amtrak. The pay cut comes after two employees with the city's tax office and others have been charged with stealing more than $20 million dollars in fraudulent property tax refunds in a scandal that may date back to 1990.
Other transportation programs funded in the bill included $3.5 billion for the Federal Aviation Administration's airport improvement grant program, and $1.3 billion for Amtrak. The bill also includes a one-year ban on the tolling of existing interstate highways in Texas. Another provision would extend funding for the FAA programs through the end of February in order to give lawmakers additional time to replace the current law, which expired on Sept. 30, the end of the fiscal year.
For housing, the bill would provide $16.4 billion for tenant-based Section 8, which helps the poor, elderly, and disabled pay for rental housing. State and local housing finance agencies sometimes use Section 8 vouchers to help back bonds issued to finance the construction of multifamily housing projects.
Meanwhile, about 23 million additional taxpayers will not have to pay the alternative minimum tax for the 2007 tax year under a one-year "patch" the House approved yesterday by a 352 to 64 vote.
The bill, which did not include any provisions to pay for the $50 billion that the patch is estimated to cost over a 10 year-period, now goes to Bush, who is expected to sign the legislation into law.
The AMT, which applies to interest earned on private-activity bonds, as well as some governmental and 501(c)(3) bonds, is designed to target high-income households, which are eligible for so many tax breaks that they pay little or no taxes. However, the AMT is not indexed to inflation, so more taxpayers become subject to it each year. AMT relief was in effect for the 2006 tax year, but expired on Sept. 30.
The Senate approved the AMT patch with no revenue raising offsets earlier this month. House passage of the bill came after House Democratic leaders twice rammed through offset AMT legislation, largely paid for by new taxes on high-income individuals. But Senate Republicans, who opposed paying for an AMT patch with new taxes, blocked the legislation. Tax lawmakers yesterday said they hope to enact a permanent offset next year.
"We hope we can pass this suspension and then maybe the House and Senate can deal with this more permanently next year," House Ways and Means Committee chairman Charles Rangel, D-N.Y., said yesterday during debate on the bill.
Also yesterday, Bush signed into law a bill that would raise auto fuel efficiency standards. He lifted a veto threat on the measure after Congress jettisoned the bill's tax package, which authorized of $5.5 billion of tax credit bonds. Supporters of the tax provisions expected Congress to try to enact the tax package next year.
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Private-Activity Bonds: PAB Cap Boosted To $28.48B
Posted on Thursday, December 27, 2007
Source: Bond Buyer
By Andrew Ackerman
New population estimates, coupled with an inflation adjustment for 21 states and the District of Columbia, will boost the amount of private-activity bonds that can be issued nationwide in 2008 to $28.48 billion - a 1.03% increase over the $28.19 billion allowed this year.
Of the $295.44 million increase in the 22-year-old state-by-state volume cap, about $166.52 million was prompted by a 0.74% rise in the U.S. population from a year ago, while $128.92 million was triggered by a cost-of-living adjustment for states with smaller populations.
The annual increase in the 2008 cap comes as the Census Bureau this morning formally releases its new estimate of the nation's population for 2007, showing it rose by about 2.22 million residents to about 301.6 million from the figures released a year ago.
The boost in the volume cap for next year also comes after the Internal Revenue Service issued a revenue procedure last month that said as of Jan. 1, an inflation adjustment in the cap would give the smaller-population states an increase in their underlying caps for the second year in a row.
Specifically, the adjustment will allow the 21 smaller-population states and the District of Columbia to issue $262.095 million each in 2008, up from 2007's $256.235 million cap.
Meanwhile, the per-resident limit for the 29 large-population states will remain steady at $85 per resident for the second year in a row.
The IRS adjusts states' private-activity bond volume caps each year using the consumer price index for the 12-month period ending Aug. 31 that is compiled by the Labor Department, and the estimates of the states' populations as of July 1 that is prepared by the Census Bureau.
The cap's overall 1.1% increase for 2008 is well below the 6.6% jump for 2007, when the per-person cap was raised to $85. The 1.1% gain is similar to the 1.4% rise for 2006 when the overall cap was held at $80 per person.
Six large-population states received volume cap decreases - Connecticut, Michigan, New Jersey, New York, Ohio, and Pennsylvania - after populations declined in their 2007 estimates.
Of those states, New Jersey and Michigan posted the largest volume cap declines. New Jersey's fell 0.44% to $738.3 million while Michigan's fell 0.24% to $856.1 million. The other declines were much smaller.
Hawaii, Maine, Rhode Island, Vermont, and West Virginia also lost population compared to the year-ago estimates, but their volume caps all rose because of the rise in the small-population state minimum.
Based on the inflation adjustment and using the new 2007 population estimates, California, with a population of 36.55 million, once again will have the largest private-activity bond volume cap next year: $3.107 billion, up about $8 million from this year.
Texas, which gained some 400,000 residents from last year's estimate, will have the second largest cap of $2.032 billion, up $33.71 million.
Meanwhile, New York, with a population of 19.297 million, will again be third with a cap of $1.640 billion, though its cap is down by about $700,000 from this year.
Other states with $1 billion or more in volume caps are: Florida, $1.551 billion, up $13.7 million; Illinois, $1.092 billion, up $1.75 million; and Pennsylvania, $1.057 billion, down about $666,000.
Wyoming, with just 522,830 residents - an increase of about 7,800 from last year's estimate - remains the smallest U.S. state, but will receive the minimum cap of $262.095 million in 2008. The District of Columbia, which had recently gained population after years of declines, registered another increase of about 6,800 residents for a total of 588,292. Like the other small-population states, it will receive the new minimum cap of $262.095 million.
Arizona posted the largest percentage increase to its volume cap, 2.8%, spurred by a population that grew by about 170,000 to 6.34 million. The increase means that the state's volume cap will increase next year to $538.794 million from $524.137 million.
Annual adjustments to state private-activity bond volume cap levels are required by a tax law change enacted by Congress in 2000. The change raised the cap over a two-year period from its original level of the greater of $50 per resident or $150 million per state set under the Tax Reform Act of 1986 to the larger of $75 per capita or $225 million per state starting in 2002.
Beginning in January 2003, the cap was indexed for inflation. Rising costs drove up the per resident cap to $80 in 2004, and while inflation rose in the subsequent two years, it did not rise enough to trigger an increase to $85 per capita until this year.
Federal law stipulates that the per-capita volume cap must be raised in multiples of $5 and the per-state minimum must be increased in multiples of $5,000. The per-capita and per-state minimum must subsequently be rounded to the nearest $5 or $5,000 interval each year.
Last year's inflation calculation brought the per-resident cap for the 29 large-population states to $85.41, which bumped the cap from $80 to $85.
For the cap to rise to the next level of $90, inflation would have to rise enough to push the cap to $87.50 - a level that would allow it to be rounded up to $90. Since inflationary pressures have been subdued in recent months, it is not clear whether costs will rise enough to trigger an increase in the per-resident cap next November.
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OutLook 2008: Congress to Return With Full Agenda
Posted on Wednesday, December 26, 2007
Source: Bond Buyer
By Alison L. McConnell
Lawmakers will return from vacations next month to restart work on a slew of unfinished legislative proposals - some of which include new municipal bond provisions - that were left on the table last week when Congress took its holiday recess.
Among other bills, work had stalled this month on alternative minimum tax relief; the farm, energy, and trade bills; and a package of so-called tax extenders, which includes an extension of the expired qualified zone academy bond program and the optional deduction for state and local sales taxes.
Congress managed to approve a last-minute, one-year AMT "patch" after a long and drawn-out partisan battle over whether the patch's $50 billion price tag should be offset by revenue-raising measures. The patch prevents over 20 million more taxpayers from becoming subject to the AMT, which applies to interest earned on private-activity bonds. But House Ways and Means Committee chairman Charles Rangel, D-N.Y., and other lawmakers have vowed to try to permanently repeal the AMT next year.
Lawmakers also finished work on the energy bill before leaving town. The bill originally contained several tax-credit bond proposals, but all tax provisions were stripped from the legislation before it went forward for President Bush's signature last week. Groups, such as the American Public Power Association, have said they will continue to push for some of those proposals next year.
Still to come is House action on the farm bill, which contains a $1.5 billion proposal for tax-exempt timber conservation bonds, $400 million for "rural renaissance" bonds, and several technical changes to the small-issue "aggie" bond program. The Senate may act on a trade bill that includes $9 billion in tax-exempt and tax-credit bonds for manufacturing redevelopment in areas with a high percentage of abandoned or under-utilized manufacturing facilities.
Muni market participants, however, are more concerned with the tax extenders, which would allow for another $400 million in QZAB issuance and maintain the state and local sales taxes deduction, "something that is very important to our members, especially in non-income tax states," said Susan Gaffney, federal liaison director of the Government Finance Officers Association.
Qualified zone academy bonds are used by municipalities to finance renovations and repairs to existing school facilities. Congress has authorized $400 million for the program each year for the past decade. Some states have QZAB allocations left over from 2006 and 2007, since they have had difficulty adjusting to recently enacted arbitrage restrictions for the tax-credit bonds, according to Laurence Peters, vice president of the National Education Foundation and cyberlearning.org. Still, a "good two-thirds of the states" are planning to immediately start issuing QZABs from their 2008 capacity "to satisfy pent-up demand," he said.
"If we can get a two-year extension passed soon, one that ameliorates the problems caused by last year's over-broad arbitrage rules, it will go far to re-stablizing a program only just now getting back on course," Peters said.
Gaffney said last week that the GFOA and other market groups will be "closely monitoring" any congressional action on the subprime mortgage crisis. The Treasury Department has said it hopes Congress will enact an increase in the annual private-activity bond volume cap to allow state and local governments to issue tax-exempt mortgage revenue bonds to refinance subprime mortgages, many of which are set to adjust to higher rates in 2008 and 2009.
Such refinancings with bond-backed, fixed-rate mortgages would mean cheaper mortgages for borrowers. The proposal requires a legislative change because the tax code currently allows single-family mortgage revenue bonds to finance only new mortgages, not refinancings.
Senate Finance Committee members indicated that $15 billion to $20 billion of additional bonding authority could be provided to housing finance agencies over the next three years. One bill was introduced last week just before the congressional session ended, but more are expected next year.
The usefulness of such a proposal "really depends on how Congress structures it," said Bruce Serchuk, an attorney with Nixon Peabody LLP here.
"State and local governments are in the business of making loans to first-time homebuyers whose income is generally on the lower side. They certainly understand that business," he said, but the introduction of potentially weaker mortgages into state housing finance agencies' pools carries with it certain risks that HFAs will have to evaluate.
"It's firmly in the lap of Congress now, and we'll see where they go with it," said NABL president J. Foster Clark,a partner at Balch & Bingham LLP in Birmingham, Ala. "The whole credit area is a very large and very complex problem the country's facing right now. This mortgage revenue bond [proposal] is relatively small in comparison to the problem, but it's one tool that occurred to us in September and seems to make sense. We will watch with interest."
Another group monitoring the action is the National Association of Health and Educational Facilities Finance Authorities, which looks for "fallout" from some legislative proposals on hospitals and higher education.
"There's talk now about forcing university endowments to provide particular-percentage payouts, like foundations do; there's talk about hospitals having to meet certain criteria in order to maintain their full tax-exempt status," said NAHEFFA counsel Charles Samuels, a partner with Mintz Levin Cohn Ferris Glovsky & Popeo PC here.
"We don't have particular position on those legislative suggestions, except that ... we would oppose them including restrictions on bonds," he said. "If the Congress is going to define what a university needs to do or what a hospital needs to do, that's up to those communities and the Congress. From our point of view, though ... those qualified entities should continue to be allowed to issue 501(c)(3) bonds."
Market advocates are keeping an eye out for a Congressional Budget Office report on university endowments and their relationship to tax-exempt bonds, which is expected sometime in late winter or early spring. "That certainly is important to us," Samuels said.
This fall, the National Council of Health Facilities Finance Authorities and the National Association of Higher Educational Facilities Authorities agreed to merge and create the NAHEFFA on Jan. 1.
"People are looking at it with a lot of enthusiasm," because the group will provide a broad representation of 501(c)(3) bond issuers, according to Samuels.
The group's legislative agenda lines up between two bills, the first of which would authorize the Federal Home Loan Banks to issue letters of credit backing municipal debt.
Samuels said a coalition of local governments, as well as health care, higher educational, and economic development authorities, and banks sees the legislative change as a chance "to use letters of credit particularly for small deals that are underserved, for which the bond insurance community has no interest." In light of the financial difficulties bond insurers have experienced in the subprime mortgage crisis, they are likely to be "even more conservative, understandably, and are going to be even less interested in small, unrated deals," he added.
"We would really like this to finally come to fruition. We've got lots of co-sponsors, particularly on the House side," Samuels said. "It would be a very, very low-cost way to enhance getting reasonably priced funding in the hands of small governments and small charities, and even for very small economic development projects."
The other bill NAHEFFA is pushing would liberalize a bank deductibility rule enacted as part of the 1986 tax reforms. It allows banks an 80% deduction for the cost of purchasing and carrying the tax-exempt bonds of issuers that reasonably expect to sell $10 million of bonds or less a year.
Legislation introduced in January 2007 by Rep. Bobby Jindal, R-La., would permit banks to determine their interest expense deduction without regard to tax-exempt bonds issued to provide certain small loans for health care or educational purposes.
The bill would make banks "interested in buying some of these bonds," Samuels said. "One would hope, if Congress looks at ways of making sure the economy stays strong, that this would be one small, inexpensive thing that could be done."
The Council of Development Finance Agencies, which represents local economic development agencies around the country, also has lobbied for the bank deductibility bill. The council's top legislative priority, however, is the modernization of a tax code requirement for small-issue industrial development bonds to accommodate new, high-tech types of manufacturing.
Current tax code rules limit the use of small-issue IDBs to a "manufacturing facility," defined as a facility that is "used in the manufacturing or production of tangible personal property, including processing resulting in a change in the condition of such property."
The proposal, which the CDFA hopes to have introduced as legislation early next year, would add intangible property to that definition, allowing "knowledge-based" companies to be eligible for access to tax-exempt financing, according to CDFA executive director Toby Rittner.
"While certain market forces, i.e. the subprime lending issues, are putting pressure on underwriters and insurers, we feel that the municipal bond market, such as IDBs, [tax-increment financing], and other economic development tools will weather the storm in 2008," Rittner said.
"Our early indications show that issuers will continue to actively use private-activity bonds for manufacturers, 501(c)(3)s, and other development projects. In fact, based simply on industry discussions, we see a very active year in 2008," he said. "Capital market underwriters have diversified their portfolios and are braced for market changes and the issuers have gotten very creative on packaging deals that work very well financially."
ARBITRAGE REGS
For its part, according to Clark, NABL is planning projects that include technical comments to be released "soon" on changes Treasury proposed this year for the arbitrage regulations, which restrict the amount of earnings municipal issuers can receive and retain on investments of tax-exempt bond proceeds.
Treasury's proposed changes would accommodate interest rate swaps with floating payments based on taxable rates, such as the London Interbank Offered Rate. So-called Libor swaps, which have become commonplace in the muni market, would be eligible for simple integration, under which variable-rate bonds subject to an integrated floating-to-fixed rate swap are treated as variable-yield bonds. But such swaps would not be eligible for super integration, which has a separate set of requirements that allow the bonds to be treated as fixed-yield bonds.
The revamped rules would allow issuers to make yield reduction payments on certain variable-rate advance refunding bond issues in which the issuers have entered into a qualified floating-to-fixed swaps. They also would provide that the floating rate on a taxable-index hedge and the variable rate on the hedged bonds will be treated as "substantially the same" for purposes of the hedging rules if the rates are no more than 0.25% apart, and if, for a three-year period ending on the date the issuer enters into the swap, the average difference between the rates does not exceed 0.25%.
Gaffney said the GFOA "greatly appreciates the recently proposed changes to the arbitrage rules, and hopes that there are more to come, especially on topics such as issue price."
Indeed, in 2008, a second package of arbitrage rules is expected, along with updated guidance on the tax-exempt bond voluntary closing agreement program, arbitrage rebate refunds, and proposed regulations on public approval requirements for private-activity bonds.
The Treasury Department's 2007-2008 priority guidance plan also includes tighter partnership rules for tender option bonds; final regulations on solid-waste bonds; final allocation and accounting rules for private-activity bonds; and temporary regulations on clean renewable energy bonds.
The IRS' exempt organizations division aims to issue guidance on the excise tax on prohibited tax shelter transactions - a category that includes about 15 tax-exempt sale-in, lease-out and lease-in, lease-out deals - as well as on qualified tuition savings plans under Section 529 of the tax code.
FORM 990
IRS officials announced Thursday that tax-exempt entities with more than $100,000 in outstanding bonds will not be required to fill out Form 990's new Schedule K in the 2008 tax year.
The schedule, part of the annual information return filed by exempt organizations, asks for a breakdown of outstanding bond issues' gross proceeds in reserve funds, proceeds in refunding or defeasance escrows, issuance costs, working capital expenditures, capital expenditures, and other unspent proceeds.
The schedule's "arbitrage" section asks whether the issuer has invested bond proceeds in a guaranteed investment contract or identified a hedge on its books. The section specifically asks the groups to specify the providers' names and the terms of their hedges or GICs. It also asks whether the regulatory safe harbor for establishing a GIC's fair market value was satisfied, and whether the bond issue qualified for an exception to arbitrage rebate requirements.
In addition, the schedule asks whether the entity maintains "adequate books and records to support the final allocation of proceeds," routinely engages bond counsel to review contracts related to bond-financed property, and uses procedures to ensure post-issuance compliance with tax code rules.
"It reflects a major effort on the Service's part to encourage better post-issuance tax compliance," said Maxwell D. Solet, a partner at Mintz Levin Cohn Ferris Glovsky & Popeo PC. "[It is] a strong inducement to have such practices, so that you'll be able to fairly honestly answer yes."
"I believe that given the sophistication of the questions on Schedule K, nonprofits will need to hire outside experts to assist with ongoing tax compliance and private use monitoring on an annual basis," said Ed Oswald, a partner at Orrick Herrington & Sutcliffe LLP here. "As a practical matter, borrowers would be best served by engaging an outside expert for these duties."
The final form, which was revised from a version proposed in June, lessens the burden on exempt organizations somewhat by not requiring reporting of bonds issued before 2003. For the 2008 tax year, exempt organizations will merely be required to provide the IRS with a list of outstanding bond issues and a description of each issue's purpose, issue price, and Cusip.
The agency has been holding one-day workshops around the country for small and mid-sized exempt organizations, explaining the new form and other requirements for maintaining tax-exempt status. The remaining workshops, which will be held in Austin, Arlington, Va., and Columbus this spring, also include a discussion of required disclosures.
In addition, Treasury and the IRS are tackling modifications to the allocation and accounting regulations they proposed Sept. 26. The rules set forth standards for "mixed-use" facilities, which in addition to governmental use, have private business use in excess of the 10% permitted for tax-exempt private-activity bonds. The rules would allow issuers to finance mixed-use facilities with a combination of municipal bonds and "qualified equity," which can come from taxable bonds or other funds.
"The proposed regulations that are out there are complex, but provide much-needed flexibility," Clark said. "People are still sorting through how they would apply to particular situations. Treasury has been cooperative; they've been very open to comments and suggestions, and we plan to send some more."
NABL also will be working on comments about older revenue procedures that deal with reissuance and qualified management contracts, according to Clark.
"People who practice in [the nonprofit sector], particularly in the health care field and educational field, tell us that the way these management contracts are drafted has evolved significantly in the last 10 years," he said. "That's a project that's worth doing ... to see if there are suggestions that can be made to modernize [Rev. Proc. 97-13]."
In general, NABL wants to continue "to make progress on our efforts at raising our profile and credibility with our government regulators," Clark said. "We'll continue to do the best job we can to provide credible, technical comments and suggestions in response to proposed regulations and legislation, and other initiatives and questions that get thrown at us from time to time."
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November 2007
Volume Still On Pace To Break '05 Records
Posted on Thursday, November 01, 2007
By Matthew Hanson
Guide for Tax Increment Financing Released Prior to CDFA Meeting
Posted on Monday, November 05, 2007
By Peter Schroeder
House OKs One-Year AMT Patch
Posted on Monday, November 12, 2007
By Humberto Sanchez
BoA Fires LaSalle's Muni Group
Posted on Monday, November 19, 2007
By Yvette Shields
CDFA to Congress: Expand Definition Of Manufacturing for Small-Issue IDBs
Posted on Monday, November 26, 2007
By Alison L. McConnell
Volume Still On Pace To Break '05 Records
Posted on Thursday, November 01, 2007
By Matthew Hanson
With 2007 nearing a close, municipal primary volume remains well ahead of last year and on pace to break the record set in 2005.
Preliminary results from Thomson Financial show that about $41.4 billion of bonds were sold during October, up 31% from the same month of 2006. The increase was driven by 14 sales larger than $500 million, as some of the deals pulled in August's volatility were called back to market.
Through the first 10 months of 2007, more than $366.1 billion of bonds were sold - 22.7% ahead of last year's pace. The year-to-date volume is also above the $337.3 billion that were sold by the end of October in 2005, a year that later set the record with more than $408 billion of total primary-market volume.
With the exception of August, every other month of 2007 has marked an increase in market volume from the corresponding year of 2006, according to Thomson's data.
"Part of what happened is August," said George Friedlander, managing director and fixed-income strategist at Citi. "I think some stuff that would have gotten done in August got delayed because things were so messy."
Several large deals were postponed indefinitely during August as divergent muni and taxable yields led to stagnant buyers in both the primary and secondary muni markets.
The health care sector was one of the hardest hit in August, Friedlander said, adding that even double-A-rated hospital systems saw the value of their bonds drop.
Health care issuers sold $4.3 billion of bonds last month, up from the $3.6 billion sold during October 2006, Thomson's data showed. The nearly 20% increase could be a sign that some of the postponed deals were put back on the calendar.
The general purpose finance sector saw the largest increase from year-ago volume, as $15.3 billion of bonds were generated by the sector last month. Ohio's $5.5 billion Buckeye Tobacco Settlement Financing Authority deal - the muni market's largest sale in three years and the largest tobacco bond deal to date - was a large factor in this boost, along with a $2.5 billion general obligation bond deal from California.
Electric-power issuers sold $2 billion of bonds during the month, up from just $725 million during October 2006. A $1.1 billion gas prepay deal from Arizona's Salt Verde Financial Corp. was a large part of this increase.
As the municipal yield curve has regained some of its slope, issuers seem to have gone back to using synthetic fixed rate transactions to reduce their borrowing costs. The difference between average yields on one-year debt versus 30-year high-grade municipals was 56 basis points on Jan. 2, the first business day of the year. That spread widened to 108 basis points by yesterday.
During October, issuers sold $5.5 billion of debt in the auction-rate mode, a 228% increase from the $1.7 billion sold during the same month of 2006, according to Thomson. The volume of variable-rate debt with a short put also increased to $5.2 billion, as compared to $3.2 billion sold during the year-ago month.
But the changing environment surrounding bond insurance companies has not lessened issuers' willingness to buy a wrap for their bonds. About $20.6 billion of the bonds sold last month were backed by bond insurance - 49.8% of the total.
Thomson's preliminary data often excludes information for deals done in the final days of each month. The Bond Buyer will report final volume figures for October next week.
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Guide for Tax Increment Financing Released Prior to CDFA Meeting
Posted on Monday, November 05, 2007
By Peter Schroeder
The ins and outs of tax increment financing are detailed in a new guide released last week by two organizations, the first of its kind to specifically address the growing public finance tool.
The "Tax Increment Finance Best Practices Reference Guide" was released jointly by the Council of Development Finance Agencies and the International Council of Shopping Centers on Thursday. It was introduced in conjunction with the beginning of CDFA's annual tax increment financing training course held in here.
The 100-plus page manual is intended to serve as a reference guide for public officials, developers, and other market participants looking to take advantage of the public financing technique that is now practiced in 49 states and the District of Columbia.
The CDFA, a national association dedicated to development finance interests, says TIF can be used as a tool to transform blighted and abandoned communities while encouraging new private investment.
"TIF is an extremely valuable economic development tool, but it is important that the financing vehicle be used responsibly and structured as effectively as possible," said CDFA president Frances Walton.
There has been a growing demand in recent years for a guide to TIF, according to Toby Rittner, the group's executive director. "With TIF becoming the most popular and widely used tool for financing development, the groundswell for this guide was somewhat evident. CDFA began to look into the national trends and needs of the TIF industry two years ago and found that education and best practices were severely lacking nationwide."
The guide examines what type of projects typically are a good fit for tax increment financing, as well as its advantages and disadvantages.
One section addresses developing a community buy-in for the project, dealing with affected neighborhoods and presenting TIF to residents. Since TIF bonds are repaid by tax revenues obtained from the developments, community support is vital to the projects.
The guide also discusses the specific mechanics of TIF deals, from the basic structure of typical deals to details of the varying processes and the documentation required.
The CDFA said that as TIF regulations change and develop, the guide will be updated to accommodate these modifications.
"As we regularly update the guide it will continue to be timely and relevant," said Marc Hughes, who chairs the CDFA's TIF committee.
The final chapter of the guide consists of 26 case studies of developments employing TIF, including developments in retail, housing, transportation, and schools. Deals highlighted include a $2 billion mixed-use development in Atlanta named Atlantic Station.
The dilapidated industrial site, spread over a 138-acre TIF district, will include 3,700 residential units, 1.5 million square feet of retail, 6 million square feet of office space, and 1,000 hotel rooms when completed in 2010. The project includes TIF bond proceeds totaling over $200 million.
The guide is available at the CDFA and ICSC Web sites.
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House OKs One-Year AMT Patch
Posted on Monday, November 12, 2007
By Humberto Sanchez
The House has approved legislation that would provide a one-year "patch" to the individual alternative minimum tax to prevent it from applying to an additional 23 million taxpayers this year.
The $81 billion tax package, which House members approved Friday by a 216-to-193 vote, would also extend for one year the qualified zone academy bond program, special rules for veterans mortgage bonds, and the deduction for state and local sales taxes.
But the future of the House bill is uncertain. Leaders of the Senate Finance Committee appear to be balking at the House's "carried interest" offset and the White House has threatened to veto any such legislation.
Senate Majority Leader Harry Reid, D-Nev. said last week that he does not expect Congress to send the White House an AMT bill until after Thanksgiving. The AMT, which applies to interest earned on private-activity bonds as well as some governmental and 501(c)(3) bonds, is designed to target high-income households, which are eligible for so many tax breaks that they pay little or no taxes. However, the AMT is not indexed to inflation, so more taxpayers become subject to it each year. AMT relief was in effect for the 2006 tax year, but expired on Sept. 30.
Under the House bill, the AMT exemption for joint filers for the 2007 tax year would be increased to $66,250 from $62,550. For individuals the exemption would rise to $44,350 from $42,500. The one-year patch is estimated to cost $50 billion over 10 years.
To pay for the tax package, the bill would institute a series of tax increases, including a controversial provision requiring that hedge fund, private equity, and other investment managers who share in their investors' profits pay taxes on that income at ordinary tax rates. Currently they pay the lower capital gains rate on that revenue, which is known as "carried interest." The provision would raise $25.6 billion over 10 years.
Democrats included the revenue raisers in the bill in order to comply with a pledge to offset all spending increases that would add to the deficit, a concept called "pay-go."
During debate on the House floor, Ways and Means Committee chairman Charles Rangel, D-N.Y., said he agreed with Republicans that the AMT, which was enacted in 1969, was a bad idea and should be repealed. He has introduced legislation to repeal the tax and plans to push it next year. But Rangel reasoned, it is "fiscally responsible" to offset the $50 billion in revenue that the AMT would raise given the nation's needs in infrastructure, health care and other areas.
He also argued that it would be fair to tax high-income private equity managers to pay for an AMT tax cut for 23 million middle income taxpayers.
"We are trying to bring some degree of equity to the system," Rangel said, adding that the private equity managers should pay taxes at the same rate as other taxpayers in similar professions.
Republicans argued that the Democrats' insistence on paying for the bill was misguided and would hurt the economy.
Pay-go "puts this House and this Congress in a fiscal straitjacket with respect to tax policy and fiscal policy," said Rep. Jim McCrery, R-La., the ranking minority member of the Ways and Means Committee.
He reasoned that raising taxes on one set of taxpayers in order to cut taxes for another set of taxpayers is a net tax increase, which limits economic growth.
"The chairman has said himself that this AMT thing is crazy, it was never meant to apply to middle class taxpayers," McCrery said. "We never meant to collect this level of revenue."
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BoA Fires LaSalle's Muni Group
Posted on Monday, November 19, 2007
By Yvette Shields
Less than two months after closing on its $21 billion acquisition of LaSalle Bank Corp., Charlotte, N.C.-based Bank of America Corp. last week shut down LaSalle's municipal bond department, firing nearly all of the group's 30 employees, including its longtime manager, Mike Smale, and public banking finance head, Steven Eaddy.
"They came in on Thursday and blew just about everyone away in the department," said a former employee. The move ended speculation among the staff and market participants as to the department's fate that began last spring when LaSalle's parent - ABN Amro Holding NV and Bank of America announced the proposed sale of LaSalle in a side transaction to be completed ahead of ABN's larger plans to be acquired by a European bank.
The staff of the investment banking group LaSalle Financial Services Inc. received the news in person last Thursday from Ramiro Albarran, managing director of public finance banking at Banc of America Securities LLC, according to former LaSalle employees who asked that they not be named.
The bond group's closure impacted about 30 remaining employees, mostly located in Chicago. The bank also employed several public finance professionals in its Michigan and New York offices.
In recent months, several had left to take other positions, but most remained, awaiting word as to whether they would be offered positions or to collect severance packages, sources said. It was unclear Friday how several pending bond deals would be handled. Many issuers had shied away from working with LaSalle in recent months with the merger pending.
Former employees said Albarran traveled to Chicago when Bank of America closed on the deal to speak personally with public finance professionals and said the bank intended to offer some positions, although no promises were made. The group knew an announcement was coming as they were asked to be in the office last Wednesday, Thursday, and Friday.
The decision to cut the department comes amid the bank's announcement a week earlier that it faces "significant disclocations" in debt capital markets from problems related to its collateralized debt obligations, including many tied to subprime mortgages, and that fourth-quarter results will suffer as a result.
A $1.46 billion trading loss led to a 93% reduction in corporate and investment banking profits in the last quarter. Bank of American chief executive Kenneth Lewis recently announced 3,000 job cuts, including cuts in investment banking, and announced plans to review the bank's investment banking business, although he said in a speech that the bank remains committed to keeping its investment banking arm.
Bank of America spokesman Scott Silvestri declined to comment on whether those issues contributed to the bank's decision to eliminate most of the LaSalle positions. He said the bank had previously announced that as part of the acquisition, it intended to cut 2,500 jobs in Chicago and another 1,500 in Michigan, with the bulk impacting commercial banking operations. "We said there were going to be layoffs and this is part of that process," he said Friday.
Smale had led the municipal group, including the sales, trading, underwriting, and banking team for more than 12 years. He could not be reached to comment Friday. Sources said he expected that Banc of America would cut his leadership position as the two firms' businesses were fully merged.
LaSalle had about six bankers in Chicago led by Eaddy, who was hired in July of last year. LaSalle had two bankers in Michigan, Catherine Vaughan and Glenn Watson, although Vaughan recently left to join Stifel, Nicolaus & Co. in Detroit. Chicago-based Banker Kristen Harold recently resigned to join Griffin, Kubik, Stephens & Thompson Inc., and analyst Juliette Deshaies recently left the public finance business for another private sector job.
Peter Glick, a longtime LaSalle banker, was cut along with Tom Tzakis, Watson and analyst Joanne Zhou. It was unclear on Friday whether banker David Schott was cut. Banker Ivan Samstein was asked to stay. He is a general government banker in the middle markets and sources said some of his deals fall under a department outside of public finance.
Keith Wakefield, who worked on structured municipal products, was asked also to stay at least through the end of the year. Sources said most of the sales and trading professionals, some of whom had worked at LaSalle for more than a decade, were also cut.
LaSalle's municipal bond practice was ranked 23rd last year among underwriters nationally, while Banc of America was ranked ninth, according to Thomson Financial. Banc of America again ranked ninth so far this year through the third quarter.
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CDFA to Congress: Expand Definition Of Manufacturing for Small-Issue IDBs
Posted on Monday, November 26, 2007
By Alison L. McConnell
Congress should modernize a tax code requirement for small-issue industrial development bonds to accommodate new, high-tech types of manufacturing, a market group recommended in proposed legislation unveiled last week.
The Council of Development Finance Agencies wants the definition changed because an expanded law will allow small, and mid-sized companies to finance expansion and job growth with private-activity IDBs - growth that would not be possible with higher-cost financing, it says.
CDFA members and staff met with congressional leaders on Nov. 2 to discuss their recommendation, visiting the offices of House Ways and Means Committee chairman Charles Rangel, D-N.Y., and members from California, Illinois, Michigan, Minnesota, and Pennsylvania. The council's legislative agenda, including the expansion of the manufacturing definition, was "positively received," with the lawmakers expressing interest in working with the CDFA to enact the change, the group said.
Current tax code rules limit the use of small-issue IDBs to a "manufacturing facility," defined as a facility that is "used in the manufacturing or production of tangible personal property, including processing resulting in a change in the condition of such property."
The council's proposed change would add intangible property to that definition, allowing "knowledge-based" companies to be eligible for access to tax-exempt financing, it said.
CDFA legislative counsel John McMickle is working to get the proposed legislation introduced in the House and Senate.
"CDFA plans on having strong support on both sides of the aisle on this issue as Congress looks for effective ways to stimulate the economy," the council said in a statement last week. "Once the legislation is introduced, CDFA will be working to garner co-sponsors."
"We'd like to get it introduced as soon as possible, and see it move along some time before the end of this Congress," CDFA research and policy associate Brian M. Anderson said Wednesday.
"Since 1992, when the small-issue [IDB] program became permanent, state and local issuers have used this low-cost financing tool to create and retain jobs in manufacturing plants across America," the council said. "The changing economy in the United States is providing new and exciting employment opportunities for our citizens in the area of software development and biotechnology ... [but] the tax-exempt bond finance programs ... do not extend to these important and growing sectors of our economy."
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September/October 2007
Interest Rate Swaps: Moody's to Release New Rating Methodology
Posted on Wednesday, October 10, 2007
By Matthew Hanson
Philadelphia Agency, Citizens Bank Team Up for Financing
Posted on Thursday, October 11, 2007
By Jonna Stark
Transportation: State and Local Governments Should Use Caution Over P3s, Panelists Say
Posted on Thursday, October 11, 2007
By Humberto Sanchez
Decision in Strand Case Up in Air
Posted on Wednesday, October 10, 2007
By Shelly Sigo
Florida Supreme Court Revises TIF, COP Ruling
Posted on Monday, October 01, 2007
By Shelly Sigo
Keeping Good Records
Posted on Tuesday, October 02, 2007
By Alison L. McConnell
Pennsylvania Considers Two Different Forms of Financing for Turnpike, I-80
Posted on Tuesday, October 02, 2007
By Michelle Kaske
Treasury Offers New Arb Rules
Posted on Tuesday, September 25, 2007
By Alison L. McConnell
Potholes on Road to P3s
Posted on Thursday, September 27, 2007
By Matthew Hanson
Interest Rate Swaps: Moody's to Release New Rating Methodology
Posted on Wednesday, October 10, 2007
Source: Bond Buyer
By Matthew Hanson
Love them or hate them, interest-rate swaps are becoming more and more a part of the everyday municipal bonds market.
In one more sign that swaps have become mainstream options in public finance, Moody's Investors Service was set to release today its first rating methodology to standardize how it figures swaps into the credit ratings of issuers around the muni market.
If used prudently, interest-rate swaps offer the potential for lowering borrowing costs, hedging risks, and smoothing out debt obligations, according to the report. But these same swaps pose a complicated set of new risks that issuers must gauge and manage if they are to see the planned benefits.
"We thought it was important to have a comprehensive statement across public finance for purposes of transparency and clarity, as to what our approach is to incorporating interest rate swaps and other derivatives into bond ratings," said Bill Fitzpatrick, senior vice president and senior analyst at Moody's. Until now, the rating agency had published reports on their methods in different municipal sectors, but this is the first effort to establish an industry-wide process.
The amount of swaps that an issuer has on its books, among other things, helps decide how in-depth Moody's will go evaluating individual swaps, according to the report.
"For financially sophisticated, highly rated issuers who are frequent users of derivatives, Moody's analysts may not always conduct a detailed review of each individual trade at the time of a financing, and focus instead on the issuer's swap policies and overall book of swaps," the report said. "In contrast, when an individual swap can materially affect the credit quality of an issuer or financing, we will perform a detailed review of each swap transaction."
The main things that Moody's analyzes in any given swap are the issuer's swap management practices, the potential positive and negative financial impacts of the swap, and the swap's legal documentation.
Management is essential partly because of the potential for rapid changes in the muni market and the broader interest-rate environment.
"Because the impact of derivatives may change over time, in some cases the ability to monitor swap performance and respond effectively to future contingencies may be just as significant as identifying the risks at the outset of the contract," the report said.
Fitzpatrick, who was the report's lead author, said he has seen issuers' understanding of swaps, along with their benefits and perils, increase as swaps have become more common.
Floating-to-fixed swaps, typically used to get a synthetic fixed rate lower than the market's standard fixed rates, still are the most prevalent type of swap in the muni market, Fitzpatrick said. But he added that a rising diversity in the types of contracts has led to a growing number of basis swaps and forward-starting swaps, too. Basis swaps involve paying one variable rate in exchange for another, while the term forward-starting means that the issuer has locked in a rate for a swap that would start at some later date, making a bet that the rates locked in are as good or better than rates that would be available in the future.
When considering swaps - from the most common to the most obscure - issuers have to be well aware of what they're getting and the risks involved.
"Basis risk is certainly one that we need to consider, particularly because of the fact that many of the swaps involve both taxable and tax-exempt indexes," Fitzpatrick said. Basis risk refers to the chance that the variable rates, based on different underlying scales, can fluctuate in ways that are unwanted or unexpected.
Basis risk is particularly prevalent in the tax-exempt municipal market because some of the most common kinds of swaps are based on the London Interbank Offered Rate. Commonly referred to as Libor, this taxable rate is used in fixed-income markets worldwide, meaning its relationship to municipal rates is sometimes unpredictable.
The Moody's report also catalogued a list of other risks that the rating agency weighs when deciding how a swap will affect an issuer's broader credit rating.
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Philadelphia Agency, Citizens Bank Team Up for Financing
Posted on Thursday, October 11, 2007
Source: Bond Buyer
By Jonna Stark
The Philadelphia Industrial Development Corp. and Citizens Bank have joined together in a public-private financing partnership that will provide financial support for Philadelphia's nonprofit sector through the use of bonds.
The program, which the PIDC oversees, will allow nonprofit groups throughout the city to borrow money through tax-free bond offerings issued by the Philadelphia Authority for Industrial Development and backed by Citizens Bank.
The program is "recognition of the importance of the non-for-profit community for the economy of Philadelphia," said PIDC senior vice president Steven C. Genyk. Nonprofits in Philadelphia, such as giants like the University of Pennsylvania, as well as smaller organizations, comprise 27% of all private employment in Philadelphia, according to a 2005 Johns Hopkins study of nonprofit employment in Pennsylvania.
This public-private partnership is the first program of its kind in Philadelphia and the commonwealth, and it is designed to provide low-cost financing to nonprofit organizations including health care, education, cultural, and social service agencies, according to the PIDC and Citizens Bank.
The PIDC developed its nonprofit pooled loan program after a similar pool program created by Massachusetts Health and Educational Facilities Authority. Citizens Bank also provides the letters of credit for the 20-year-old Massachusetts program, so the bank "brings a lot of experience" to Philadelphia's new program, said Citizens Bank senior vice president Irene Hannan, who oversees the bank's not-for-profit group.
Fitch Ratings assigns a long-term rating of AA to Citizens Bank, while Moody's Investors Service gives it a Aa2 rating, and Standard & Poor's gives it a AA-minus.
While the PIDC and Citizens Bank just announced this new program at the beginning of October, they conducted their first bond transaction for it in August, as a trial run, Hannan said. About $23 million of bonds were issued for the National Museum of American Jewish History, which is building a new museum, and for Jewish Employment and Vocational Service, which is constructing a new technical institute.
As the first issuance went smoothly, the PIDC anticipates another transaction as early as November for this pooled program, Genyk said. The next deal will be for about $50 million to $60 million of bonds for five or six different borrowers.
The bonds for the pooled program are issued as variable rate general obligation bonds, and they are remarketed weekly, Hannan said. Each borrower also has the option of synthetically fixing the rate if they so choose. Additionally, if a borrower has a project with immediate financial needs, Citizens Bank will extend credit to them until the bonds are issued.
For the pool program, Merrill Lynch & Co. serves as the underwriter and remarketing agent, while Public Financial Management Inc. is the financial adviser and program administrator. Ballard Spahr Andrews & Ingersoll LLP is the bond counsel and Blank Rome LLP is the underwriter counsel.
When officials were designing the program, they wanted it to have "maximum flexibility" and be as "open-ended" as possible, Hannan said. "We have no limits on either the number of issuances per year nor the amount per issuance," she said. Still, Hannan noted that they would like the minimum pooled issuance to total at least about $25 million.
Since the cost of doing a single stand-alone bond issue for mid- to smaller-sized organizations is "generally very high and very costly," this pooled program makes "the cost of financing affordable," Hannan said.
She also believes that larger nonprofits will join in on the pool program because of the re-borrowing feature in which the borrower can re-borrow some of the principal after it's paid back without having to go through additional public hearings for borrowing money.
"We think this program, because of its easy access, flexibility, and low cost of financing, will really fill the bill and the needs," Hannan said. She added that while the program currently involves only Philadelphia, officials would consider eventually making it a statewide program.
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Transportation: State and Local Governments Should Use Caution Over P3s, Panelists Say
Posted on Thursday, October 11, 2007
Source: Bond Buyer
By Humberto Sanchez
State and localities should proceed with caution when deciding whether to pursue a public-private partnership to finance transportation infrastructure because of a tendency for private sponsors to overestimate the revenue the project will generate, according to a managing director with Lazard Freres & Co., which is seeking to increase its governmental advisory business.
"There are a couple of infrastructure funds that continue to win asset after asset in every auction across all sorts of industries," Lazard's George W. Bilicic told attendees of a panel discussion on infrastructure at the Brookings Institution yesterday. "What they are likely doing is ... developing revenue projections that are probably unrealistic and they are also likely using leverage that is unrealistic."
Bilicic did not name the firms to which he was referring.
"The problem for governments is that these transactions are pursued, and seven or eight years from now when the relevant individuals that have structured the deal have collected their fees and have moved to the next asset [and] are not around anymore ... the problem is there for the government." In most cases, the government will have to renegotiate the terms of the transaction, Bilicic said, adding, "This tool that [many] believe governments should make use of is a dangerous tool and needs to be carefully used."
Bilicic's comments come as states and private firms have been increasingly exploring P3s as federal, state, and local gas tax revenue and other traditional transportation funding sources have failed to meet the nation's needs.
In one high-profile P3 deal that closed last year, Indiana leased the Indiana Toll Road for 75 years to a private consortium, including Macquarie Infrastructure Group, in exchange for $3.8 billion. In another 99-year deal that closed in 2005, Chicago leased its 7.8-mile Chicago Skyway for $1.83 billion. MIG was also part of the consortium that won that deal. In both instances, the private consortium is responsible for operating and maintaining the roads over the life of the lease in exchange for collecting the tolls during the same period.
These two deals have come under scrutiny by certain federal transportation lawmakers, as well as some state and local officials who question the wisdom of leasing roads to the public sector for long periods of time. Lazard found the same concerns from a poll it commissioned to better understand public support for P3s.
"What polls very badly is this 99-year lease structure," Bilicic said. "Different assets polled differently, so parking garages polled extremely well in this study, but lotteries surprisingly didn't poll well."
Bilicic believes the poll shows that state and local governments have just been reacting to P3 proposals brought to them and have not done the proper analysis to determine whether a P3 deal is the best financing option.
"What we see is that [state and local] governments ... have not gone through a process themselves, separate and apart from the infrastructure funds and investment banks that are visiting them, where they take an inventory of their assets, they look at their long-term capital budgeting needs ... look at the funding needs over the long-term, the growth objectives of the relevant governmental entity, and then look at the assets themselves and decide what their options are," Bilicic said. They also must "put [the P3 idea] through a public interest and public policy" test, as well as gauge the level of support for it, he added.
Meanwhile, former Iowa Gov. Tom Vilsack, who also addressed the group, urged the creation of some mechanism to allow for average Americans to invest in infrastructure, similar to savings bonds, which Vilsack bought as a child.
"I felt that I was investing in my country," he said. "There ought to be some process or mechanism to empower the ordinary people of this country to invest in the infrastructure that will allow for a brighter, more competitive future."
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Decision in Strand Case Up in Air
Posted on Wednesday, October 10, 2007
Source: Bond Buyer
By Shelly Sigo
Florida Supreme Court justices yesterday indicated by their questions that they may consider narrowing their opinion in Strand v. Escambia County, which held that governmental entities in Florida must get voter approval before issuing tax increment finance bonds.
The seven-member court listened to 40 minutes of oral arguments in a rehearing of the Strand case with Chief Justice Fred Lewis concluding: "We take this very seriously."
Throughout the arguments several justices asked questions about narrowing what many bond attorneys felt was an unusually broad opinion.
"Clearly the court is weighing the issue and understands that it's a complicated issue," Randy Hanna, managing shareholder at Bryant Miller Olive LLP, said after arguments were presented. Hanna represents the Florida League of Cities, and his firm also is representing clients in two pending cases before the state Supreme Court that involve community redevelopment agencies.
What brought the case into the limelight was Gregory Strand, a veterinarian, who opposed a plan by Escambia County to issue $135 million of TIF bonds to widen a road in Florida's panhandle. On Sept. 6, the state Supreme Court reversed a circuit court's judgment and invalidated the county's proposed TIF bond issuance.
The Supreme Court granted Escambia County a rehearing after the Sept. 6 opinion called into question the validity of both outstanding TIF bonds and certificates of participation. The resulting upheaval in Florida's debt market prompted the court to revise its opinion on Sept. 28, saying the outstanding TIF bonds were validly issued and that the COPs were not affected.
But the court still maintained that a referendum was necessary to issue TIF bonds going forward, overturning 27 years of case law in State v. Miami Beach Redevelopment Agency, which held that TIF bonds did not require a referendum prior to issuance.
Elaine Johnson James, a partner at Edwards Angell Palmer & Dodge LLP, told justices yesterday that the Escambia case is not related to the Miami Beach case, which centered on Florida's Community Redevelopment Act.
James, whose firm is co-counsel to Escambia, said the county wanted to issue TIF bonds under its home rule powers, not under the redevelopment act. She asked the court to judge the case narrowly and focus only on Escambia's right to use home rule powers.
"This is not a community redevelopment case," argued former Florida Supreme Court Justice Stephen Grimes, who is now an attorney with Holland & Knight LLP, on behalf of the League of Cities and the Florida Redevelopment Association. "In this case, neither party asked for Miami Beach to be overturned."
Grimes noted that two CRA-related cases are set for oral arguments before the court in January. He asked the justices to wait until briefs are filed in those cases to consider issues dealing the redevelopment act.
Florida's constitution requires a referendum be held before a local government can issue bonds backed by ad valorem taxes. Justice Barbara J. Pariente said using ad valorem any time to pay back bonds, no matter how small the amount, required a referendum.
Strand's attorney, David A. Theriaqueof Theriaque, Vorbeck & Spain, told the justices that he did not cite the Community Redevelopment Act or the Miami Beach case because the Escambia County case did not involve those issues. In Miami Beach, he said, three forms of revenues were pledged to the bonds.
Theriaque also argued that using TIF bonds could mean Escambia might not have funds available to adequately service other areas of the county. He also said Strand is a fiscal conservative and believes government should not incur long-term debt.
In Escambia County, "at the end of the day ... tax dollars are going to be used," Theiraque said.
Justice Kenneth B. Bell indicated that he believed Miami Beach was different from issues involving Escambia County, while Chief Justice Lewis suggested that the decision in Escambia could be more limited, particularly with other cases pending.
"I think it was an open-minded court," Richard Miller, a partner at Edwards Angell, said after arguments concluded.
The Florida Supreme Court could revise its opinion a second time or take no action in response to yesterday's argument.
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Florida Supreme Court Revises TIF, COP Ruling
Posted on Monday, October 01, 2007
Source: Bond Buyer
By Shelly Sigo
Market participants on Friday said a cloud had been lifted from the municipal bond market in Florida following a revised opinion from the state Ssupreme Court clarifying the status of certificates of participation and outstanding, but not validated, tax increment bonds.
The court moved quickly to return stability to a market stunned by its Sept. 6 ruling that said a referendum must be held before tax increment finance bonds can be sold and calling into question the status of outstanding COPs and TIF bonds. The justices on Friday said all outstanding TIF bonds - not just those validated by the courts - are unaffected by the original ruling. The justices also clarified that the ruling would not affect COPs.
Reacting to the revised opinion, Standard & Poor's on Friday afternoon removed billions of dollars of COPs and hundreds of millions of dollars worth of TIF bonds from its watch list, where they had been placed for monitoring following the decision in the case known as Strand v. Escambia County. Fitch Ratings said it had removed $164 million of Florida TIF bonds from rating watch negative.
In saying that their revised opinion would have no impact on certificates of participation, the justices removed a reference in the original opinion to State v. School Board of Sarasota County, a case that said a referendum was not required to sell COPs.
The Court action was praised by the Securities Industry and Financial Markets Association on Friday.
"The Florida Supreme Court's revised opinion in Strand v. Escambia County marks a major victory for investors, the markets, and issuers," said Leslie Norwood, managing director and associate general counsel for SIFMA. "The revised opinion removes any concern with regard to the approximately $13 billion in bonds and certificates that had been issued prior to this opinion.
"This step was absolutely vital in eliminating the enormous market uncertainty caused by the earlier decision," Norwood added.
The new opinion came almost two weeks before oral arguments were set to begin in a rehearing of the unanimous opinion handed down Sept. 6, which brought national attention to the Sunshine state's market for TIF bonds and COPs because of its potential impact on billions of outstanding debt.
While it is unusual for the state Supreme Court to revise an opinion before hearing oral arguments, Richard Stephens, a bond attorney and partner at Holland & Knight LLP, said Friday's action showed that the justices understood why they needed to clarify their original opinion.
"They were concerned about the effect on the marketplace, particularly as it related to school board financings," Stephens said.
In scheduling oral arguments for Oct. 9, the justices in their revised opinion said their ruling would not affect bonds sold or validated prior to the opinion becoming final, and that it would remove any issue with regard to COPs.
"Therefore, the Court will not entertain any arguments related to bonds previously issued or validated or any arguments related to certificates or obligations issued in reliance upon State v. School Board of Sarasota County," the justices said.
The opinion, which overturned 27 years of established case law, resulted from an appeal of a lower court bond validation sought by Escambia County as it wanted to issue $135 million of tax-increment bonds to widen a road. After the lower court validated the bonds, Gregory Strand, a local veterinarian opposed to the county's use of TIF bonds, filed an appeal taking the case to the Florida Supreme Court.
In a 7-to-0 opinion Sept. 6, the justices held that bonds payable through tax increment financing are subject to the referendum requirement of Florida's Constitution. They added, "our decision in this case does not affect bonds that were validated prior to this opinion becoming final."
The decision raised questions about the status of bonds that were not validated by a court before being sold. Most of Florida's TIF bonds have not validated because of a 1980 Supreme Court decision, State v. Miami Beach Redevelopment Agency, which ruled that a referendum was not necessary.
The court said it was receding from State v. Miami Beach and a portion of State v. School Board of Sarasota County, which raised questions about how it impacted COPs, most of which had been sold by school districts.
Soon after the opinion was handed down, Standard & Poor's placed all of Florida's TIF bonds and COPs on watch. Fitch Ratingssoon followed placing all of Florida's TIF bonds that were not court validated on watch. Moody's Investors Service said it would wait for further court input before taking any action on the credits.
About $300 million of Florida school district COP deals were placed on hold after the Sept. 6 ruling, but Wayne Blanton, executive director of the Florida School Boards Association Inc., said on Friday that those deals would be readied for sale now.
"We're extremely pleased that the Supreme Court acted so quickly on this issue that is so important to our school districts," Blanton said. "We can now get our school construction program back into full gear. We feel very comfortable with the revised opinion and feel that we can start reissuing COPs as soon as possible."
The Florida League of Cities Thursday filed a letter urging the court not to consolidate two pending TIF cases with the Strand case.
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Keeping Good Records
Posted on Tuesday, October 02, 2007
Source: Bond Buyer
By Alison L. McConnell
The Internal Revenue Service looks more favorably upon municipal issuers with established policies and procedures for record-keeping and compliance monitoring when settling audits, tax-exempt bond office director Clifford Gannett told lawyers meeting here over the weekend.
Over the past two years, TEB officials have increasingly emphasized that issuers should track their compliance with the tax code after bonds hit the market. Gannett explained at the American Bar Association's fall meeting here Saturday that when negotiating settlements with municipalities under audit, the TEB office considers conscientious post-issuance compliance policies an "equitable factor."
What that means, he told members of the ABA tax-exempt financing committee, is that in TEB's facts and circumstances-based analysis of each case, the existence of such policies "would certainly be one of the factors that would weigh in [an issuer's] favor."
"If they have these procedures in place and somehow [violated federal tax rules] - as opposed to somebody who just ignored all this; didn't put anything into place - they are going to be in a better situation," Gannett said.
Record retention has long been a problem, both for issuers who would rather not maintain boxes of bond-related documents and auditors who sometimes cannot find the records they need.
Gannett said TEB has been "highly successful on the arbitrage side in reconstructing records that were deficient, coming up with assumptions, and [reaching] resolutions of those kinds of retention problems.
"We have some history of doing that on private use side, but not as much," he continued. "We're available, given the willingness of the issuers and borrowers to come forward and say, 'Yes, we have a failure here, and yes, because of this failure you can credibly make the case that there's a violation.' "
John J. Cross 3d, an attorney in the Treasury Department's Office of Tax Policy's tax legislative counsel office said Treasury is actively "trying to move" on record retention issues and hopes to release guidance next year.
"While we can't solve all the problems of the world on record-keeping, there are some themes that we want to get out there to see if they work, and to illustrate in a big-picture way," Cross said. Treasury and the IRS might recommend, for example, that issuers summarize records on investments or the use of bond proceeds, keeping the summaries but not underlying documents, he said.
The idea of summary documents "has real legs," said Jeremy Spector, vice-chair of the ABA committee and a partner with Mintz Levin Cohn Ferris Glovsky and Popeo PC in New York.
"I think that would be a document that would have real meaning [and] eliminate real recordkeeping burdens for issuers; truckloads of documents that may able to be disposed of after a period of time," Spector said.
ARBITRAGE REGS
Earlier in the ABA committee's meeting, Cross answered attorneys' questions about the arbitrage regulations that were proposed last week.
The rules, which are to take effect in late December but can be relied upon now, would make swaps based on taxable market indices such as the London Interbank Offering Rate, or Libor, eligible for simple integration - under which variable-rate bonds subject to an integrated floating-to-fixed rate swap are treated as variable-yield bonds for purposes of certain tax code rules.
"One of the significant developments in the past four to five years has been the move to base hedges on taxable interest indexes like Libor," Cross said.
Yet issuers and their counsel have been unsure about the treatment of those hedges, because tax code rules for swaps require their rates to be "substantially the same" as the rates on the underlying bonds being hedged.
"As an overall policy matter ... Libor is the deepest, most widely used interest index in the world," Cross said. "We certainly have a desire to accommodate hedges based on Libor because they're more known, and transparent to analyze and price, than an individual issuer's tax-exempt borrowing rate."
Treasury tried to provide more clarity by providing a "bright-line" test that treats the two rates as substantially the same if the floating index on tax-exempt bonds and on a hedge meet a 25 basis-point proximity test on both a snapshot basis at time the bonds are issued and the hedge is executed, and on a three-year historic average basis.
Treasury has received some feedback raising questions about issuers that may not meet the two tests "due to some blip in the way the current market is," Cross said. "We sort of expected that comment and we welcome more comment ... Basically we think the historical test is more accurate. We didn't want it to be too burdensome" on issuers.
"We are certainly open to seeing whether it works and refining it, if it is warranted in that regard," he added.
Since the proposed regulations can be relied upon for deals done after Sept. 26, when they were released, parties may immediately start adding information about the correspondence of rates into certificates, predicted ABA committee chair Michael Bailey, a partner at Foley & Lardner LLP in Chicago.
"This should simplify process and make it much easier," he said.
Cross said Treasury's intent "is for some sort of test like this to be a rule going forward, not a safe harbor.
"We really were aiming for more closely matched hedges, because there are issues on leveraged hedges, whether there may be an investment element on the front or back end if they stray too far from the bonds," he continued. "We don't want to see over-hedging. That's part of the interpretative gloss. You should be aiming at the same interest rates."
SUPER INTEGRATION
The proposed regulations indicate that Treasury will not allow so-called "super integration," under which bonds are treated as fixed-yield debt, for Libor-based swaps.
Treasury has "never been able to get over the question of expectations over the whole term of the bonds of having a closely matched correlation," Cross said. "When tax rates change constantly, any big change would have to send it out of whack.
"We know that some areas like single-family housing are particularly keen on fixed-rate mortgages," he continued. "The door is not closed. It's open, but not open too far. We'll still take comments on it and certainly consider it."
Cross noted that regulators are not actively considering any rule to require bidding for swaps.
"The government generally views swap pricing and increasing the knowledge and transparency of swap pricing ... as things that will be increasingly important issues in the next few years," he said. "There are no present, specific plans on the agenda, or in the second arbitrage package in the coming year, to consider swap bidding as a rule."
Treasury does plan to finalize regulations proposed in 2004 for solid-waste bonds, and to update public approval requirements for private-activity bonds under the Tax Equity and Fiscal Responsibility Act. Bringing the TEFRA rules "somewhat closer to the real world" is the department's aim, Cross said.
The department also will work toward finalizing the allocation and accounting rules proposed last year for private-activity bonds. A second batch of arbitrage clarifications and rule changes is in the works as well, according to Cross.
"Particularly on those latter two topics, if anyone has any further thoughts ... we encourage immediate comment on that," he said.
APPEALS
Later in the session, Charles Fisher, IRS appeals team manager for the tax-exempt and government entities division, said only two bond cases have been closed out of appeals with no resolution. In those cases, there were "settlements on the table" and the issuers decided it was not in their interest to resolve it, "so we closed the case," he said.
Fisher stressed that the appeals office is independent from the enforcement side of the IRS, but noted that appeals officers do share information with each other on how certain kinds of cases have been handled in the past.
They collaborate on bigger cases and hold bi-monthly calls "about what's happening in the bond world; new issues; what don't we know; how we can fill the gaps," he said.
Fisher also said that though appeals' cycle time is longer than the six to eight months he would prefer, the cases that come to appeals from the tax-exempt bond office "are extremely well-developed." If an issuer's protest addresses issues that examiner hasn't looked at, appeals reserves the right to send the case back to the enforcement side for further development, he said.
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Pennsylvania Considers Two Different Forms of Financing for Turnpike, I-80
Posted on Tuesday, October 02, 2007
Source: Bond Buyer
By Michelle Kaske
Pennsylvania has two different roadways that could be headed in very different financing directions, with the Pennsylvania Turnpike leaning towards privatization and debate over tolling on Interstate 80 mounting.
The state's Department of Transportation yesterday received "numerous" submissions in a request for potential bidders for a long-term lease and concession of the Pennsylvania Turnpike. PennDOT was unable to release the exact number of bids it received, but many of the submissions were "extremely detailed and lengthy," according to Rich Kirkpatrick, a PennDOT spokesman.
Democratic Gov. Edward Rendell announced the request for qualifications in early September and has said he would like to choose a winning bid by Christmas for the possible leasing of the Pennsylvania Turnpike.
The Turnpike could generate between $840 million to $1.6 billion a year along with up-front payments ranging from $12 billion to $18 billion in a 50- to 99-year lease, according to Morgan Stanley, the commonwealth's financial adviser. Nearly 48 firms responded to Rendell's earlier proposal search in December 2006 to determine the potential value of leasing or privatizing the Pennsylvania Turnpike.
Meanwhile, opponents of tolling on Pennsylvania's I-80 gained additional legislative support yesterday as Rep. Scott Hutchinson, R-Venango-Butler, introduced a bill that would repeal Act 44, which provides for toll booths on the freeway. Rendell signed Act 44 into law in July, yet critics of the bill say there was no public hearing on the initiative and that the governor insisted on the legislature passing a transportation funding solution before he would sign off on a final budget agreement that was already two weeks overdue for the fiscal 2008 deadline.
Act 44 allows for the Pennsylvania Turnpike Commission to lease I-80 from PennDOT and begin tolling the road, with the commission paying PennDOT annual lease payments starting at $750 million for the current fiscal year. Under the agreement, the commission would have borrowing capacity of up to $5 billion of special revenue bonds with no more than $600 million of those bonds to be issued in one year. Act 44 must garner approval from the U.S. Department of Transportation before the state can begin tolling the roadway.
Hutchinson said instead of tolling I-80, the state should restrict gas tax revenue to be used solely for road and bridge projects and separate transportation funding between mass transit and roadways, with regional areas that rely on mass transit helping to support public transportation infrastructure.
"Even if you look at PennDOT documents themselves and studies they have done over the years, as recently as two years ago they did a study that said Interstate 80 - it does not make sense to toll it," Hutchinson said. "To throw that out the window was really astounding."
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Treasury Offers New Arb Rules
Posted on Tuesday, September 25, 2007
Source: Bond Buyer
By Alison L. McConnell
Municipal bond issuers would be permitted to "simple-integrate" floating-to-fixed swaps and use electronic bidding for guaranteed investment contracts under proposed arbitrage regulations made available yesterday by the Treasury Department.
Market participants still studying the rules, which were to be published in today's Federal Register, noted that they seemed to be mainly favorable to issuers.
The investment of an issuer's tax-exempt debt is subject to a set of rules commonly referred to as the arbitrage regulations, with "arbitrage" referring to earnings on bond proceeds that materially exceed the yield on the bonds. The existing regulations provide detailed rules for determining and restricting yield on the bond issue and investments, and for computing and paying arbitrage rebate to the federal government. If an issuer does not comply with the regulations, it risks the Internal Revenue Service declaring its bonds taxable.
The proposed rules, which are to become effective Dec. 25, would make several discrete changes to the existing rules, including accommodating interest rate swaps with floating payments based on taxable rates, such as the London Interbank Offered Rate.
So-called Libor swaps, which have become commonplace in the muni market, would be eligible for simple integration, under which variable-rate bonds subject to an integrated floating-to-fixed rate swap are treated as variable-yield bonds. But such swaps would not be eligible for super integration, which has a separate set of requirements that allow the bonds to be treated as fixed-yield bonds.
"The IRS and Treasury Department have determined that taxable-index hedges based on widely used taxable indices, such as Libor-based hedges, sufficiently improve the efficiency of the tax-exempt bond market to warrant accommodation," the proposed regulations stated.
"The proposed regulations make clear, however, that while taxable-index hedges can be qualified hedges, and therefore eligible for simple integration, they are not eligible for super integration because there is an insufficient correlation between tax-exempt bond interest rates and taxable market interest rate indices," the regulations said. The IRS and Treasury said they "understand that issuers have recently issued variable-rate bonds that bear interest equal to a percentage of Libor," and requested comment on whether special accommodation is required for those issues.
The revamped rules would allow issuers to make yield reduction payments on certain variable-rate advance refunding bond issues in which the issuers have entered into a qualified floating-to-fixed swaps. The modification would apply to nonpurpose investments allocable to the gross proceeds of an advance refunding issue if certain conditions are met, according to Treasury.
The rules also would provide that the floating rate on a taxable-index hedge and the variable rate on the hedged bonds will be treated as "substantially the same" for purposes of the hedging rules if the rates are no more than 0.25% apart, and if, for a three-year period ending on the date the issuer enters into the swap, the average difference between the rates does not exceed 0.25%.
The revamped arbitrage regulations would recognize electronic bidding for guaranteed investment contracts, an increasingly common practice in the muni market.
Bond proceeds are often invested in GICs, which must be valued at fair market value. If issuers comply with certain requirements - including giving all investment providers an equal opportunity to bid with no opportunity to review other bids, and obtaining all bid specifications in writing - they fall within the arbitrage regulations' "safe harbor" for fair market value.
According to the proposed rules, electronic GIC bidding generally offers "the constructive potential for increasing the transparency of pricing of investments purchased with proceeds of tax-exempt bonds" - a prominent topic as federal regulators investigate alleged bid-rigging practices in the widest criminal and civil probe ever conducted into the municipal market.
The amended safe harbor would permit bid specifications to be sent over the Web or by fax, and would provide that there is no prohibited "last look" if all bidders have the chance for a last look.
Turning to arbitrage rebate, which issuers compute based on future values of payments and receipts on investments, the proposed regulations would clarify an example that confused issuers about the amount they are entitled to receive under refund claims, which they file when they pay more rebate than necessary. That amount is what the issuer paid beyond the amount of rebate that was actually due, according to Treasury. The IRS said it will not reopen rebate refund claims that have been processed before today.
Issuers and their counsel "still have to go through and look at the existing regs to see how these fit in ... but overall, they seem pretty issuer-friendly," said Nancy Lashnits, a partner with Ballard Spahr Andrews & Ingersoll LLP in Phoenix.
"We are particularly pleased that they have listened to industry concerns regarding the need for clarification and simplification relating to Libor swaps and electronic bidding," said Carol L. Lew, a partner at Stradling Yocca Carlson & Rauth in Newport Beach, Calif., and outgoing president of the National Association of Bond Lawyers. "Although not all of our comments have yet been addressed - such as issue price, more complete integration of the yield restriction, and arbitrage rebate rules - this is an excellent and thoughtful first phase to provide workable rules in this area."
Comments on the proposed rules will be accepted until Jan. 2, and a public hearing is scheduled for Jan. 30 at IRS headquarters here.
Officials said yesterday that they are reviewing other items for additional guidance.
"This reg is 'Part One' of what we hope to be a two-part process," said Carla Young, an attorney in the IRS' associate chief counsel office. She declined to discuss which topics might be included in another set of regulations.
"This is the kind of package that oftentimes doesn't get done," said Nixon Peabody LLP's Bruce Serchuk. "They hit some bigger issues that are important to the market, but they also hit a number of smaller things that, on their own, don't get attention."
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Potholes on Road to P3s
Posted on Thursday, September 27, 2007
Source: Bond Buyer
By Matthew Hanson
It started with a failed unsolicited bid.
Colorado's Northwest Parkway Public Highway Authority was feeling the pressure of meeting debt service on an underperforming toll road and had to pull a $428 million refunding in late 2005. But when it received its first offer to restructure the road's finances through a public-private partnership, the authority did not consider it.
The concept sparked NPPHA officials' interest, though. One year and a heavy dose of experience later, the authority signed a $603 million lease deal that put Brisa/CCR in charge of the road for 99 years.
NPPHA officials told a conference of infrastructure finance professionals yesterday that they believe it was the right decision. They added, however, that the path to signing a concession agreement was much more expensive and complicated than they expected.
"If I had known everything that I know today, I would still do this concession," said Karen Stuart, mayor of the city and county of Broomfield, Colo., at the conference, which was sponsored by Euromoney Seminars and ProjectFinance magazine.
Between August 2006, when the NPPHA announced it would entertain P3 offers, and the end of last month, when they awarded the deal to Brisa/CCR, it often seemed that the costs of evaluating and processing the concession agreement might outstrip its financial benefits, said Stuart, who is also chairwoman of the NPPHA's board of directors.
"The board is made up of elected officials who really scramble for small pots of money," Stuart said. "I go to Washington every year to look for a million, to two, or three million dollars to fix local roads. When you look at what it costs to do a deal like this, it's quite substantial."
The number of consultants and legal advisers for both the authority and the bidders began to pile up.
"We were almost running out of firms in Denver by the time we got to the concession," said Ed Icenogle, partner at Icenogle, Norton, Smith & Blieszner PC. His firm is the NPPHA's general counsel.
Being among the earliest U.S. governments to enter into a concession meant that they also had to establish precedents for how such deals should be done, rather than rely on past best practices. Icenogle said he started by combing through Colorado statutes to decide if the authority could, in fact, lease its toll road.
With costs, criticism, and choices mounting, the NPPHA's "political will" to complete a P3 deal waned a bit at times, Stuart said.
Unlike the blockbuster Chicago Skyway and Indiana Toll Road deals, the NPPHA opted not to chose a winning concessionaire based solely on the price bid. Instead, the authority chose Brisa/CCR and then negotiated exactly how the agreement would be structured.
One of the main reasons the NPPHA chose Brisa/CCR was the firm's willingness to negotiate details of the concession so that they would be favorable for the NPPHA, Stuart said.
It was the first high-profile U.S. concession that Brisa/CCR has won. The Portuguese-Brazilian firm's full name is Brisa Auto-Estradas de Portugal SA/Companhia de Concessoes Rodoviarias.
Fifteen teams submitted their qualifications to pursue a P3 with the authority, and 11 were qualified for consideration. The NPPHA then chose Brisa/CCR as its preferred bidder in the spring.
Brisa/CCR paid the NPPHA $503 million at closing - $50 million for rent and the rest for the privilege of operating the parkway and collecting its tolls and other revenue, according to Joseph Seliga of the law firm Mayer, Brown, Rowe and Maw LLP.
"What I have gleaned from this process is that this model really needs public sector support," Stuart said. "It needs some champions. You can hear from many people why this might not be a good deal from a public policy standpoint, and often the rhetoric is alarmist."
Explaining the details of a public-private partnership to voters and the local media can often be the hardest part.
"The complexity of this doesn't allow a sound-bite answer," she said.
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August 2007
Regulation: Cox Urges Senate Panel to Support Disclosure Reform Legislation
Posted on Wednesday, August 01, 2007
By Andrew Ackerman
IDBs: CDFA Releases Recommended Practices
Posted on Thursday, August 09, 2007
by Alison L. McConnell
Oberstar Wants Trust Fund for Bridge Repair
Posted on Thursday, August 09, 2007
by Humberto Sanchez
A Push for Transparency
Posted on Wednesday, August 15, 2007
by Andrew Ackerman
Legislation: FHLB Credit Enhancement Bill Gets Support in Congress
Posted on Tuesday, August 21, 2007
by Andrew Ackerman
Regulation: Cox Urges Senate Panel to Support Disclosure Reform Legislation
Posted on Wednesday, August 01, 2007
Source: Bond Buyer
By Andrew Ackerman
Securities and Exchange Commission chairman Christopher Cox said yesterday that "several members" of Congress are interested in sponsoring legislation to boost disclosure and accounting rules for the municipal market and that he is optimistic about the chances of the current Congress approving such a bill.
Speaking to reporters after a three-hour hearing with the Senate Banking Committee, Cox stressed that his proposal would have bipartisan support, though he did not mention any members by name.
"This will be the first opportunity for new leadership in the [House] Financial Services Committee and the [Senate] Banking Committee to consider these questions," Cox said. "I don't know what their take on it will be ... but there are big changes that have taken place in the markets and so here as in other areas of securities regulation we have to constantly examine the adequacy of our approach."
Rep. Vito Fossella, R-N.Y., has already indicated his support for Cox's proposal. Though his aides said it was still premature to comment, Fossella wrote to Cox in May to offer assistance in drafting legislation that would make municipal disclosure more like corporate disclosure.
Hill sources have said that Fossella and Rep. Spencer Bachus, R-Ala., the ranking minority member on the House Financial Services Committee, may be working together on legislation, though a Fossella spokesman declined to comment and Bachus' aides have not returned repeated phone calls.
But the fact that only one senator, Wayne Allard, R-Colo., ranking minority member of the securities subcommittee, questioned Cox on his muni initiatives at yesterday's hearing and suggested that they may not be needed, appear to indicate that Cox has yet to receive widespread support for the initiative. At the very least, it suggests that lawmakers are still mulling over the initiatives, which Cox previewed in February, unveiled two weeks ago, and fleshed out in a 12-page white paper sent to Congress on Thursday.
"Right now, municipal bonds are rated as to risk; why isn't that adequate for serving the current market?" Allard asked Cox during the hearing.
"Corporate debt is also rated - that is one piece of a whole system that is supposed to give the market the kind of information and transparency that it needs to price assets," Cox said. "The truth is that the standards for municipal securities are nowhere near what they are in the corporate market, and what's happened in a period of many decades is that the municipal market has matured to a point where it is every bit as significant as the corporate market."
"But there is no way for investors to require or demand the kind of disclosure that they would routinely get for the same kind of debt instrument were it a corporate issue," Cox added.
Asked by Allard if corporate regulations should apply to munis, Cox said: "No, is the short answer."
"Certainly what we're looking for are things that we have become accustomed to in the capital markets more generally," he continued. "But the model regulation shouldn't, and I don't believe can, be the same as it is for the corporate world for a variety of reasons, all of which proceed from the basic difference that we're dealing with governments and sovereigns, not commercial enterprises, although commercial enterprises in many cases are able to use municipal finance to accomplish their capital-raising objectives."
Cox noted that he did not believe that the SEC should review mandatory filings from issuers prior to their sale, as it does for corporate bonds. Instead, he urged "consistency and clarity" in accounting standards for all muni issuers along with more timely and uniform disclosure rules, which he said "would wash a lot of the cost out of the system."
"The evidence is that individual investors pay a transaction cost that is about 40% higher in the municipal area than they do in the corporate area," Cox told Allard. "A lot of that's related ... to the fact that the disclosure system for municipals is substandard compared to corporate [standards]."
Senate Banking chairman Christopher Dodd, D-Conn., and Sen. Richard Shelby, R-Ala., the committee's ranking Republican, are both studying Cox's proposal, their spokesmen said yesterday.
Municipal issuer groups, such as the Government Finance Officers Association, contend that the current municipal disclosure system is working, and warned they will fight any efforts to get Congress to grant the SEC more regulatory power over munis.
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IDBs: CDFA Releases Recommended Practices
Posted on Thursday, August 09, 2007
Source: Bond Buyer
by Alison L. McConnell
Small municipalities that issue industrial development bonds should pay particular attention to program management, marketing, and oversight to maximize their investments in IDB programs, according to a set of recommended practices released yesterday by the Council of Development Finance Agencies.
The issuance of so-called small-issue IDBs has experienced a major resurgence over the past three years as resources at the state and federal levels have diminished, the CDFA said, while predicting that local economic development finance agencies will continue to search for sources of capital and affordable financing for small- and medium-sized manufacturers.
The CDFA also asserted that "tax-exempt bond financing, as we know it today, has become the cornerstone of economic development financing."
According to the CDFA, which lobbies on behalf of state and local governments and municipal authorities that provide economic development financing programs, qualified small-issue IDBs are one of the most popular choices for issuers and manufacturers seeking financing.
IDBs, which are private-activity bonds, are typically issued by municipalities on behalf of a borrower, becoming limited obligations of the issuer and payable solely from loan repayments from the borrower.
Issuance of the bonds grew 25% in each of the years 2004 and 2005, and in 2006 rose 19.5%, according to The Bond Buyer's annual survey of the 50 states' use of private-activity bond volume cap. But the IDB issuance process is complex, requiring considerable understanding and dedication, especially since small issuers may not be well-versed in tax laws or do not have enough staff to achieve appropriate levels of due diligence, according to the council.
And "while IDBs continue to be a popular economic development tool, they don't sell themselves," the CDFA said. "Many manufacturers do not know the program is available. Businesses are pulled in different directions when it comes to receiving the best deal to meet their financing needs."
The council recommended that IDB issuers develop a mission statement for their bond programs and hold regular public meetings. It also urged issuers to think creatively in marketing IDBs to the right audience.
"Often small- to medium-size manufacturers are unaware of the financing options available to them through these types of programs," the CDFA said. "Outreach to the local manufacturing community and the promotion of success stories in the media and online will cultivate new projects and drive demand."
Issuers may find presentations with local chamber of commerce organizations, banks, and business groups to be helpful, and should work to build relationships with those entities, as well as other financial institutions, the CDFA said.
"Equally important, issuers should build strong relationships with various economic development and like-minded organizations," the council said. "These networks can help to build a referral network and enhance issuers' programs."
To address oversight concerns, IDB issuers should document a detailed process that will ensure manufacturing companies comply with the requirements of the bond financing documents, and that bond proceeds are spent properly to adhere to applicable laws and regulations, the council recommended.
"It is also important for issuers to produce an annual report to detail the bond program, including updates on bonds issued during the immediate past year and information on issuance performance compared to expectations," the CDFA said. "This is typically done in conjunction with the participating borrowers to ensure they are reporting on the project on an annual basis."
Issuers should also perform regular independent audits as necessary, as audits "provide a third-party, objective review of programs and allow an issuing authority a foundation with which to build a strong program," according to the council.
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Oberstar Wants Trust Fund for Bridge Repair
Posted on Thursday, August 09, 2007
Source: Bond Buyer
by Humberto Sanchez
Congress would establish a dedicated trust fund to help repair and replace the nation's nearly 74,000 structurally deficient bridges, under legislation unveiled yesterday by House Transportation and Infrastructure Committee chairman Rep. James L. Oberstar, D-Minn.
Oberstar's bill comes after the Interstate 35W bridge collapsed into the Mississippi River in Minneapolis Aug. 1 during the evening rush hour, killing at least five and injuring roughly 100. A federal investigation is currently under way to determine the cause of the bridge's failure.
"One week ago, a routine commute after a day of work, school, or shopping turned to horror, shock, and tears," Oberstar said in remarks he delivered in Minneapolis. "Today, as the recovery effort continues, we ask ourselves if such a tragic failure can happen elsewhere."
The I-35W bridge had been rated "structurally deficient" by the U.S. Department of Transportation, which meant that the bridge had major deterioration, cracks, and other flaws, but was not thought to be unsafe.
Oberstar said that there are 73,784 bridges in the U.S. that carry the DOT's structurally deficient rating and that the nation's bridges have about $32.1 billion in needs. His bill is aimed and ensuring those bridges get the funding needed so that a future tragedy can be avoided.
"We react to tragedy, when lives are lost, but we fail to take preemptive action that could prevent these tragic events," Oberstar said. "We cannot wait for another tragedy. We must act, and act quickly."
The bill's bridge reconstruction trust fund would be modeled on the existing highway trust fund, Oberstar said. Federal funding for highway and transit construction is generated from the federal gas tax and other transportation-related fees. The revenues are collected into a pool known as the highway trust fund, and are distributed to states annually based on a formula.
States sometimes use their share of the tax revenue to repay tax-exempt bonds issued to finance transportation projects, and bonds could similarly be issued in connection with the bridge trust fund.
"Theoretically, the same framework could be applied to a new program," Cherian George, a transportation analyst with Fitch Ratings, said yesterday in a brief interview. States could leverage their bridge funding "to accelerate the delivery of projects."
The bonds typically issued in connection with the highway trust fund are known as Garvees, which stands for grant anticipation revenue vehicles. The bonds are issued by state and transit authorities to finance the construction of transportation projects and are repaid with future federal transportation grant funds.
But George said that other types of financing options could also likely be used, including private-activity bonds and public-private partnerships.
To fund the bridge plan, Oberstar suggested that Congress either enact a user fee on gasoline and diesel fuel or place a tax on each barrel of oil imported into the U.S. The funds would be available for four years, under the plan. However, any new fee would likely have to be approved by the Ways and Means Committee, which oversees tax issues in the House.
Each one-cent-per-gallon user fee on gasoline and diesel fuel could generate about $1.7 billion and a $1 fee on each barrel of oil at the refinery could generate $5.5 billion a year, according to Oberstar.
The bill also would require the DOT and state governments to improve bridge inspection requirements and would distribute funds based on public safety and need.
But the bill is too narrowly focused for the House transportation committee's top Republican John Mica of Florida.
"This nation lacks a national plan to address the continuing deterioration in all modes of transportation," Mica said in a statement yesterday. "The Oberstar plan is a Band-aid approach to a critical national transportation infrastructure problem."
"If we concentrate on developing a national strategic transportation plan and redefining the federal role in transportation, with a new policy for how this nation finances infrastructure improvements, including public-private partnerships, we can rebuild this country's transportation systems," Mica said.
Other observers applauded Oberstar's plan.
"The approach he has outlined is not Washington 'business as usual,' " American Road and Transportation Builders Association president and chief executive officer T. Peter Ruane said in a statement yesterday. "It is a strategic, targeted capital investment plan that has accountability and a defined national outcome - eliminating structurally deficient bridges on America's most heavily traveled highways. He is proposing a surgical strike approach that could be a model for the future."
Meanwhile, federal spending on infrastructure is expected to rise from $76.3 billion in 2006 to $77.3 billion in 2007, $79.4 billion in 2008, and $81.5 billion in 2009, according to a report published yesterday by the Congressional Budget Office. Spending on infrastructure would account for roughly 3% of total federal spending during that period, the report said.
Between 1956 and 2004, total annual spending on infrastructure, from federal, state, and local governments, rose steadily, growing an average of 2.3% each year, the CBO report found.
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A Push for Transparency
Posted on Wednesday, August 15, 2007
Source: Bond Buyer
by Andrew Ackerman
Rep. Vito Fossella, the first member of Congress to publicly support Securities and Exchange Commission chairman Christopher Cox's proposed municipal market initiatives, has been pushing for improvements in municipal disclosure ever since controversy erupted over the financial condition of an authority that serves his district five years ago.
The Republican congressman from New York, whose district includes Staten Island and a portion of Brooklyn, has looked into making municipal disclosure more like corporate disclosure since 2003.
In his view, municipal disclosure is "stuck in time" while other markets have moved toward greater transparency.
"You could argue that municipal securities investors are almost treated like second-class investors, in the way that the information that is available in the corporate market per se, is not available in the same shape or form to muni investors, and as a result it has an impact on risks and volatility, whether it's in the primary or the secondary market," Fossella said in a recent interview. "Our goal should be to minimize those risks."
The congressman told The Bond Buyer he plans to help draft legislation based on the broad set of muni market proposals Cox outlined last month.
Cox asked Congress to consider writing legislation that would, among other things, create a free, centralized Web site, similar to the SEC's EDGAR, through which investors could easily access information disclosed by muni issuers. He also asked Congress to: clarify the legal responsibilities of muni transaction participants; require muni issuers to use generally accepted accounting standards issued by the Governmental Accounting Standards Board; and provide an independent source of funding for, and SEC oversight of, GASB.
Fossella said he is in the minority party for the first time in his 12 years in Congress and does not sit on any committee with jurisdiction over securities, but says muni disclosure falls under the purview of the House GOP task force on capital markets, which he chairs.
He points to his long-standing interest in muni disclosure and an appeal he made in April to work with Cox in crafting legislation after the SEC chairman publicly expressed concerns about the muni market. In a letter sent to the Cox that month, Fossella wrote: "Ensuring adequate disclosure of the financial statements of public authorities is essential in maintaining the safety and soundness of the bond market. It is essential to make certain that quality information is available to retail investors who traditionally seek public authority bonds to reduce portfolio risk."
Fossella also said he will work to put together a bipartisan group of supporters for Cox's proposals.
"It's the right thing to do, whether it's a Democratic Congress or a Republican Congress," he said.
Fossella became interested in municipal disclosure in 2003, when he and other local officials challenged the Metropolitan Transit Authority in New York about an alleged downturn in its financial condition and the need for proposed fare and toll increases.
In April of that year, the MTA was accused of keeping two sets of books and misrepresenting its finances to justify the timing of a fare and toll increase. Led by then-state Comptroller Alan Hevesi, state and city officials charged that the agency manipulated its financial statements by shifting $500 million in savings from a massive debt restructuring in 2002 to future budgets to bolster the case for the toll hikes. By moving the cost savings to future budgets, the MTA made it appear that their financial situation was worse than it actually was, the officials charged.
Warning of an impending multibillion dollar budget shortfall, the authority voted in March 2003 to increase subway and bus fares in New York City by 50 cents to $2 and also to increase commuter rail fares and bridge tolls, including the toll for the Verrazano Bridge, which connects Staten Island to Brooklyn, the two portions of Fossella's district.
Incensed by the findings of an audit Hevesi conducted, Fossella and five other Staten Island lawmakers, along with a local motorist group, sued the MTA in a trial court in Manhattan, charging the agency had misled the public about its finances.
Though a Manhattan judge initially agreed with the lawmakers and threw out the MTA's toll hikes, an appellate court panel of judges overturned the verdict later that summer, ruling that the MTA met its statutory requirements in notifying the public of a looming financial crisis and essentially rejected the conclusion that the authority had misrepresented its financial statements.
Still, the MTA, which had insisted that it had done nothing wrong, revamped its disclosure later that year. In response to criticism about foggy financial reporting, it began releasing four-year financial plans and quarterly financial statements that outside auditors reviewed.
Fossella described the experience as a formative one in shaping his thoughts on disclosure. He noted that the MTA now charges $9 per round trip on the bridge, an "exorbitant toll," he said.
"In trying to get a sense of how they justify these tolls ... it was like pulling teeth, and I would say that the MTA is among the better ones," he said. "When you look at it from 30,000 feet and say, 'OK, why is the corporate market so transparent and information is so available?' Yet you have to go through this whole network or system to get all this [municipal] information that you can get almost instantaneously in the corporate market?"
"I'm not saying it should be exactly like the corporate market, but we should be moving in that direction to meet the needs of those who want information on the underlying public assets that are the collateral for [tax-exempt debt]," he added.
Though Fossella stressed that the vast majority of the issuers in the muni market are "good, honest, and decent people," he described five changes that are needed to enhance muni disclosure, all of which Cox proposed:
- Public accessibility to the offering and continuing disclosure documents, "at little or no cost to investors."
- Timely access to financial information pertinent to investors, and reduced reliance on "stale or otherwise outdated information."
- Adequate and timely disclosure of material events that may impact the financial stability of the issuer. Citing the San Diego pension scandal, among others, he said: "History can point to examples where there was information discovered after the fact, so you can have an enforcement action, but my view is it's always better to error on the side of disclosure up front."
- Clarified roles of issuer officials in the preparation and submission of financial documents.
- Further progress in the "use of information technology" for bond offering document submission and retention.
"All of those sort of add up to the establishment of the cornerstone of a limited regulatory regime, designed expressly for the needs of the municipal market," Fossella said.
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Legislation: FHLB Credit Enhancement Bill Gets Support in Congress
Posted on Tuesday, August 21, 2007
Source: Bond Buyer
by Andrew Ackerman
Supporters of legislation that would allow the 12 Federal Home Loan Banks to credit enhance municipal bond transactions claim it is gaining momentum now that identical bills have been introduced in both houses of Congress.
Specifically, the legislation would change the federal tax code and allow any of the 8,100 member lenders of the FHLB system to issue letters of credit, which could be used to insure small industrial development bond deals or transactions involving small nonprofit health care facilities, colleges, or universities, supporters say.
The tax code would have to be amended because currently only housing bonds can be backed by a federal guarantee and still retain their tax-exempt status.
Proponents argue that the bill is crucial for local projects financed by small issuers that have trouble accessing the capital markets. They also note that it would put the FHLB system on the same level as Fannie Mae and Freddie Mac, two other government-sponsored enterprises that are permitted to issue letters of credit in support of tax-exempt bonds.
Small unrated issuers face "limited access" to debt markets without credit enhancement, said John R. Price, president and chief executive officer of FHLBank Pittsburgh. He stressed that underwriting such small types of credits "is in the very nature of community banking."
"We expect there will be a limited area of overlap between bond insurers and community banks in this market," Price added.
Sen. Jay Rockefeller, D-W.Va., co-sponsored the bill earlier this month, along with Sens. Mike Crapo, R-Idaho, Debbie Stabenow, D-Mich.,Tom Carper, D-Del., Robert Casey, D-Pa., and Tim Johnson, D-S.D.
The Senate version of the bill comes three months after four lawmakers introduced identical legislation in the House. That bill was authored by Rep. Sander Levin, D-Mich., and cosponsored by Rep. Phil English, R-Pa., who introduced similar legislation in the last Congress that went nowhere, as well as Reps. Deborah Pryce, R-Ohio, and Paul E. Kanjorski, D-Pa., chairman of the House Financial Services subcommittee on capital markets, insurance, and government sponsored enterprises.
Toby Rittner, the executive director of the Council of Development Finance Agencies, which supports the plan, noted that the legislation could spur issuance of IDBs.
"As a major measure of support to the economic development finance community, this important legislation would effectively improve the use of small issue industrial development bonds across the country," Rittner said in a statement.
But insurers are concerned about the legislation, stressing that it would create a double government subsidy because the bonds would retain their tax-exempt status and also be backed by the GSEs that benefit from lower borrowing costs because of an inherent federal guarantee.
Gary C. Dunton, the president and chief executive officer of MBIA Inc., suggested at a conference last spring that the proposal might eventually limit the tax revenues currently paid to federal, state and governments, based on the assumption that private credit enhancers would be displaced by the banks.
Though Dunton was unavailable to comment for this story, an MBIA spokeswoman said the company's concerns remain the same.
"The investment-grade municipal market remains exceptionally well-served by the triple-A bond insurers," the spokeswoman said. "This is evidenced by the steady demand in the market, which has been unchanged since 2002."
According to the Association of Financial Guaranty Insurers, which represents the insurance industry, $187 billion in par value of munis were insured last year, along with $1.3 trillion in outstanding debt as of Dec. 31.
Though the volume of bonds that could be enhanced by the banks is unknown, the Congressional Budget Office has estimated that roughly $6 million over five years would be diverted from federal coffers if FHLBs were allowed to provide letters of credit for tax-exempt deals, according to the banks.
"This does not cost a lot of money," said Peter Knight, a spokesman for the FHLBank of Pittsburgh.
Still, Bob Mackin, AFGI's executive director, described the bill as "poor tax policy" and warned it would "effectively permit the FHLBanks to use their federal subsidies to enter a new line of business that competitive private firms already serve."
Alex J. Pollock, a resident fellow at the American Enterprise Institute and former president and chief executive officer of the FHLB of Chicago, who is opposed to the proposal, said he sees no reason to expand GSE powers except in the case of a clear-cut market failure.
"There's a theoretical problem," he said. "Why would you expand GSE powers without some kind of pressing problem, and why would you ever do it permanently instead of temporarily?"
Pollack also cited a little noticed aspect to the plan that would require underwriting banks to post collateral equivalent to as much as 115% of the transaction with the bank providing the letter of credit.
"That might reduce its appeal," Pollack said.
But Knight said that high collateral requirements should ease the concerns of bond insurers that are worried the banks would steal their business.
"That is one of the things that will be a natural check on the volume of this business," he said.
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July 2007
June Volume Down 2.5% to $44.1 Billion
Posted on Monday, July 02, 2007
By Matthew Hanson
Citigroup Manages Most in '07
Posted on Tuesday, July 03, 2007
By Matthew Posner
Moody's: Florida Tax Reform May Hurt Local Tax Districts
Posted on Wednesday, July 11, 2007
By Shelly Sigo
Treasury Issues QZAB Regulations
Posted on Monday, July 16, 2007
By Alison L. McConnell
Firms Forming Pro-P3 Lobbying Group
Posted on Wednesday, July 18, 2007
By Humberto Sanchez
June Volume Down 2.5% to $44.1 Billion
Posted on Monday, July 02, 2007
By Matthew Hanson
In a month that saw rising long-term rates spoil issuers' appetites for last-minute refundings, market volume for June was about $44.1 billion, according to preliminary numbers from Thomson Financial.
This was a 2.5% decrease from the same month of 2006.
While market sources disagreed as to whether the higher rates are here to stay, they said that 2007 will likely be a record year for municipal volume either way.
Through the first half of 2007, state and local governments have sold $226.9 billion of debt, according to the preliminary figures. This amount is 26.5% ahead of last year's pace and 8.2% ahead of 2005, which eventually set the record for issuance in a year.
"If every month from here on out comes in at just 95% of the three-year average, then we'll have a record year," said Matt Fabian, a senior analyst at Municipal Market Advisors. "We've been averaging 115% of the three-year average."
George Friedlander, fixed-income strategist at Citigroup Investment Banking, said he still expects municipal market volume to hit $430 billion by year-end.
The first full week of June saw yield curves steepen in fixed-income markets around the world, as the European Central Bank and the Reserve Bank of New Zealand raised their target interest rates and U.S. Federal Reserve Bank officials made cautionary comments about inflation.
The 10-year Treasury rose steeply during the final days of the week, closing at 5.10% on June 7. It was the first time this benchmark yield had closed at more than 5% since August 2006.
The muni market followed suit, as yields headed higher and the yield curve steepened. The average yields on 30-year high-grade munis jumped nine basis points to 4.41% on June 7, and by Thursday the average yield had risen to 4.48%.
While some pointed to recent market rallies as signs that rates will head back down, some warned that they could signal the beginning of a new market environment.
"The interest rate movement in June could very well signal the beginning of the end of what has been a terrific municipal finance bull market of the last five or six years," said Chris Hamel, RBC Capital Markets' head of municipal finance.
"That's consistent and normal with municipal finance cycles," Hamel added. "There is an upswing, and there's a downswing. It appears that the downswing might be on it's way."
Issuers reacted to the rate jump mainly by tapering off their last-minute refundings, which had become a common part of many deals during the last year.
Puerto Rico provided perhaps the best example this month, as the commonwealth postponed a $1.5 billion general obligation refunding. The deal was set to price in late May, but did not get the proper legal governmental approval in time. The bonds then were going to sell during the second week of June, but rising interest rates led Puerto Rico to pull the plug, saying they would wait until at least the beginning of July to sell them.
West Virginia pushed its $906.4 million tobacco bond deal back a day, as investors were slow to commit to the offering during the second week of June as market rates had become more volatile. Following a rush to get the deal to market, it priced on June 14 and met its state-mandated goal of raising at least $800 million of proceeds. There is little doubt, though, that market rates would have been more favorable if they had been able to get the deal in before June's rate increases.
"We were pleased with the way it went," said Joe Martin, deputy chief of staff for Gov. Joe Manchin3d. "Certainly, if we had been there a little sooner it might have been a little better, but we achieved our objective."
Thomson's measure of "combined" issuance, which accounts for bond series that include both new-money and refunding proceeds, declined to $2.7 billion in June - a 55.4% drop from the same month in 2006. It is a good indication of how often issuers decide at the last minute to include extra refunding proceeds in their bond sale.
Combined issuance had been one of the main reasons 2007 volume is on pace for a record year. Even with the dip, combined issuance still made up $43.3 billion of first-half volume, 73% more than the combined volume in the first half of last year.
New-money issuance for June was $35.8 billion, a 5.1% increase from the same month of 2006, and refunding volume was $5.7 billion, up 9.1%.
The education and general purpose sectors, typically the most common types of bonds sold, both showed slight volume declines from June 2006. About $10.5 billion of education bond were sold last month - an 8% decrease - while $12.7 billion of general purpose bonds were priced - a 7.2% drop.
Issuance of housing bonds, which charted year-over-year increases consistently in 2006, dropped to just $3.5 billion last month. This was 28.8% less than the total sold last June.
Friedlander said this decrease was "just noise" and added that he thinks the woes of sub-prime mortgage defaults will create increased demand during the rest of the year for the nation's large state housing finance agencies that sell bonds to fund single-family mortgages.
Hamel suggested that the housing volume statistics might be lower because an increasing number of multifamily housing deals are being done as direct placements and private placements. The securities from these deals are being packaged as trusts and placed into broker-dealers' tender-option bond programs, he said, adding that his firm has 12 such deals in the pipeline right now.
More bonds have come from California issuers during the first six months of 2007 than from those in any other state, the data showed. The largest deal of June came the state itself, as California sold $2.5 billion of GO refunding bonds on June 20, according to Thomson.
Texas and Florida were the second and third largest sources of volume, respectively, during the first half. The Texas Transportation Commission's mass transit GOs sold on June 7 were the month's second largest deal.
Despite pushing back its GO refunding, Puerto Rico was the ninth largest source of bond issuance during the first half of 2007, with its February $2.2 billion deal for the Puerto Rico Highway and Transportation Authority leading the way. The commonwealth has several other multi-billion dollar deals tentatively set for the next six months, including a pension obligation bond deal that could be as large as $9 billion and a sales tax-backed deal that could reach $6 billion.
Reflecting on the months to come, Fabian said all the rallies and sell-offs of June have left many people hoping that July will a more stable sense of market direction.
"People are happy to let the second quarter go, and move into July," he said.
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Citigroup Manages Most in '07
Posted on Tuesday, July 03, 2007
By Matthew Posner
The first half of 2007 saw the cast of usual suspects running the books for municipal bond sales, with Citigroup Investment Banking leading the pack managing 344 transactions worth a combined $36.2 billion, according to Thomson Financial.
As total municipal issuance for the last six months grew to more than $229 billion, the top five underwriting firms controlled more than 49% of all the business. In addition, the overall dollar volume of bonds sold outpaced all prior first halves and jumped up 27% from the first half of 2006.
But the number of discreet bond deals was up about 4% to 6,331 from 6,025 a year ago, according to Thomson. The ongoing shift to larger deals could have implications for profitability of firms in the market.
Citigroup's year-to-date business accounts for 15.9% of the market, up from the first half of 2006 when it made up 12.9% of the market, managing 258 issues worth $22.8 billion.
Citigroup took back the top spot from Merrill Lynch & Co., which in the first quarter not only dominated in its bread and butter competitive sales, but also edged out other banks in negotiated sales.
In the first six months of 2007, Merrill managed 234 deals worth $27.5 billion. While dropping down one spot, it is still doing more business than it did in the first six months of 2006, when it managed 217 deals worth $17.7 billion and did the third most business overall. Citigroup and Merrill declined to comment on the rankings.
Third this year was UBSSecurities LLC, which managed 347 issues worth $18.1 billion. Last year at this time it did the second most bond business, managing 351 issues worth $19.5 billion. One reason for the drop could be attributed to the bank's reshuffling of senior staff in April in an effort to grow its capital markets side of the business. UBS did not return calls for comment.
Rounding out the top five are Bear, Stearns & Co. and Morgan Stanley, with 69 issues totaling $15.1 billion and 135 deals totaling $14.7 billion, respectively. These two firms moved up in the rankings as a result of running the books for a few very large deals. In the case of Bear Stearns, two tobacco bond sales accounted for more than $8 billion of bonds. The casualties of the increase in business for these two firms were JPMorgan and Goldman, Sachs & Co., which fell from the fourth and fifth spots in 2006, down to the seventh and eight spots in the first half of 2007.
Bear Stearns' senior managing director and head of public finance, Robert Foran, explained that the firm's ongoing strategy has been to focus on large deals. Bears' managing so much volume through only 69 issues is unique when compared to the underwriting strategies of their competitors. In the first six months this year, UBS managed fives times the number of issues, but this only accounted for roughly $3 billion more of dollar volume of bonds.
"Our strategy has been to focus on large, frequent issuers," Foran said. "It may be tobacco one year or some large restructuring the next. We are a national firm, we have a national practice, and are national players but we certainly do not operate in every state and don't do a lot of small transactions."
"It takes as much time and effort to do a large transaction as it does to do a small one and so the extent that volume and deal size increase and spreads stay constant, you are going to make more money," Foran said. "But often what you see is as deal sizes go up and the transactions get larger, fee pressure increases as well. We are doing more as an industry in volume but the pressure on spreads continues."
According to Thomson statistics this is the case, spreads including managers fee, underwriting fee, average take downs, and expenses have decreased consecutively since 1999, with the exception of 2006. In 1999, the spread per $1,000 face-value bond issue was $7.14. In 2005 it was $5.45. Last year the spread increased slightly to $5.56.
The contraction in spreads might account for the increasing concentration of underwriters in the municipal market. A relatively small number of banks continue to handle significantly more issuance in public finance. The top five underwriters accounted for almost half of all sales so far this year, which is almost the same as last year when the top five banks underwrote roughly 47% of all deals. The top 10 senior managers underwrote 72.9% of all municipal issuance in 2007 so far.
As for the senior managers for small-issue bonds, Morgan Keegan & Co. took the top spot from RBC Capital Markets. Morgan Keegan has managed 166 issues totaling $868.1 million. RBC managed 131 issues totaling $773.1 million so far this year. The two firms switched the first and second spot from last year to this.
Tony Marcone, senior vice president at Morgan Keegan who focuses on bank-qualified sales, attributes the increase in business to the focus on the competitive side and their increased efforts in Texas. In fact, as for small competitive sales, Morgan Keegan tops the list with 121 issues worth $635.5 million, whereas RBC falls to the 38th spot with 11 sales worth $24.3 million.
"We've stepped up our presence and taken a commanding lead in the competitive aspect of our business and that has led to overall rankings," Marcone said. RBC "has seen its presence diminish in this space. Also, last year we decided to refocus on Texas and also just make sure that we are a national presence in all 50 states."
RBC did not return calls for comment.
As for financial advisers, Public Financial Management Inc. continues to dominate in the public finance arena. The company acted as financial adviser on 342 issues totaling $20.8 billion of bonds. One striking development, however, was in advising on negotiated sales, where as First Southwest Co. took the top spot as they advised on 224 issues totaling $17.2 billion. Here, PFM was second with 210 issues totaling $15.3 billion.
PFM chief executive officer F. John White attributed this to timing.
"When you look at the first half of the year, it is probably more of a reflection of timing and that our clients just didn't have as much negotiated business planned for the first part of the year," White said. "For the rest of the year, I expect things to change."
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Moody's: Florida Tax Reform May Hurt Local Tax Districts
Posted on Wednesday, July 11, 2007
By Shelly Sigo
Florida's local governments and special tax districts could suffer long-term financial instability as a result of property tax reform measures ordered by state officials, according to Moody's Investors Service analyst John Incorvaia.
Last month, Gov. Charlie Crist signed a bill implementing reforms that would be introduced in two phases - the first round amounting to a freeze of current local property tax rates and the second round dependent on passage of a statewide referendum in late January 2008 that would significantly increase the state's homestead exemption through a constitutional amendment.
Particularly challenging for governments and tax districts would be passage of the constitutional amendment that could leave them with very limited operating flexibility and ultimately have a negative impact on credit quality, Incorvaia said yesterday.
"We really think that the first round of tax reform seems to be manageable," Incorvaia said, noting that a large number of Moody's clients were contacted to assess impacts of the tax reform measures. "The constitutional amendment, I think, puts a lot more constraints on reserves and personnel levels, and obviously schools."
If voters approve it on Jan. 29, the amendment would institute a new "super" homestead exemption system. It would allow a 75% exemption on the first $200,000 of a home's value, another 15% exemption on homes valued from $200,000 up to $500,000, and it would cap the exemption at $195,000 on homes valued at $500,000 or more. Homeowners could choose the new homestead exemption or keep a current 3% annual cap on assessments. The state has promised to make up what school districts would lose from the new homestead system, which is estimated at $7.2 billion over five years.
Moody's believes that tax increment districts, especially those created recently and those highly leveraged, will be more severely impacted as millage rates are rolled back. Without material growth in the tax base to offset reduced tax rates, incremental revenues will decline annually, Incorvaia said.
Certificates of participation, used widely by Florida school districts, and debt secured by non-ad valorem revenues will be indirectly impacted as available revenues are used elsewhere to pay for essential services, said Incorvaia, who predicted that issuers would begin to scale back on capital expenditures.
"I think what you'll see is more school districts, cities, and counties going to the voters and asking their approval for debt," he said.
On Monday, Eric Hersh, the mayor of Weston in South Florida, filed a petition asking the Florida Supreme Court to issue a writ of mandamus removing the constitutional amendment from the ballot on Jan. 29.
Hersh's complaint argues that the ballot language is "highly misleading" because it fails to inform voters that its passage would ultimately eliminate a previously voted constitutional amendment that limits assessments on homestead property to 3% annually.
The complaint also argues that the referendum has been improperly scheduled for a vote during a special election in January 2008 while Florida's constitution requires votes on amendments to be held during general elections.
A third point argued in the complaint is that the Florida constitution gives local governments the right to levy up to 10 mills in ad valorem taxes, and the proposed amendment would interfere with that right.
"The Legislature is impermissibly usurping the powers of local governments protected by the Florida constitution," the complaint said. "The Legislature's usurpation of power will continue to occur up to and through the special election unless this court intervenes and prevents the Legislature from disregarding the constitution."
The complaint was filed on behalf of Hersh by the law firm of Weiss Serota Helfman Pastoriza Cole & Boniske PL, which had published a paper suggesting the amendment proposed by the Legislature was unconstitutional.
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Treasury Issues QZAB Regulations
Posted on Monday, July 16, 2007
By Alison L. McConnell
The Treasury Department on Friday issued long-awaited qualified zone academy bond regulations that contained few surprises for bond lawyers but were highly technical, leading QZAB advocates to predict they would create headaches for small schools.
The temporary regulations finalize rules proposed in March 2004 and flesh out restrictions imposed by Congress in December. The final rules will take effect Sept. 14, but Treasury asked market participants to submit comments by Oct. 15 on the three new provisions enacted as part of the 2006 Tax Relief and Health Care Act.
Qualified zone academy bonds, commonly referred to as QZABs, are taxable, tax-credit bonds that municipal issuers use to finance renovations and repairs at existing school facilities. They cannot be used for new school construction, and provide holders with an income tax credit rather than tax-exempt interest payments.
The temporary regulations issued Friday include provisions from the proposed rules, but Treasury wanted market participants to have the chance to comment on the extra twists Congress threw in last year - a new five-year spend-down requirement, arbitrage provisions, and an information reporting requirement, according to John J. Cross 3d, an attorney in the tax legislative counsel's office of Treasury's Office of Tax Policy.
"We wanted to have all [the QZAB rules in the same set of] regulations, so we decided to issue the rules in temporary form," he said Friday.
As a result, some of the rules will become final in 60 days and the three new provisions will not be effective until later this year.
"Congress kind of gave them a bad deal with having to come up with two sets of rules," said an attorney who helps issuers do QZAB transactions.
One of the three new measures enacted in December requires issuers, on the date of issuance, to: reasonably expect to spend 95% of QZAB proceeds within five years; have a binding commitment with a third party to spend at least 10% of the proceeds within six months; and proceed with due diligence to spend all the funds for qualified purposes.
The second measure requires issuers to comply with arbitrage restrictions from Section 148 of the tax code. In last year's tax act, that requirement constituted "just a one-liner that applied provisions from the tax-exempt bond area," Cross noted. "That's a whole body of law that has hundreds of pages of laws, exceptions."
For QZAB purposes, Treasury generally tried "to apply the arbitrage regulations in the same way across the board, including the exceptions and everything else, unless there was some quite specific [area for which] we needed a special rule," he continued.
For example, there is a statutory small-issuer exception to arbitrage rebate requirements for municipalities that issue less than $5 million of tax-exempt bonds per year. "We took the exception, too," Cross said. "For QZABs, that should be helpful, because a lot of these are done by little guys."
The temporary regulations retain most of the provisions from the 2004 proposed rules including one that treats proceeds used to develop course materials or train teachers as qualified during any period after the expenditures are made. Another treats a public school facility as a qualified academy if it is located in an empowerment zone or enterprise community on the issue date of a QZAB transaction - key because academies must be so located, but Congress has allowed most EZs and ECs to expire.
The rules allow issuers to set reasonable expectations that 35% of a school's students will be eligible for the federal reduced-cost lunch program - another qualified academy requirement - for one year in advance, and outline standards for how much of a school must still be standing for a project to count as rehabilitation, versus new construction.
Market participants had few concerns when the rules were proposed in 2004, so there were no real surprises in the temporary regulations, according to Linda Schakel, a partner with Ballard Spahr Andrews & Ingersoll LLP and a former Treasury official.
"There were a few little things," she said. "I was sorry they did not take the suggestion that just because a school is no longer an academy you'd treat it as change of use. Schools are notorious for thinking that a certain technical program is the best thing since sliced bread - you issue bonds for equipment, and five years later decide to do away with program. If [the academy is] too specific a type and you lose your status, as of the first date on which the school fails to qualify ... you have to take a remedial action" such as redeeming some of the QZABs.
The 60 pages of temporary regulations also signify a departure from the QZAB program of the past, according to sources.
"This used to be a very simple, easy program. That was part of its appeal," said Laurence Peters, vice president of the National Education Foundation and Cyberlearning.org. "Now it seems like we're entering another, more bureaucratic phase."
Peters said his organizations were still studying the regulations, but upon an initial perusal are concerned about practicality.
"We are dealing with very small school districts without a lot of technical expertise, and with small QZAB issues," he said. "Allocations for 2006 and 2007 are already out there ... so how do they get information out there, in midstream, when people are in the process of making plans?"
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Firms Forming Pro-P3 Lobbying Group
Posted on Wednesday, July 18, 2007
By Humberto Sanchez
A Wall Street investment bank and two foreign firms seeking to invest in U.S. transportation infrastructure are backing an effort to form a lobbying group that will promote public-private partnerships to lawmakers in the wake of concerns raised about whether these deals are in the public interest.
The group, identified as the Coalition for Strengthening America's Infrastructure, has been provided "seed funding" by Goldman, Sachs & Co., Macquarie Bank Ltd., Transurban Group, and the American Association of State Highway and Transportation officials, which represents the state transportation departments in Washington, according to preliminary promotional documents obtained by The Bond Buyer. The documents did not disclose how much money was provided.
Peter Loughlin, with Loughlin Enterprises LLC, a lobbyist and attorney who is putting the coalition, declined to comment for this article other than to say that the coalition is still in the formative stage and that the group's membership has not been fully determined.
The firms involved in the effort also were reluctant to talk about the creation of the new lobbying group. A spokesman for Goldman declined to comment. A spokesman for Macquarie said the bank has not provided seed money, but has been involved with the group-forming effort. And a spokeswoman for Transurban said that while the company provided an unspecified amount of funding, it stipulated that the payment was for Loughlin to explore the formation of the group and not to fund the group's operations.
AASHTO did not return a phone call seeking comment and sources said it has backed out of the coalition because not all of its members support P3s.
Group organizers hosted a "kick-off meeting," titled "A Call To Action" on June 22 in New York City where former New York Gov. George E. Pataki, one-time U.S. House Majority leader Dick A. Gephardt, former Colorado Gov. Bill Owens, and the prior acting U.S. Department of Transportation Secretary Maria Cino all spoke in favor of P3s, according to sources.
They were unavailable for comment.
The coalition would broadly "focus on education and advocacy" and "pursue an agenda ... that ensures public-private partnership solutions remain available as a financing and delivery tool to enhance our nation's transportation system," according to the promotional documents.
The group would also "work towards removing legislative and regulatory barriers that restrict the full utilization of public-private partnerships and opposing any efforts to impose additional restrictions on public-private partnerships," the documents said.
In addition, the coalition would support increased federal transportation funding to state and local governments, but "with public-private partnerships positioned as viable, available, and sound alternatives."
Another goal of the group is to counter criticism from Congress and Americans for a Strong National Highway Network, a group formed in February to oppose highway privatization deals. Members of the P3 opposition group include the Owner-Operator Independent Drivers Association, which represents small business truckers, and the American Trucking Association.
"Their motivation is economic," OOIDA executive vice president Todd Spencer, said the "motivation" of the investment and toll development firms involved in P3s "is economic" and added, "That is there job to do that, I suppose ... but our lawmakers, the people we put into positions of responsibility, they shouldn't be buying into that nonsense."
However, Spencer conceded that there is a place for some P3s among available financing tools. Those P3s would build new road capacity, instead of taking over existing roads, and provide assurances that road users get a reasonable return.
The formation of the new P3 coalition also comes as Congress prepares to begin drafting broad transportation legislation that expires Oct. 1, 2008. The new bill is expected to be the legislative vehicle for any federal P3 curbs that might be imposed.
Goldman Sachs, one of the backers of the new P3 coalition, has been a leading voice advocating the use of P3s by state and local governments. The firm both advises state and local governments on P3 deals and also seeks to invest in the transactions. However, Goldman has said that its advisory and investment units are separate and do not interact to prevent conflicts of interest.
The New York investment bank advised Indiana and Chicago in their P3 deals, which have been disparaged by some lawmakers.
Under the Indiana transaction, which closed last year, the state leased the Indiana Toll Road for 75 years to a private consortium in exchange for $3.8 billion. Chicago leased its 7.8-mile Chicago Skyway in a 99-year deal for $1.83 billion that closed in 2005. In both instances the private partner is responsible for operating and maintaining the roads over the life of the lease in exchange for collecting the tolls over the same period.
The creation of the P3 lobbying group comes as federal lawmakers have criticized P3s in a series of P3 hearing in recent months. Rep. Peter DeFazio, D-Ore, chairman of the House Transportation and Infrastructure Committee's highways and transit subcommittee, lambasted the Indiana deal for benefiting the private partner more than the state. By one estimate, the deal would bring in $11 billion over 75 years to the private partner, much more than the $3.8 billion payment received by the state. He also criticized the Chicago transaction, in part, because the city planned to use its $1.8 billion payment to cover operating expenses rather than as a reinvestment in its transportation infrastructure.
The P3 supporters "have a right to advocate for their company's gain and I am here to advocate for the public interest, which sometimes involves [P3s] and many other times would be better done through a fully public arrangement," DeFazio said in a brief interview yesterday.
DeFazio and full committee chairman Rep. James L. Oberstar in May wrote to all 50 governors, leading state lawmakers and state departments of transportation warning them about entering into P3 deals, particularly those that lease existing roads to a private company for a long period of time in exchange for a large cash payment.
Sydney, Australia-based Macquarie Bank, another backer of the coalition, invests in road infrastructure through its Macquarie Infrastructure Group subsidiary. MIG is part of the private consortium that won the concessions for the Indiana Toll Road and the Chicago Skyway.
Coalition supporter Transurban is a toll road developer based in Melbourne, Australia. The firm is involved in a $882 million P3 deal that would build 36 miles of high-occupancy toll lanes down Interstates-395 and 95 in Northern Virginia, which may be financed partly with bonds. The firm was also picked by Virginia in May to take over Pocahontas Parkway in Richmond for 99 years, including operations, maintenance, and collection of toll revenue, in exchange for $525 million.
Other possible members of the coalition include the departments of transportation in Indiana, Colorado, Texas, Missouri, Virginia, and Utah, as well as Chicago, the law firms of Nossaman, Guthner, Knox, Elliott LLP, and McGuireWoods LLP, and the consulting engineering firm Hatch Mott McDonald, according to the documents.
Firms that participated in the group's June 22 meeting included Spanish infrastructure firms Abertis and Cintra; law firms Chadbourne & Park, Mayer Brown Rowe & Maw LLP, Orrick, Herrington & Sutcliffe LLP and Hunton & Williams LLP; investment banks DEPFA Bank, Royal Bank of Scotland, and Lehman Brothers; and the construction firm, Kiewit. Macquarie, Goldman and Transurban also participated.
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June 2007
Hotchkiss To Head MSRB Staff
Posted on Friday, June 01, 2007
By Lynn Hume and Andrew Ackerman
Colorado's Northwest Parkway Leased to Foreign Consortium
Posted on Monday, June 04, 2007
By Richard Williamson
IRS Forms New Team to Oversee Derivatives
Posted on Friday, June 08, 2007
By Alison L. McConnell
Florida Lawmakers Cut Property Taxes
Posted on Monday, June 18, 2007
By Shelly Sigo
Private-Activity Bond Cap Carryforward Down 14%
Posted on Monday, June 25, 2007
By Alison L. McConnell
Hotchkiss To Head MSRB Staff
Posted on Friday, June 01, 2007
By Lynn Hume And Andrew Ackerman
The Municipal Securities Rulemaking Board has tapped Lynnette Kelly Hotchkiss, a managing director and associate general counsel at the Securities Industry and Financial Markets Association, to become its new executive director on June 18.
The board chose Hotchkiss, 47, who has more than 20 years of legal, business, and regulatory experience in public finance and other fixed-income securities, after a 10-month, nationwide search, in which more than 100 candidates were considered for the post.
She will replace Christopher "Kit" Taylor, who has led the MSRB for 29 of its 32 years of existence and is only the third person to have served as the board's executive director. Taylor's contract with the board expires Sept. 30, but it was unclear yesterday whether he will stay that long at the board. "There will be a transition period that has not been fully defined," one knowledgeable source said.
Hotchkiss will join the board as the municipal market confronts major challenges and potential upheaval - something that MSRB officials could not have contemplated when they launched their search for a new executive director last August. The Justice Department and Securities and Exchange Commission are conducting massive criminal and civil investigations of investments and derivatives and have subpoenaed dozens of firms about virtually every investment product or derivative they have brokered, provided, or otherwise been involved with in connection with muni bond transactions during the past six to 14 years.
At the same time, SEC chairman Christopher Cox has launched an initiative to improve muni disclosure and accounting, including the possible repeal of the Tower Amendment, which severely limits the commission's authority over muni issuers. Cox is currently weighing regulatory and legislative options put before him by the staff and may soon make recommendations to federal lawmakers and others. The Central Post Office disclosure system, which 18 municipal market groups created to resolve disclosure problems, is currently mired in patent litigation with an Orlando-based disclosure services provider. And the industry is preparing to embark on a revolutionary New Issue Information Dissemination System later this year, which will require operational changes at dealer firms.
But MSRB and industry officials praised Hotchkiss yesterday and said she is well-suited for the post.
"Throughout her career, Lynnette Hotchkiss has demonstrated her commitment to the integrity, transparency, and efficiency of the municipal markets, said John Lawlor, MSRB chairman and head of municipal markets at Merrill Lynch & Co. "She has earned the respect of all participants in the municipal marketplace - making her ideally suited to lead the MSRB, the industry's self-regulatory organization, into the future."
"Lynnette is highly competent, sophisticated, and strategic in her approach to the business," said SIFMA co-chairman Edward Forst, chief administrative officer at Goldman, Sachs & Co. "As a rulemaking body, it is important that the MSRB has someone at the helm who is both knowledgeable and has expertise in this field. She fills that bill."
Prior to joining SIFMA, Hotchkiss was associate general counsel at The Bond Market Association, which merged with the Securities Industry Association to form SIFMA. Before that, she worked at law firms in New York and London, serving as bond, underwriters', and special disclosure counsel on a wide variety of bond instruments as well as municipal derivatives. From 1990 to 1993, she served as general counsel for the New York City Municipal Assistance Corp.. She received her law degree from Tulane University School of Law in 1984 and her bachelor's degree in urban studies from University of Nebraska, Lincoln in 1981. She is currently attending the Securities Industry Institute program at the Wharton School, University of Pennsylvania.
The MSRB announced last August that it planned to search for a new executive director to succeed Taylor, saying it wanted "next generation leadership" to "help guide the organization into the future." During his tenure, the board passed controversial rules on political contributions and consultants and increased the transparency of muni trade data. But Taylor was viewed as a "strong personality" who raised the hackles of some in recent years over supplemental retirement benefits that had not been widely disclosed. Lawlor praised Taylor yesterday, saying, "The entire industry owes a great deal of gratitude to Kit Taylor. His passionate leadership over the years has helped set standards in this marketplace that are second to none. I know I speak for the entire board in wishing Kit every success in his future endeavors."
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Colorado's Northwest Parkway Leased to Foreign Consortium
Posted on Monday, June 04, 2007
By Richard Williamson
A consortium of Portuguese and Brazilian toll road developers will operate Colorado's troubled Northwest Parkway for the next 99 years under a $603 million deal announced last week.
In the nearer term, the new operators envision connecting the 11-mile tollway to a larger loop that has nearly encircled the Denver metro area.
Brisa Auto-Estradas de Portugal SA and Companhia de Concessoes Rodoviarias (Brisa/CCR) of Brazil will establish a $40 million fund that could be used to add a 2.3-mile extension of the Northwest Parkway to C-128 in Broomfield.
Ultimately, the tollway could extend another 15 miles to the C-470 highway that created the first part of a growing loop around metro Denver. A toll section known as E-470 arcs the eastern suburbs to Denver International Airport. Northwest Parkway connects DIA in the northeast to Interstate 25 and the northwest suburbs.
Making the final link will be a political challenge, however. Golden has fought the idea of any new toll project connecting the Parkway and C-470.
Brisa officials said the consortium has the inside track to finish the loop if the political trends shift.
"We believe we've established a strong relationship, which allows us to believe that we will be in a very good position to bid for the next 15 miles," said Brisa chief financial officer Joao Azevedo Coutinho in a conference call with analysts.
Conceived during an expanding economy in the late 1980s, the Northwest Parkway opened in 2004 and immediately failed to produce expected revenues in the wake of the dot-com bust, the Sept. 11, 2001 terrorist attacks, layoffs at the area's largest employers, and declining air traffic at DIA.
"We still are of the opinion that we got caught in a confluence of circumstances that no one could have envisioned," said Steve Hogan, executive director of the Northwest Parkway Public Highway Authority. "So, as a result of that, our traffic was lower than we anticipated."
With 2006 revenues of $5.6 million - slightly more than half of the $10.4 million projected - the parkway board began looking for a savior in January to avoid default on its debt. After screening 11 contenders, the consortium of Brisa/CCR emerged on top in April.
Despite the lengthy term of the operating agreement, Hogan said he and the board were pleased with the deal, granting unanimous consent.
"To Brisa's credit, they recognized that we weren't talking about a fire sale," Hogan said. "The negotiations were very long and very complex and touched on a number of subjects."
Hogan said the board must decide in a future meeting how to defease the $503 million of outstanding revenue bonds. But Matthew Hobby, analyst for Standard & Poor's, said the technical aspects of the defeasance are probably of little concern to bondholders.
"Defeasance happens all the time," he said. "What makes this unusual is the source of funds to defease them."
After the authority announced its negotiations with Brisa on April 10, Standard & Poor's affirmed its B-minus underlying rating on the authority's Series 2001A-C senior bonds and its CCC rating on the 2001D subordinate bonds. The outlook remained negative.
Moody's Investors Service downgraded the authority's $364 million senior revenue bonds from Baa3 to B1 in December 2005. Fitch Ratings downgraded the Series 2001A, 2001B, and 2001C senior debt last year to CCC-plus from BB-minus and maintained a negative outlook.
The parkway's senior revenue bonds are insured by Ambac Assurance Corp. and Financial Security Assurance Inc.
In addition to defeasing the bonds, Brisa/CCR will make good on about $100 million of non-bond debt claimed by the cities that partnered in the toll road, primarily Broomfield. Broomfield built exits and entrances to Flatirons Crossing Mall and the Interlocken Business Park.
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IRS Forms New Team to Oversee Derivatives
Posted on Friday, June 08, 2007
By Alison L. McConnell
The Internal Revenue Service's tax-exempt bond office has formed a team to oversee its soon-to-be-expanded enforcement efforts on swaps and other derivatives, an agency official said yesterday.
The team will coordinate all of the TEB office's examination work that relates to derivatives, track trends, identify factual variances, and coordinate audit settlements. Down the road, it may also develop voluntary compliance agreement program standards for issuers or swap providers, Steven A. Chamberlin, manager of TEB's office of compliance and program management, told those attending The Bond Buyer's National Municipal Derivatives Institute here.
Speaking at the conference, Chamberlin said the cross-TEB coordination will aid officials later this year as they ramp up the IRS' existing swaps initiative.
TEB officials will decide in late August or September how many more audits to open, he said, declining to provide further details. Currently, the IRS is examining about 50 municipal bond deals involving derivatives for compliance with tax law requirements for the proper treatment of interest rate hedges.
"I can tell you that in our next fiscal year we will be expanding our audit coverage in this area," Chamberlin said.
The additional audits will come as the U.S. Justice Department and Securities and Exchange Commission continue their criminal and civil investigations into pricing practices for muni bond-related derivatives and investment contracts. At least two dozen major firms have been subpoenaed in the wide-ranging investigations, which are thought to center on alleged price-fixing, bid-rigging, and securities fraud.
IRS officials, for their part, have said increased sophistication in the swaps market and the more widespread use of derivatives advisory firms may mean issuers need more transparency on markups and spreads.
The way issuers treat interest rate hedges, such as swaps, caps, and collars, is important because related payments and receipts are taken into account in bond yield calculations. A higher swap rate increases the bond yield, reducing an issuer's rebate liability and providing for the investment of bond proceeds at a higher rate.
In the most egregious cases, the IRS has unearthed evidence of bid-rigging and collusion between swap brokers and bidders that facilitate the diversion of arbitrage to deal participants, Chamberlin said yesterday.
In its efforts to gauge municipal issuers' compliance with tax code requirements for derivatives, the agency's ongoing swaps initiative focuses on the qualification and proper accounting treatment of hedges, the treatment of any off-market components, and the value of termination fees.
One "particularly troubling" initial finding is that in more than 10% of the cases issuers failed to submit rebate payments on time, and TEB is concerned about whether "a more systemic rebate problem" exists, Chamberlin said.
The newly formed derivatives team will monitor that issue and any other potential trends, he said, stressing that the IRS will not overlook the facts and circumstances of cases to impose a universal range or standard for swap pricing.
Municipal market participants have expressed concern in the past that the agency's work on derivatives has been too simplistic or narrow in scope, with an approach that fails to account for numerous variables that can affect the price of a swap.
Chamberlin noted at the conference yesterday that the IRS is aware of those worries and is chiefly concerned with the reasonableness of a derivative contract's price. A swap that priced 50 or 100 basis points outside a particular day's range of deals will not be presumed to be abusive or inappropriate, but the IRS hopes that issuers and derivatives providers will evaluate such transactions to be certain they are in compliance, he added.
The CPM manager said that TEB tax law specialist Michael J. Muratore and field manager Allyson Dodd are to lead the team, a joint venture of field personnel and staff from the Office of Compliance and Program Management.
The team will report to the TEB office's senior management, and may also develop issuer- or provider-driven voluntary compliance standards that either municipalities or swap firms could use to approach the agency - before an audit is opened - if they discover problems with derivatives contracts, according to Chamberlin.
"We're going to look at what types of voluntary compliance avenues we can produce; what would be appropriate," such as a global settlement for any swap providers that discover problems, he said.
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Florida Lawmakers Cut Property Taxes
Posted on Monday, June 18, 2007
By Shelly Sigo
The Florida Legislature passed historic property tax relief bills late Thursday and rating agency analysts said they would immediately begin assessing how the legislation would impact local credits.
"It's no longer business as usual in Florida," John Incorvaia, a longtime Florida analyst for Moody's Investors Service, summed up on Friday.
In only three of 11 days scheduled for a special session that started on Tuesday, lawmakers churned out two major bills. One ordered local taxing authorities to begin cutting property taxes in fiscal 2008, while the other is dependent on the passage of a statewide referendum to amend the constitution and create what is called a "super," or significantly higher, homestead exemption plan.
Together the bills could slice more than $30 billion of anticipated revenues over five years from local budgets, including some $7.2 billion from public school district coffers if the amendment passes.
Gov. Charlie Crist immediately commended the work done by his Republican colleagues and said that he would sign the bills as soon as possible.
"It is clear that without property insurance and property tax reform, Florida has been becoming unaffordable," Crist said in a statement, referring to passage of bills earlier this year designed to reduce insurance rates and the bills passed last week to provide relief from property taxes.
Although Crist went on to say, "Lower property taxes will ignite Florida's real estate market and Florida's economy will continue to boom," the tax relief bills only cap tax increases and do not address skyrocketing property values that led businesses and homeowners to cry for relief.
Rating agency analysts did not believe wholesale rating actions would come about immediately, but they all plan to begin assessing the stability of issuers' budgets based on tax reduction formulas adopted in HB 1B, which freezes tax rolls at the current fiscal year level and requires further reductions up to 9% based on past spending practices.
Taxing authorities can override the restrictions with stringent voting requirements, such as a unanimous governing board vote or a local referendum. If they don't follow the voting procedures, cities and counties face losing sales tax revenues they receive from the state.
"We haven't seen the detailed legislation," Standard & Poor's analyst Robin Prunty said on Friday. "We feel that many of the property tax cuts add some level of uncertainty to local governments in Florida."
Each issuer would be evaluated on a case-by-case basis, Prunty and other analysts said.
Fitch Ratings will review all of its tax-supported credits in Florida to determine the severity of cuts and the ability of each issuer to sustain stable operations while adjusting to lower operating revenues, said analyst Kelly McGary.
"We recognize that property values could decline as a result of the constitutional portion of the package and will assess issuers' ability to withstand tax base reductions, also based on financial flexibility in the shorter term," McGary said. "We plan to assess both near-term and longer-term plans to reduce future spending to adjust to lower revenue levels, limited future revenue growth, and potentially, lower taxing bases as we determine credit ratings and outlooks throughout the state."
Incorvaia said Moody's is assessing how much of a rollback issuers will have to make and determining what areas of their budgets will initially be affected. Each case will be different in the severity of losses, he said.
"Tax-increment districts appear to be the most directly affected initially as their revenues are dependent on the taxing entities, usually cities and counties, that will now be rolling back their tax rates," Incorvaia said. "The January 2008 vote on the super homestead exemption could be even more severe for municipalities, and will include schools as well."
Republicans who spearheaded the tax cut legislation also promised to make up any losses schools would suffer if the amendment passes a statewide vote Jan. 29, the date of Florida's new, earlier primary election. Since the Legislature's next regular session does not begin until March 4, school supporters said they would immediately mount a campaign to defeat the referendum.
"On Jan. 29, the people will have the power to cut their taxes in a historic way," Crist said.
The so-called super homestead exemption, if approved by 60% of voters in the January election, would replace the current $25,000 exemption with a tiered percentage approach. The first $200,000 of value would get a 75% exemption, then property values between $300,000 and $500,000 would get an additional 15% exemption. Homes valued at $500,000 or more would get a maximum exemption of $195,000.
When asked where taxing authorities could make up for losses, Crist said they could dip into reserves.
A study of unreserved fund balances and unrestricted net assets in fiscal 2005 by the governor's office found that Florida's 67 counties had a total of $8.7 billion of reserves, while the state's municipalities had $6.6 billion of reserves, and special districts had $3.7 billion of reserves.
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Private-Activity Bond Cap Carryforward Down 14%
Posted on Monday, June 25, 2007
By Alison L. McConnell
For the first time in a decade, states carried forward less private-activity bond volume cap and at least 11 had projects that went unfunded, raising questions about whether Congress will need to raise the cap in the next few years, according to The Bond Buyer's survey for 2006.
Buoyed by higher issuance, particularly in the single-family housing sector, the 50 states and the District of Columbia rolled a total of $22.7 billion of unused volume cap forward into 2007, a 14% decline from last year, when they carried forward $26.3 billion.
Issuance in 2006 was up $3.6 billion to a total of $25.5 billion, pushed by a 55.1% jump in the single-family housing category. Issuance in the industrial development and exempt facilities sectors was also up, but there was a 21.6% contraction in the student loan sector.
The cap carried forward into 2007 represented 46.5% of states' $48.7 billion in total capacity for 2006, down from the 53.6% share of the capacity carried forward into 2005. The 2006 figure is the sum of the year's aggregate volume cap and any unused cap from the previous three calendar years - 2004, 2005, and 2006 - which states were permitted to roll over. The $26.4 billion in aggregate cap, shaped each year by inflation and state populations, was up 1.1% from the 2005 level of $26.1 billion.
Sixteen states abandoned a total of $1.4 billion in 2003 volume cap that could not be carried forward another year, due to tax code restrictions - up 55.7% from the $910 million discarded by 20 states in 2005. The amounts abandoned in 2006 ranged from $13.7 million in South Carolina to $275 million in New Jersey. Abandoned cap represented only 2.9% of the $23.6 billion carried forward from 2005, which some market participants say highlights the scarcity of cap.
Eleven states - Arizona, Florida, Indiana, Iowa, Kentucky, Massachusetts, Missouri, Oklahoma, Pennsylvania, Texas, and Vermont - reported that they did not have enough cap to go around in 2006. Only three states said as much last year.
Arizona would have used more cap for student loans and multifamily housing, and Indiana reported a need for cap to fund exempt facilities projects. Massachusetts' requests totaled almost $340 million more than its capacity. Almost all of Kentucky's state and local issuers expressed interest in applying for more cap, had it been available. Missouri turned down 14 applications for cap, and Florida needed $85 million more for a solid waste disposal project, according to Jane Berry, bond development specialist supervisor in the state's division of bond finance.
Lori Beary, community development finance officer for the Iowa Finance Authority, said the state is now issuing taxable bonds along with tax-exempts to cover insufficient cap for its single-family program. Concerns about running out of cap next year were raised by officials in Montana and Nebraska.
John Murphy, a longtime muni market participant and the executive director of the National Association of Local Housing Finance Agencies, said in a few years the market may reach a point where the private-activity bond volume cap is oversubscribed in most states.
"We'd have to go to Congress and see if we could get an increase. It's going to be a tough study at this point," Murphy said. "We'd have to really demonstrate that the per capita is not enough."
Market participants predict that 2007 will be another year of upward trends in private-activity bond issuance, especially in the single-family sector. Already this year, overall first-quarter issuance is up 50% compared to the first quarter of 2006, according to Michael Decker, senior managing director of research and public policy for the Securities Industry and Financial Markets Association.
CAPACITY
Under federal tax regulations, states and the District of Columbia can issue the greater of a fixed per-capita amount based on population or a set dollar limit of tax-exempt private-activity bonds, which benefit private businesses and are subject to separate rules from those that apply to governmental bonds.
Congress created the aggregate bond volume cap in 1986 to limit the amount of private-activity bonds sold each year. Initially, states were allowed to sell $75 per capita annually or a minimum of $225 million in each of the years 1986 and 1987. The 1986 tax act reduced the limit to $50 per resident, or a minimum of $150 million per state, and those levels were used from 1988 to 2001.
In late 2000, Congress enacted a two-year increase that brought the per-capita limit back to $75 and the minimum state limit to $225 million by 2002. Starting in 2003, increases in the two figures were pegged to inflation and the per-capita figure was restricted to rise only in $5 increments.
In 2006, the District of Columbia and 21 states with smaller populations, which use the set dollar limit because it is greater than their per-capita totals, received a 3.1% boost in capacity to $246.6 million, from $239.2 million in 2005. Price increases were not enough to boost the authorization from $80 per resident for large-population states.
That didn't stop them from issuing more private-activity bonds. Issuance rose in all but one category in 2006, according to The Bond Buyer's survey.
Housing bonds typically make up the bulk of all private-activity debt issuance, and 2006 was no exception to the rule. Over $17.4 billion, or 68.2%, of the $25.5 in total issuance went to single-family bonds, multifamily bonds, mortgage credit certificates, and other housing projects.
Single-family housing issuance soared 55.1%, driven by rising interest rates and turmoil in the subprime lending market. The bonds, also known as mortgage revenue bonds, are used to provide low-interest loans to first-time homebuyers. The 55.1% jump compared to a 25% rise in issuance in 2005. MRBs comprised 39.5% of states' total private-activity bond issuance.
Multifamily housing bond issuance rose 12.4% to $6.3 billion, after growing 11.1% last year, and the issuance of mortgage credit certificates rose 3.5% to $510.2 million in 2006, compared to a 18.3% increase in 2005.
The housing issuance numbers are consistent with broader trends in the market, according to sources.
Single-family bonds are targeted to lower- and middle-income homebuyers buying in relatively modest areas. That market has also been served fairly well by conventional "subprime" lenders, and with many of those firms experiencing problems, programs funded by state and local governments have been picking up some of the slack, Decker said.
"Now those lenders are either going out of business or they're in trouble, so the best game in town is state housing finance agencies' loan programs," said Charles Giordano, senior director in Fitch Ratings' public finance group. "That's why you see that huge spike."
Subprime lending problems - delinquency, default, and foreclosure - are "not behind us yet," and may continue through the end of this year. "It may start to wane a bit into next year, because a lot of adjustable-rate mortgage resets will take place this year," Decker noted.
Furthermore, the flat yield curve and the overall rise in taxable rates on the short and long end are widening the gap between conventional mortgage loans and the kinds of housing products that municipal issuers offer, sources said.
"Up until maybe nine months to a year ago, the negative arbitrage was too great. Single-family bonds were not being issued in any quantity," Murphy said.
He predicted that housing issuance will remain strong in 2007.
"I don't think rates are going down," Murphy said. "They're going up. I would see a heavy emphasis on single-family."
"The long end of the yield curve in the taxable market is rising, which is pushing up mortgage rates. There have been pretty consistent increases over last couple of months," Decker said.
"I think we'll continue to see a lot of housing being done in the near term because the spreads have widened out, and it's easier to do deals," said one investment banker who did not want to be identified.
"I think it's going to stay strong, because of the subprime problems," said David Wyss, chief economist at Standard & Poor's. "Subprime became way too cheap. Now it's probably going to be a little expensive for a while until things settle down again."
On the multifamily side, which tends to track with subsidized housing programs, Wyss pointed out that skyrocketing private rents are pushing more people into public housing and upping demand for bond-financed programs.
"Because of all the condo developments slowing down the high end, now developers are saying, 'Let's start building some more affordable [properties],' " Giordano said. "Between the tax credit financing and a piece of the state's cap, I think they're starting to do a lot more multifamily again."
Murphy said "tried and true" multifamily bond financing could get a boost if Congress enacts a provision that would allow municipal issuers to recycle mortgage prepayments into new loans. Currently, issuers of single-family mortgage revenue bonds can "recycle" such prepayments within 10 years of bonds being issued. Market groups would like to see the 10-year limit repealed, and if a provision for multifamily bonds were created, "we wouldn't want that to be limited to 10 years either," Murphy said.
"[House Ways and Means Committee chairman Charles Rangel, D-N.Y.] seems to be very interested in it," he added. "We went out to our members and asked if it would be helpful, and I got zillions of responses saying, 'This would be terrific.' "
OTHER CATEGORIES
Industrial development bond issuance was slightly below the 25% growth recorded in 2004 and 2005, rising 19.5% in 2006, according to The Bond Buyer's survey.
The rising issuance rate is directly tied to legislation enacted in May 2006 that sped up the effective date of an increase in the capital limit, from $10 million to $20 million, on projects financed with IDBs, according to the Council of Development Finance Agencies, a national group that lobbies on behalf of state and local governments and municipal authorities that provide economic development financing programs, including those using tax-exempt and taxable bonds.
The capital expenditure limit increase was part of the 2004 corporate tax bill and was originally scheduled to go into effect on Sept. 20, 2009, Market groups, led by the CDFA, lobbied to move up that date after hearing that projects were already bumping up against the $10 million limit, and the tax reconciliation bill passed in May 2006 moved the effective date to Dec. 31 of last year.
CDFA executive director Toby Rittner said his group sees a direct correlation between the increase in IDB issuance and the legislation.
"While this new limit did not take effect until Dec. 31, it did increase the public awareness and attitude towards this important economic development tool," he said.
SIFMA's Decker agreed, noting that the legislation created a lot of opportunities for issuers with economic development programs.
"It expanded the market for those kind of loans, and raised the funding needs of those issuers," he said.
Rittner said the economic development finance community has continued to employ IDBs as a major resource for supporting the manufacturing sector and securing jobs and investment in their communities.
"The growing support by state issuing agencies has also played a role in the return of the popularity of IDBs ... [and the] CDFA has made considerable efforts to educate, advocate, and promote IDBs as a tried and true economic development finance tool," he said.
On the radar of issuers and economic development groups this year are efforts to increase the overall cap on IDB issuance, which currently is $10 million annually, and to expand the definition of "manufacturing" so that IDBs can finance modern industrial activity such as software and biotechnology development.
Issuance of private-activity bonds for student loans declined 21.6% to $4 billion in 2006, compared to a 8.5% rise to $5.124 billion in 2005. The decline may have been influenced by strong previous years - in 2004, issuance was up 50% - as well as by a decrease in consolidation lending, according to Kenneth B. Roberts, a partner with Hawkins Delafield & Wood LLP in New York who represents a number of student loan bond issuers.
Roberts pointed out that the scope and variety of pending student loan legislation in both the House and the Senate may be inhibiting activity in some states. It "certainly makes volume predictions unusually speculative," he said.
"While it is possible that legislative change may ultimately result in an increase in lending demand that is not met by the private sector, and resulting in demand for state program financing, it may not work out that way - and cannot be expected with respect to the coming academic year," he added.
"The student loans [decrease] is a bit of a surprise because there have been a lot of complaints and attacks on private student loan programs," Standard & Poor's Wyss noted. "One would think there would be more demand for state-funded programs as a result. It didn't happen this year, obviously."
SIFMA's Decker pointed out that the decline could reflect greater demand in other sectors that is crowding out student loan issuance. "It probably has less to do with less demand for student loan bond-funded programs and more to do with demand in other sectors ... making it difficult for state and local agencies" to get cap allocations, he said.
In the exempt facilities category - which includes private-activity bonds sold for airports, solid-waste disposal facilities, sewage facilities, district heating and cooling systems, docks, wharves, and mass commuting facilities - bond issuance was up 36.1% to $2.6 billion in 2006, according to data collected by The Bond Buyer.
Issuance of exempt facility bonds had risen 16.3% to $1.914 billion last year. Since the category contains a laundry list of facilities that can be financed with tax-exempt bonds, including airport-related deals, "you can see some very, very large transactions," according to another investment banker who did not want to be identified. "That can skew the numbers."
"Because [exempt facilities] covers so many areas, it's hard to nail down the individual trends," Decker said.
The push toward the privatization of traditionally government-owned assets, such as water and sewer services, might be driving issuance to the extent that the ownership and management of those facilities is being outsourced to private firms that qualify for tax-exempt private-activity bond financing, he added.
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May 2007
Thousands of Charities To Receive IRS Surveys
Posted on Tuesday, May 15, 2007
By Alison L. McConnell
Trends in the Region: Reform Looms in Florida
Posted on Thursday, May 17, 2007
by Shelly Sigo
N.J. Eyes Pension P3s
Posted on Wednesday, May 30, 2007
by Michelle Kaske
Hotchkiss To Head MSRB Staff
Posted on Friday, June 01, 2007
by Lynn Hume And Andrew Ackerman
In Brief: CDFA: Gahanna, Ohio, Has Best TIF Program
Posted on Thursday, June 07, 2007
by Tedra DeSue
Thousands of Charities To Receive IRS Surveys
Posted on Tuesday, May 15, 2007
By Alison L. McConnell
The Internal Revenue Service's post-issuance compliance survey will be sent to thousands of muni bond-borrowing charities, not just a few hundred, a senior agency official said Friday.
Tax-exempt bond office director Clifford Gannett said the surveys, sent by the IRS' exempt organizations division, will ask straightforward, mainly "yes-no" questions about record-keeping and other compliance topics. The office plans to take a broad look at "the entire community of charities that borrow," he told bond lawyers attending the American Bar Association's tax-exempt financing committee.
The surveys will widen an existing charitable finance compliance initiative launched last year. Nine of about 30 "fairly general" audits -- an "extremely small" sample -- have been completed, and while the IRS has turned up a range of post-issuance compliance problems, the most troubling are disparate record-keeping practices among borrowers of tax-exempt bond proceeds, Gannett said.
Gannett told bond lawyers last week that the initiative's second stage was imminent. The tax-exempt bond office is coordinating its efforts with a compliance unit of the IRS' exempt organizations division, or EO, which will send the surveys. He had said that between 200 and 500 surveys would be sent, but the actual number will be much larger.
"I was corrected by [manager of compliance and program management Steven Chamberlin] yesterday. He indicated that I got it way low," Gannett said Friday. "There are going to be thousands. I don't know what the number is now ... . You'll probably see them sometime in early summer, if not sooner."
Currently there are no explicit record-keeping requirements for issuers and borrowers. Municipal market participants have long called for more guidance on what documents they should keep over the life of their bonds. Treasury Department and IRS regulators recently asked for comment on the issue, and are thought to be developing guidance.
Chamberlin said yesterday that TEB and EO are still working out the exact sample size. Surveys will likely be sent to between 2,000 and 5,000 charities that show a tax-exempt bond balance on their Form 990s, depending on how much the EO staff can handle, he said.
The surveys are a "broad sketch trying to figure out what kind of underlying documentation is there" and will not go into detail or minutiae, Gannett said Friday. "The intention really is to try to determine what the conditions are out there. They will give us a broad brush; an idea of whether we need to do more education ... [or] more exams in certain areas."
The surveys will pose questions, most requiring yes or no answers, with a handful that are multiple choice, about post-issuance compliance issues, including oversight, private business use, arbitrage, management practices and policies, and record retention. The TEB office plans to post a copy of the survey on its Web site after they are sent out.
Soon after the charitable organization questionnaires are out the door, TEB plans to send similar surveys to issuers of governmental bonds, according to Gannett.
"We don't really, at this point, intend to pick on charities. It's where we started. We also are going to look at the governmental bond side," he said.
The IRS is also looking at exempt organizations whose Section 501(c)(3) status has been terminated, but who have outstanding tax-exempts, but those investigative efforts are "a little ways down the line," Gannett said. "There are a lot of folks in that category, and it may or may not be a problem depending on remedial provisions. We know that issue is out there, but that will come probably later."
The director delved into enforcement personnel issues at the Friday ABA meeting, noting that "a year and a half after my esteemed boss left us -- a long period of not having senior management positions filled -- it's great to come to you and say that's been accomplished in the last couple of months."
Robert Henn, formerly the employee plans division's Northeast area manager, recently took up the post of TEB's national field operations manager, replacing the now-retired Charles Anderson. Chamberlin was officially named manager of the compliance and program management office last year. Gannett himself was part of the transition, replacing former TEB director W. Mark Scott in late 2005.
"I really appreciate the fact that [Henn and Chamberlin] were willing to take up an enormous challenge," Gannett said Friday.
The compliance and program management office, or CPM, with only seven employees, is tasked with administering the voluntary closing agreement program, project initiatives, and claims for refunds. The office also was recently given the task of allocating clean renewable energy bond-issuing authority, which was previously handled by the IRS Office of Chief Counsel.
Thirty-seven VCAP requests have already come in this year, and the office has seen a substantial increase in refund claims as well -- the office usually receives 25 to 35 claims a month, but has already closed more than 80 claims this year, according to Gannett.
"These typically are ones we have to take a look at. We can't just give them a cursory look," he said. "Between the folks there, and Steve Chamberlin and all his energy, they're doing a tremendous job."
Some of the CPM staff have also provided "quite a bit of input" to the Treasury Department in its arbitrage regulations project, playing roles "very instrumental in the content of those changes," Gannett added.
The director noted that the project would include a clarification that interim arbitrage rebate payments should not be future-valued, and that enforcement personnel will be careful to follow that guidance going forward. "Over the years there've been a lot of questions about that," he said. "It's a very practical issue, and it does impact claims."
Turning to the examination side of the tax-exempt bond office's duties, Gannett said a lot of work on abusive transactions has progressed to a stage where cases are being prosecuted.
"That requires a number of [TEB's 37 agents and five field managers] to be involved in coordination with" the IRS' criminal investigation division and Office of Professional Responsibility, he said. "That has really consumed quite a bit of our resources, and I don't see that letting up any time soon."
At the same time, the office is responsible for monitoring the ever broadening, $2.3 trillion municipal market with "minimum coverage," at least, in every area, he continued. "It's very challenging for us. We have been, in the past, doing at least one market segment initiative a year."
The TEB office has two initiatives in progress -- the charitable finance initiative and the so-called swaps initiative, which has covered several dozen hedging transactions thus far. At this point, TEB has closed eight to 10 of the correspondence audits with no change to bonds' tax-exempt status, mostly because spending exceptions applied, Gannett said. Over the next few months, the rest should be complete and the enforcement staff will decide how to proceed.
Gannett also told bond lawyers that a "fair amount" of outstanding solid waste cases should be closing soon, and discussed a more general, procedural change at work in the TEB office regarding settlement offers. He said he is putting a "much higher premium on taking a look at those offers earlier" and is requiring his staff to provide "clear, credible" settlement proposals to ensure consistency between field closing agreements and the less substantial settlements of the voluntary closing agreement program.
He said the office is not getting quite as many "snitch" audit referrals, in which market participants refer other parties, oftentimes competitors, to the IRS.
"Maybe there was a pent-up 20 years' worth of material ... and now we've worked through it," he joked.
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Trends in the Region: Reform Looms in Florida
Posted on Thursday, May 17, 2007
by Shelly Sigo
Bondholders are being warned by issuers that the Florida Legislature is discussing statewide tax relief reforms that could potentially impact all kinds of revenues.
Such disclosures spanning nearly all market sectors are appearing more frequently in bond documents as lawmakers gear up for a 10-day special session starting June 12 to work on property tax reform measures they could not agree on during the regular session that ended less than two weeks ago.
Cities, counties, school districts, conduit issuers of pool bonds, and special districts are warning potential investors that lawmakers expect to approve tax relief that could affect their budgets. Disclosures are appearing in new-money transactions, general obligation bond refundings, tourist development tax bond issues, revenue bond transactions, and certificates of participation deals.
The city of Bradenton even included a disclosure in its fiscal 2006 comprehensive annual financial report included in bond documents for an $18.6 million sale of special obligation revenue bonds in March.
"The hyper increase in property values throughout the state of Florida has forced the Florida Legislature to examine means of reducing the property tax burden on the average taxpayer," the CAFR said, noting that any proposed relief could have a significant impact on Bradenton's ad valorem revenues. The city pledged to "react as necessary" to maintain its favorable financial position.
While there is no indication that the widely publicized tax relief debate is affecting bond yields yet, disclosures indicate that issuers are concerned.
Freshman Gov. Charlie Crist and lawmakers promised tax relief during election campaigns last year, but they could not reach a compromise after rolling out plan after plan during the regular session. Essentially, both chambers of the Legislature wanted to roll back ad valorem tax rates. The House wanted to substitute revenues from an increased state sales tax, while the Senate wanted a rollback with future increases based on new construction and growth in per capita income.
But most of the plans left out consideration of debt secured -- or future debt to be secured -- by tax increment financing, Orange County Commissioner Teresa Jacobs said in a recent interview.
Tax increment financing establishes a baseline year in which the property tax rate is frozen and most governmental entities receive income based on that frozen tax rate. In years going forward, the increase in tax revenue from higher property values and new construction goes for capital improvements, typically done in Florida by a community redevelopment agency, or CRA. Frequently, TIF revenue is used to secure bonds.
Orlando and Orange County are negotiating funding agreements for the concurrent financing and construction of a new arena for the National Basketball Association's Orlando Magic, a new performing arts center, and renovation of an existing stadium -- projects estimated to cost more than $1 billion. The major sources of funding will be bonds secured by tourist tax revenues and tax increment financing.
Project supporters are pushing for officials to move ahead with the projects before the Legislature meets. But Jacobs, who has a degree in economics, has questioned funding projections and raised concern about how legislation might impact CRAs.
"I'm reasonably optimistic the Legislature won't do anything so draconian that it would result in drastic cuts, but it does not make sense to make a decision when the session is [less than] a month away without all the information," said Jacobs, who is president-elect of the Florida Association of Counties.
Jacobs expressed concerned about how the impending legislation might affect credit quality. "I think it's a very legitimate concern for CRAs because they use bonding to finance a lot of their projects and there's an assumption that there will be an increasing revenue stream," she said. "If they are forced roll back millage rates that could have a significant impact."
House and Senate leaders agreed to hold a 10-day special session to focus solely on property tax relief. And in the weeks preceding the special session -- now less than three weeks away -- new tax relief proposals have surfaced and lawmakers say they are closing in on a plan.
Discussions now are centered on increased tax exemptions for businesses and residences tied to the median value of properties in each county. But the amount of exemptions and the impact on local budgets dependent on property taxes is still unknown.
With so many proposals on the table, issuers are feeling compelled to add disclosures to bond documents, according to Michael Wiener, a public finance attorney with Florida-based Holland & Knight LLP.
"Issuers are carefully considering whether disclosure is necessary, especially for bonds that are not pledging ad valorem taxes, when there is so much uncertainty over what, if any, property tax relief reform may be enacted," Wiener said.
Revenues such as those collected for water and sewer bills could be more insulated than others depending on how legislation is crafted, Wiener said, noting that some tax relief proposals could affect TIF districts.
Whatever the Legislature enacts may be subject to impairment clauses in the state and federal constitutions that say the state cannot pass a law that would impair a contract, such as the contract between issuers and bondholders.
"Impairment goes to any contract that a government has entered into, so it will be interesting to see what effect, if any, that may have on the legislation," Wiener said.
If pending or adopted legislation affects yields or ratings, it most likely would be on the tax-backed debt of local governments and special districts, particularly those with lease-backed bonds that are not protected by the contract clause of the U.S. Constitution, said Dick Larkin, senior vice president and municipal trading desk analyst at JB Hanauer & Co.
"I don't think yields so far have been impacted. There are no real specifics on the extent to which property taxes will be rolled back, and what if any replacement revenues would replace property taxes," Larkin said.
Even if tax relief is passed, yields may not be substantially affected because the spreads are very narrow now, he said, noting that the difference between triple-A rated 30-year bonds and triple-B rated 30-year bonds is only about 30 basis points. The yield between triple-A insured bonds and triple-B bonds is even less -- about 20 basis points.
"The state of Florida traditionally has been very good at replacing lost local revenue with state-level and state-shared revenue," said Larkin, who has followed the state for years. "If property tax reduction is legislated without any replacement revenue offered, bondholders at that point should demand some extra yield to make up for the fiscal uncertainty at the local level, but I doubt it will come to that."
If legislation results in the loss of a major local tax, Larkin said there could be pressure on rating agencies to place credits on watch, suspend, or downgrade them, but those actions are likely to be tempered by past experience.
For example, in 1978 after the passage of Proposition 13 in California, he said at least one rating agency suspended ratings for most non-GO bonds.
However, the state redistributed some of its general fund surplus over several years to replace lost local revenue. When California ran out of surplus in the early 1980's, the Legislature created formal state-shared revenue programs to make up for the ongoing loss of local property taxes.
Since then, Larkin said, rating agencies have been slower to take action in the face of a planned revenue loss because of legislation or a voter initiative. Rating agencies usually wait until a tax cut is implemented, or to see what revenue will replace the tax cut, or if the change might be overturned in a court.
"Passage of a property tax cut law will likely trigger many legal reviews and challenges," Larkin said. "The key thing investors should look at is what the replacement revenue for a cut in property taxes will be. As a practical matter, there will have to be some replacement."
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N.J. Eyes Pension P3s
Posted on Wednesday, May 30, 2007
by Michelle Kaske
New Jersey officials are considering plans to direct a portion of the state's roughly $80 billion pension fund into non-traditional investments, such as public infrastructure assets.
At a time when state officials are mulling plans to possibly lease out some of New Jersey's toll roads, one of its pension fund consultants has suggested the state take a page from the playbooks used by foreign pension funds - buying into public-private partnerships. Some pension funds find such P3 arrangements favorable because they offer relatively stable and predictable cash flow.
The thinking on the matter is timely. New Jersey's State Investment Council is now mapping out its pension investment plan for fiscal 2008, which starts July 1 and may include an allocation towards infrastructure investments, including transportation projects. The fund's investment consultant, Peter Keliuotis, a managing director at Strategic Investment Solutions Inc., recently presented the council with an investment strategy that would include a 1% to 2%, or $1 billion to $2 billion, allocation towards infrastructure.
New Jersey officials have so far declined to say whether they'd like the pension fund to add infrastructure to its list of investments when the board compiles its fiscal 2008 investment portfolio in July. However, the approach is gaining attention.
"In general, there will be a massive increase in infrastructure investing among pension funds over the next few years," said Investment Council chairman Orin Kramer.
Data compiled by Merritt Research Services LLC using the states' comprehensive annual financial reports from 2006 indicates that the overall value of public infrastructure, net, in the U.S. totals roughly $609.4 billion. Infrastructure investment options are increasing as more state and local governments are seeking to extract capital from existing assets, with private companies also looking to pool funds from investors to produce that capital. Public pension funds, sources say, are well suited to become such investors.
The Illinois State Board of Investment has committed $300 million, 2.5% of its roughly $12 billion portfolio, to two private funds, Macquarie Infrastructure Partners and Alinda Capital Partners LLC, and anticipates allocating another $200 million later this year, according to William Atwood, executive director of the ISBI.
Atwood said the ISBI is looking into non-traditional, fixed-income alternatives to spark greater returns - possibly around 11% per year - as traditional fixed-income investments may not yield similar returns the next 20 years.
"We've increased our allocation of real estate and we've increased our allocation to alternative forms of fixed income like construction loans," he said. "We have also made an allocation to hedge funds, so in that context what we see and what we hope to experience is that infrastructure as an asset class will be an effective fixed-income proxy. What we expect out of that is low correlation of the overall economy, which is what all the data seem to suggest, and returns north of what we would expect from conventional fixed income."
In June of 2006, the ISBI approved infrastructure investing of up to 5% over three years, with transportation projects receiving 20% to 40% of that allocation, Atwood said. Experts say transportation assets like toll roads fit well with the long-term needs of pension plans. Matching the long-term liabilities with a long-term revenue producing entity could work well for pension systems - as retirement costs increase, so might the cost of tolls.
Earlier this year, other pension funds approved infrastructure allocations including the San Bernardino County Employees' Retirement Association, which committed 2%, or about $120 million, of its $6.1 billion fund and the City of Cincinnati Employees' Retirement System which approved 5%, or about $135 million, of its $2.7 billion fund towards infrastructure.
The SBCERA's $120 million investment includes $70 million to AIG Highstar Capital and another $50 million to RREEF North America, a member of the Deutsche Bank Group. RREEF's infrastructure portfolio would include investing in transportation, mature assets that produce revenues, according to Donald Pierce, SBCERA's investment officer.
"These are long-dated assets that are attractive for a pension fund," he said. "Typically, one of the things that you are always thinking about in the back of your mind as a pension manager is if you've deployed money into an asset that has certain operating features that generate very attractive cash flows and you have reasonable expectations that that can last for many years and is outside the normal business cycle. There's a wide variety of attractiveness of an asset that's kicking off yields."
Along with international and out-of-state infrastructure, pension funds can also invest in their own state's infrastructure and transportation systems, an arrangement that places the state on both sides of the privatization bargaining table. One advantage in that type of transaction is that if the P3 agreement ends up favoring the investor, the state will ultimately benefit through its pension system, although it would be one of many investors in the asset.
"The concern in many of these deals is that it's hard to value. If it's worth a lot more, you then in fact would be leaving money on the table," Cherian George, who heads the P3 team Fitch Ratings. "If your investor, in part, is one of your pension funds, in theory that portion of the investment will have some inverse benefits to the state and to the municipalities that contribute to support the pension fund."
This type of arrangement could happen in New Jersey, where the state has been evaluating its asset monetization opportunities, in particular the 146-mile Turnpike. JPMorgan estimated the Turnpike to be worth roughly $20 billion, according to Strategic Investment Solutions documents. Although there are private and publicly listed funds, state pension systems could also invest directly into infrastructure assets, including the state's own entities, although it would require additional time and attention from the pension system compared to using an outside funds' expertise and staffing, according to Alistair Sawers, director and head of the western group of infrastructure and project finance for RBC Capital Markets.
"There is no reason why a pension fund can't do a direct investment on something that's kind of operating an established asset with some support and obviously they're tax-exempt entities so they can do some stuff that other people can't do," Sawers said. "But, the flip side is, at the moment, they don't have the staff to do this to either analyze the investment or to operate it which would require a certain amount of protection to the retirees to make sure the investment works."
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Hotchkiss To Head MSRB Staff
Posted on Friday, June 01, 2007
by Lynn Hume And Andrew Ackerman
The Municipal Securities Rulemaking Board has tapped Lynnette Kelly Hotchkiss, a managing director and associate general counsel at the Securities Industry and Financial Markets Association, to become its new executive director on June 18.
The board chose Hotchkiss, 47, who has more than 20 years of legal, business, and regulatory experience in public finance and other fixed-income securities, after a 10-month, nationwide search, in which more than 100 candidates were considered for the post.
She will replace Christopher "Kit" Taylor, who has led the MSRB for 29 of its 32 years of existence and is only the third person to have served as the board's executive director. Taylor's contract with the board expires Sept. 30, but it was unclear yesterday whether he will stay that long at the board. "There will be a transition period that has not been fully defined," one knowledgeable source said.
Hotchkiss will join the board as the municipal market confronts major challenges and potential upheaval - something that MSRB officials could not have contemplated when they launched their search for a new executive director last August. The Justice Department and Securities and Exchange Commission are conducting massive criminal and civil investigations of investments and derivatives and have subpoenaed dozens of firms about virtually every investment product or derivative they have brokered, provided, or otherwise been involved with in connection with muni bond transactions during the past six to 14 years.
At the same time, SEC chairman Christopher Cox has launched an initiative to improve muni disclosure and accounting, including the possible repeal of the Tower Amendment, which severely limits the commission's authority over muni issuers. Cox is currently weighing regulatory and legislative options put before him by the staff and may soon make recommendations to federal lawmakers and others. The Central Post Office disclosure system, which 18 municipal market groups created to resolve disclosure problems, is currently mired in patent litigation with an Orlando-based disclosure services provider. And the industry is preparing to embark on a revolutionary New Issue Information Dissemination System later this year, which will require operational changes at dealer firms.
But MSRB and industry officials praised Hotchkiss yesterday and said she is well-suited for the post.
"Throughout her career, Lynnette Hotchkiss has demonstrated her commitment to the integrity, transparency, and efficiency of the municipal markets, said John Lawlor, MSRB chairman and head of municipal markets at Merrill Lynch & Co. "She has earned the respect of all participants in the municipal marketplace - making her ideally suited to lead the MSRB, the industry's self-regulatory organization, into the future."
"Lynnette is highly competent, sophisticated, and strategic in her approach to the business," said SIFMA co-chairman Edward Forst, chief administrative officer at Goldman, Sachs & Co. "As a rulemaking body, it is important that the MSRB has someone at the helm who is both knowledgeable and has expertise in this field. She fills that bill."
Prior to joining SIFMA, Hotchkiss was associate general counsel at The Bond Market Association, which merged with the Securities Industry Association to form SIFMA. Before that, she worked at law firms in New York and London, serving as bond, underwriters', and special disclosure counsel on a wide variety of bond instruments as well as municipal derivatives. From 1990 to 1993, she served as general counsel for the New York City Municipal Assistance Corp.. She received her law degree from Tulane University School of Law in 1984 and her bachelor's degree in urban studies from University of Nebraska, Lincoln in 1981. She is currently attending the Securities Industry Institute program at the Wharton School, University of Pennsylvania.
The MSRB announced last August that it planned to search for a new executive director to succeed Taylor, saying it wanted "next generation leadership" to "help guide the organization into the future." During his tenure, the board passed controversial rules on political contributions and consultants and increased the transparency of muni trade data. But Taylor was viewed as a "strong personality" who raised the hackles of some in recent years over supplemental retirement benefits that had not been widely disclosed. Lawlor praised Taylor yesterday, saying, "The entire industry owes a great deal of gratitude to Kit Taylor. His passionate leadership over the years has helped set standards in this marketplace that are second to none. I know I speak for the entire board in wishing Kit every success in his future endeavors."
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In Brief: CDFA: Gahanna, Ohio, Has Best TIF Program
Posted on Thursday, June 07, 2007
by Tedra DeSue
The Council of Development Finance Agencies selected the city of Gahanna, Ohio, as having the best tax increment finance program in the country.
The recognition came at the CDFA's 2d annual showcase competition in Miami last week where the group allowed attendees to vote on the program they think best shows efficiency in promoting economic development through TIFs.
Toby Rittner, the executive director of the CDFA, said the program was inspirational because it showed that no matter the size of a TIF, the structure is what leads to success in spurring redevelopment, growth and investment in communities.
Gahanna has a population of about 33,000 residents and is located northeast of Columbus.
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April 2007
Market Continues Record Pace
Posted on Monday, April 02, 2007
By Matthew Posner
Auction Guidance Released
Posted on Wednesday, April 04, 2007
By Lynn Hume
Regulation: Grassley Asks for Budget Office Review Of Universities' Tax-Exempt Borrowing
Posted on Monday, April 09, 2007
By Alison L. McConnell
Council of Development Finance Agencies to Give Best TIF Award
Posted on Thursday, April 19, 2007
By Tedra Desue
Florida Panel OKs Use of TIFs For Backlogged Road Projects
Posted on Friday, April 20, 2007
By Shelly Sigo
Market Continues Record Pace
Posted on Monday, April 02, 2007
By Matthew Posner
The $40.8 billion of bonds issued in the municipal market last month has the year on record-breaking pace, as the first quarter of 2007 totaled $104 billion of bonds. This is an increase of 49% from last year, according to Thomson Financial.
This continues to surprise market participants as issuance is strong coming off a late push in 2006 that ended that year with a total of $383.4 billion, just under the record set in 2005 of $408.3 billion.
"We don't typically start out the year so strong," said Chris Mier, managing director and fixed-income strategist at Loop Capital Markets LLC in Chicago. "It does sound like a big year for the municipal market. But it is only the start."
While new money volume is up, it is the swell of refundings that continue to shine, as these transactions are occurring much more than most participants expected.
For the first quarter of 2007, refundings accounted for $31.5 billion through 645 deals. This is an increase of 88% during the same period last year. Last month, $12 billion of refunding bonds were issued, a 110% increase from March of 2006.
Last year's first quarter represented the slowest start in issuance since 2001, which was greatly attributed to the slow start in refundings, which was also down 55% percent from the prior year.
Analysts have attributed this year's jump in refundings to municipalities looking to take advantage of low interest rates.
"Rates have stayed generally stayed low and you are going to pick up refundings when they stay at this level for so long," Mier said.
He pointed to the 30-year bond on the Municipal Market Data triple-A curve that was yielding 4.11% on Friday's curve. On March 14, 2006, the thirty-year bond stood at 4.38%, a 27 basis point difference.
"We've basically stayed in this low-rate mode and with rates trending down you are going to continue to get a pick-up in that activity," Mier said.
While this has been the trend thus far, Fred Yosca, a managing director and head of trading at BNY Capital Markets, warned that changes in yields for 10- to 20-year bonds could alter the big picture.
"Rates are looking good for refunding, but there is a steepening trend going on and I see that it is starting to widen out in the middle of the curve," Yosca said.
For example, on a 15-year bond maturing in 2022, yields have increased 11 basis points on the MMD triple-A yield curve from March 14 to Friday's numbers.
"If this continues to steepen, then net interest cost for issuers will rise because the longer maturities, relatively speaking, are going to be more expensive to the borrower, and that could put a crimp in refunding," Yosca said.
He also said federal tax law that limits municipalities to just one advance refunding could slow refundings, as well.
"Obviously the current levels work for them now," Yosca said. "But remember that refundings are a finite thing and there are only so many deals that you can refund. With volume so high lately it is possible that they've eaten through a lot of them."
Tied to this trend is the rise in negotiated transactions over competitive ones, which have accounted for $84.9 billion of the total for the first quarter whereas competitive have totaled $18.5 billion. Due to the complexity of refunding deals, issuers tend go the negotiated route and select an underwriter beforehand.
New money has also grown significantly. The first quarter of 2007 saw an increase of 27% over last year, through 1,856 deals, landing at $54.4 billion. New money in March 2007 increased 49% through 709 deals totaling $24.7 billion.
One reason for this could be smaller municipalities increasing support for their infrastructure needs. In fact, in the first quarter of 2007, counties have increased borrowing by 24%, cities have increased their issuing by 48% and districts have upped their spending by 38%. This accounts for $5.4 billion, $10.8 billion, and $22.5 billion, respectively.
"For years and years people kept talking about how municipalities weren't taking care of their infrastructure needs," Mier said. "Maybe this is part of it and cities and countries are finally addressing some of their needs."
Overall, California played a large role in the surge of issuance, as it has thus far issued $20.5 billion this quarter, or roughly 20% of all debt issued. Texas, which comes in second in a state-by-state breakdown, issued about half as much coming in at $9.9 billion. New York rounds out the top three with $7.4 billion of bonds sold.
California also issued the two largest deals this year with Golden State Tobacco Securitization Corp. issuing roughly $4.5 billion on March 8 and a state general obligation refunding of roughly $4.1 billion last week. These sales were the fourth and fifth largest issuances of municipal debt going back to 1947. Notably, California has issued seven of the top nine largest deals of tax-exempt bonds to date.
Looking at sectors, it was general purpose and the education bonds that had the greatest increase quarter over quarter. General purpose bonds increased roughly $14 billion from 2006 settling at $30.4 billion in 2007, or an 81% increase. Education bonds jumped 52% in 2007 with a total of $31.2 billion of bonds issued.
While many fixed-income analysts are changing their yearly volume forecasts to the upside, Mier pointed out that last year's slow start ended with a race to the finish line and the factors that are pushing volume so high now can quickly change.
"We'll see where it goes the rest of the year," he said. "We could have the same type of thing happen this year as what happened last year, or it could slow down. The bottom line is that there may be some factors that we haven't identified yet that causes people to jump the gun and issue a lot in the first quarter, and that could disappear by summer time and we'd be looking at a different muni market."
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Auction Guidance Released
Posted on Wednesday, April 04, 2007
By Lynn Hume
The Securities Industry and Financial Markets Association yesterday issued final best practices for broker-dealers involved in the more than $260 billion municipal, corporate, and preferred stock auction-rate securities markets, as well as model procedures to be used in associated agreements and sample disclosure language for offering documents.
The best practices do not differ significantly from a draft version that was issued by The Bond Market Association, one of SIFMA's two predecessor organizations, last May after 15 broker-dealer firms reached a $13 million settlement with the Securities and Exchange Commission for violating the securities laws by engaging in questionable practices that were not disclosed to issuers or investors.
The SEC found that from Jan. 1, 2003, through June 30, 2004, the firms acted negligently by following a series of practices that, among other things, favored certain investors over others, or issuers over investors, and manipulated clearing rates.
The commission followed that action up earlier this year by reaching a $1.6 million settlement with three auction agents over charges they accepted broker-dealer bids after deadlines and allowed dealers to intervene in auctions - actions that may have affected the rates paid on the securities.
SIFMA officials said yesterday that the final best practices, model procedures, sample disclosure language, and guidance for bond counsel, combined with the eight indexes of current and historical clearing rates previously developed by the industry, should improve transparency in these markets.
"SIFMA's best practices improve disclosure by describing the way the auction-rate market works, the role of the broker-dealer and how rates are determined, and by encouraging broker-dealers to educate issuers and investors about the material features of auction-rate securities, including the fact that the broker-dealer may bid," said Mary Kuan, SIFMA vice president and assistant general counsel.
"Having a single set of standard procedures that can be used in different agreements will enhance the understanding of the auction process as well as offer increased convenience to investors who invest in multiple programs, to auction agents who act for multiple programs and are required to provide their procedures to customers, and to brokers who are encouraged to post notice of their procedures on their Web sites and provide material information to customers."
Auction-rate securities are floating-rate securities whose interest or dividend rate is periodically reset by an auction. During the auction, investors indicate whether they want to hold, purchase, or sell the securities at specified rates to broker-dealers, who then submit the bids to an auction agent. The auction agent determines the clearing rate, which is the lowest rate that will result in the sale of all of the securities being auctioned.
If there are not enough bids to cover the securities for sale, then the auction fails and the issuer must pay an above-market rate set by a pre-determined formula. If all of the holders of the securities chose to hold their positions without bidding a particular rate, then the clearing rate is the all-hold rate, a below-market rate set by a predetermined formula.
The guidance released by SIFMA yesterday comes about five months after Martha Mahan Haines, chief of the SEC's Office of Municipal Securities, questioned in a public speech whether auction-rate securities actually involve an auction or benefit issuers and investors. Haines pressed broker-dealers to disclose to the market that they often intervene in the auctions, bid with the knowledge of other bids, submit bids after issuer deadlines, and either influence or set the clearing rate.
Kuan said yesterday that SIFMA's guidance addresses Haines' concerns.
"The general premise is transparency is important - it's key that rates have to be fair and reasonable and that disclosure should be adequate in respect to describing the way auctions and broker-dealers work," Kuan said.
A broker-dealer does not have "unfettered discretion" in an auction, she said, adding: "Its bid has to be at the defined market rate, which has to be fair and reasonable."
In addition, "All customers are treated equally," Kuan said. "There's not any arbitrary preferencing, if you will. And there's a substantial amount of transparency regarding the setting of auction rates. Issuers have access to SIFMA's indices [and they] can also access information about rates from their broker-dealers or the auction agents."
Haines declined to comment. But some observers are unhappy with auction-rate practices, even if they are disclosed properly. Bloomberg reported recently that the House Financial Services subcommittee on capital markets plans to hold hearings on auction-rate securities, but subcommittee aides were unable to comment yesterday.
The best practices are divided into several sections: the purpose of the auction, the broker-dealer's obligations, bidding by the broker-dealer, bidding by investors, the relationship between broker-dealers and the auction agent, post-auction sales of auction-rate securities by a broker-dealer, and program documents.
The purpose of the auction is to establish a rate for the next auction period, SIFMA said. The broker-dealer's responsibility to the issuer is to solicit bids and its obligation to existing and potential owners of the bonds is the same as to all other persons purchasing securities from the firm, the group said.
Under the best practices, a broker-dealer may submit its own bid in an auction at any time until the submission deadline. "A broker-dealer should disclose to existing owners and other bidders that it may place one or more bids in an auction and, if true, that it routinely places bids in auctions generally, with knowledge of other orders," SIFMA said.
The best practices permit a broker-dealer to provide oral or written "price talk" to existing and potential owners of the securities, but advise that this should be done before the start of the auction. Price talk represents the broker-dealer's good faith judgment, at a given time, of the range of likely clearing rates for the auction, based on market and other information. This information may include the clearing rates from prior auctions for those or similar securities, the credit quality of the issuer, market factors, and general economic conditions.
SIFMA also said, however, "Broker-dealers in a multi-dealer program must act independently. They should never share estimates of their price talk with the other broker-dealers, unless the firms are solely acting on behalf of an existing or potential owner."
"In all cases, the broker-dealer must not discuss the status of orders during the auction process," the group added.
The best practices permit broker-dealers to be designated as auction agents, but caution that, in a multi-broker-dealer auction-rate securities program, they must be sure not to treat their auction desks more favorably.
Program documents should reflect current auction practices, and should also describe the auction procedures and broker-dealer agreements, SIFMA said.
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Regulation: Grassley Asks for Budget Office Review Of Universities' Tax-Exempt Borrowing
Posted on Monday, April 09, 2007
By Alison L. McConnell
Sen. Charles Grassley, R-Iowa, ranking member of the Senate Finance Committee, has asked the Congressional Budget Office to review the economic benefits that college athletic programs receive from their schools' tax-exempt status.
Expressing concern about colleges and universities' practice of "maintaining a large untaxed portfolio of assets while simultaneously borrowing with tax-exempt debt" in two letters sent late Wednesday, Grassley asked the CBO to study college athletic programs' exemption from federal income taxation, corporate title sponsorship payments, active royalty income, and the use of tax-exempt bonds to finance the construction and renovation of university athletic facilities.
He also asked the CBO to generally review the economic benefits provided to higher education institutions via their ability to borrow in the tax-exempt market.
Generally, public and private universities and colleges are exempt from federal income tax on investment income and contributions. Municipal issuers can sell governmental bonds to finance projects at state schools, and can also issue private-activity bonds for 501(c)(3) organizations, such as private schools.
Grassley specifically requested information about changes in the volume of tax-exempt bond issuance over time, how institutions utilize bonds, the scope of possible arbitrage profits and the possible effect of those profits in motivating borrowing, the use of bonds across nonprofit versus public institutions, the value of the subsidy from tax-exempt bonds compared to the costs of raising capital through the taxable markets, and whether the subsidy affects the prices of services provided by the institutions.
The ranking member also asked about types of additional reporting, by colleges and universities to the Internal Revenue Service and the public, that could provide "useful information with respect to the borrowing by colleges and universities of tax-exempt financing while maintaining large untaxed portfolios of assets."
Grassley's request, which follows a December Finance Committee hearing on the same topic, is part of a broad look at the nonprofit sector aimed at ensuring institutions provide public benefits in exchange for their tax-exempt status, according to a committee press release.
"Educational institutions represent a big part of the nonprofit sector," Grassley said in the release. "Congress needs to know whether educational institutions actually use their generous tax breaks to improve education, or whether the taxpayers are subsidizing other priorities."
Higher education advocates said Thursday that institutions use their tax advantages to responsibly further educational goals, and a fair review will bear that out.
If the CBO "does an objective analysis [it] will find university endowments are used for quite separate but equally legitimate purposes, including making tax-exempt financing more affordable" -- because rating agencies that see strong reserves will give a higher rating and thus allow a school to borrow at a better interest rate -- as well as scholarships, personnel, and academic programs, said Charles A. Samuels, counsel to the National Association of Higher Educational Facilities and a partner with Mintz Levin Cohn Ferris Glovsky and Popeo PC here.
"If they do it in a fair manner, they'll see they serve different purposes, and people comply with the law," Samuels said.
Samuels and Robert Donovan, advocacy chairman of the NAHEFA and executive director of the Rhode Island Health and Educational Building Corp., both stressed that tax-exempt financing has a critical and legitimate place in higher education and said they were not worried about being on the defensive with Congress.
"When you get away from the headlines ... and you look at how many colleges and universities are out there, they are much more reliant [on the] endowment, which provides some ability to cover operating shortages or other initiatives that don't go to the building," Donovan said.
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Council of Development Finance Agencies to Give Best TIF Award
Posted on Thursday, April 19, 2007
By Tedra Desue
The Council of Development Finance Agencies has selected four finalists to compete for its Practitioner's Showcase award for the most successful tax increment financing program.
The finalists are Kansas City, Mo., San Antonio, Gahanna, Ohio, and the District of Columbia. The winner will be announced at the CDFA's annual conference in May in Miami.
"The showcase will be a demonstration of the very best in the tax increment finance industry, focusing on creating deal flow, marketing programs, executing projects, and raising the awareness of this important economic development finance tool," said CDFA executive director Toby Rittner.
When the finalists make their presentations at May's conference, a live audience of conference attendees will decide the winner.
"This is truly going to be a tough competition to determine which of these worthy organizations is crowned as the best TIF program in the country," Rittner said.
Kansas City's TIF program has been ongoing for 20 years. Rittner said more than $115 million has been invested in several projects and that has allowed it to leverage $1.5 billion in private investments.
"Their whole history impressed us," Rittner said.
In San Antonio, there are 23 districts, Rittner said, adding that they are actually referred to as tax increment reinvestment zones in Texas.
Since 1998, they have created $1 billion worth of investments.
Washington, D.C.'s program was highlighted for featuring several large retail companies for a redevelopment effort to bring such larger retail ventures to the inner city. So far, the district has issued just less than $300 million of TIF debt. Officials are anticipating issuing more such debt as the city continues to fund more redevelopment efforts through TIFs.
For Gahanna, CDFA officials were particularly impressed with a project in the downtown area of the city, which features commercial, retail, and housing developments. Roughly $20 million has been invested in the effort, Rittner said.
The recognitions are part of a relatively new awards program the CDFA kicked off last year. The topic then was industrial development bond programs and the winner was the Arkansas Development Finance Authority.
The decision was made to highlight the best TIF programs because the financing technique has become one of the leading economic development finance tools in the country.
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Florida Panel OKs Use of TIFs For Backlogged Road Projects - CDFA Interviewed!
Posted on Friday, April 20, 2007
By Shelly Sigo
A Florida Senate committee Wednesday night approved a major amendment to a state transportation bill that would allow cities and counties to use tax-increment financing to build backlogged road projects.
If passed as amended, SB 1928 would authorize a local government to create a Transportation Concurrency Backlog Authority to implement a plan and finance identified projects using TIF bonding if necessary.
The amendment would require transportation concurrency backlogs to be eliminated within 10 years after a plan is adopted. It also specifies that the plan is not subject to review or approval by the state Department of Community Affairs.
In Florida, the state concurrency law requires that roads and other public facilities, such as schools, be available to serve new development. It also requires local governments to measure the capacity of roads and streets and plan expansions. The DCA oversees and approves concurrency plans adopted by local governments.
Paying for improvements to meet concurrency laws has been difficult not only because of the sheer need across the state due to growth but because of the high cost of land.
TIFs are commonly used to build infrastructure, but usually in redevelopment areas and not often on a large scale, said Jessica Perko, manager of research and technical assistance for the Council of Development Finance Agencies. She did note that the Butler County, Ohio, Transportation Improvement District has used TIFs mainly for projects in rural areas.
"With limited financing tools out there, I think this will become a more popular financing mechanism," Perko said. "If this does pass in Florida, they will be using an appropriate tool to fund transportation."
One critic of the late-session amendment to SB 1928 said the TIF idea could be damaging to the state's concurrency law because the DCA could not oversee its use.
"While some of these concepts may have merit, the bill does not appropriately address how these authorities would be formed and staffed, how the transportation construction plans would be approved, and how all of this would relate to the local comprehensive plan," said 1000 Friends of Florida, a nonprofit group that calls itself Florida's "growth management watchdog."
Amendment sponsor Sen. Carey Baker, R-Eustis, said the measure gives local governments another financing tool.
"I just thought it was a reasonable way to deal with some of the transportation needs," she said. The bill must still pass the Transportation and Economic Development Appropriations Committee before heading to the Senate floor.
Another transportation bill, SB 2804, would pave the way for billions of dollars more to be issued for new toll roads in the state. It would increase to $9 billion from $4.5 billion the amount of bonds that could be sold by the Florida Turnpike Enterprise.
It also changes the definition of an "economically feasible" turnpike project. Currently, the law states that before revenue bonds can be issued for a turnpike project, the estimated net revenues must be sufficient to pay at least 50% of the debt service on the bonds by the end of the 12th year of operation and to pay at least 100% of the debt service by the end of the 22nd year of operation.
Under the pending bill, a turnpike project would be economically feasible if it can pay 100% of the annual debt service on bonds by the end of the 30th year of operation.
SB 2804 also is waiting to be heard by the Transportation and Economic Development Appropriations Committee.
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March 2007
Housing: House OKs Bill Making Mortgage Bonds More Useful for Gulf Coast
Posted on Thursday, March 29, 2007
By Alison L. McConnell
GFOA Wants to Put GASB Out of Business
Posted on Friday, March 16, 2007
By Lynn Hume
Trends in the Region: D.C.'s IRB Mastermind Looks Back On 13 Years and $5B
Posted on Monday, March 26, 2007
By Andrew Ackerman
Legislation: Senate OKs Budget With Two-Year AMT Patch
Posted on Tuesday, March 27, 2007
By Alison L. McConnell
Legislation: House Panel: Alternative Minimum Tax Repeal Must Be Priority in 2007
Posted on Thursday, March 08, 2007
By Alison L. McConnell
Housing: House OKs Bill Making Mortgage Bonds More Useful for Gulf Coast
Posted on Thursday, March 29, 2007
By Alison L. McConnell
The House late Tuesday approved bipartisan legislation by voice vote late that would make single-family mortgage revenue bonds more useful for repairs and reconstruction in the Gulf Coast region.
Sponsored by Ways and Means Committee chairman Charles Rangel, D-N.Y., and ranking Republican Jim McCrery of Louisiana, the Katrina Housing Tax Relief Act of 2007 aims to accelerate affordable home construction in the wake of the catastrophic damage by hurricanes Katrina, Rita, and Wilma in 2005.
The major element of Rangel and McCrery's bill is an expansion of the low-income housing tax credit, but the proposal would also modify certain mortgage revenue bond rules to allow the refinancing of existing mortgages on homes that were substantially or totally demolished by the storms. The legislation now goes to the Senate for consideration.
Housing officials from the Gulf Coast testified earlier this month that changes in the tax law relating to housing relief programs were needed to ensure that residents of the region had access to them.
"This is important legislation because the nation suffered a tremendous national setback in Katrina," Rangel said in a statement yesterday. "One of the major problems is housing, and we on the Ways and Means Committee are playing a part in putting together tax incentives to spur the redevelopment of the Gulf Coast so that people can return home."
Tax-exempt qualified mortgage revenue bonds are used to make loans to mortgagors for the purchase, improvement, or rehabilitation of owner-occupied residences. They can also be used to finance home-improvement loans. The issuance of such bonds is subject to the annual state volume cap for private-activity bonds.
The Gulf Opportunity Zone Act of 2005 authorized Alabama, Louisiana, and Mississippi to issue $2,500 of qualified private-activity bonds per disaster-area resident -- above their volume caps -- for recovery and rebuilding.
The act treats GO Zone bonds issued for residences in the disaster area as qualified mortgage bonds if they meet general requirements and also relaxes the first-time homebuyer requirement, as well as income and purchase price rules. The bonds must be issued before Jan. 1, 2011.
The legislation approved by the House yesterday would treat qualified GO Zone repairs or reconstruction loans as qualified rehabilitation loans for purposes of the qualified mortgage bond rules. That would mean loans financed with GO Zone bonds could be used to acquire or replace existing mortgages.
A qualified GO Zone repair or reconstruction loan would be defined as any loan used to repair damage caused by hurricanes Katrina, Rita, or Wilma, if the expenditures are 25% or more of the mortgagor's adjusted basis in the residence, according to the bill.
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GFOA Wants to Put GASB Out of Business
Posted on Friday, March 16, 2007
By Lynn Hume
Claiming the Governmental Accounting Standards Board is repeatedly overstepping its bounds, the Government Finance Officers Association is urging state and local groups to put GASB out of business and transfer governmental accounting standards-setting to the Financial Accounting Standards Board, which establishes accounting standards for corporations and nonprofit organizations.
The GFOA detailed its complaints against GASB and its position in a set of questions and answers posted on its Web site this week, suggesting that if state and local governments turn to FASB, it could treat governments like nonprofit groups in setting accounting standards for them. GASB standards are nonbinding on governments, but accountants generally insist that governments follow them in order to get clean audit opinions on financial statements.
The GFOA action comes as the Securities and Exchange Commission is working with the Financial Accounting Foundation, the group that oversees GASB and FASB, to set up formal procedures for implementing provisions of the Sarbanes-Oxley Act that require the SEC to provide more views on the selection of FAF trustees, three of which are selected by the GFOA and another group. SEC and FAF officials recently agreed to new procedures that would allow the commission recommend candidates for FAF and even interview and express views about candidates. But the procedures make clear that the FAF trustees, and not the SEC, are responsible for approving all new or reappointed trustees.
In the course of developing the procedures, the SEC has suggested that all candidates for the FAF be vetted and approved by the FAF trustees. Currently three of the FAF's 16 trustees are chosen by the GFOA and National Association of State Auditors, Comptrollers and Treasurers under a 1984 "structuring agreement" tied to the formation of GASB. The SEC has asked FAF officials to seek amendments in that agreement so that the GFOA and NASACT merely nominate candidates and the FAF then vet and approve them. FAF officials have agreed.
At the same time, former SEC chairman Arthur Levitt is publicly urging that the entire accounting standards-setting process be "reconstituted" to serve the investing public rather than corporate and government constituent groups. In an op-ed piece in the Wall Street Journal last Friday, Levitt said those chosen to become FAF trustees should have a demonstrable record of serving the public. He said GASB and FASB members should be chosen based on who is best qualified to serve, rather than based on recommendations of selections from constituent groups, and that GASB, which currently receives funds from government groups, should have an independent source of funding.
In other action in this arena, SEC chairman Christopher Cox has embarked on an effort to review and improve disclosure and accounting in the municipal securities market so that they are more in line with corporate standards.
GASB FIGHTS BACK
GASB officials are lashing back at the GFOA's action, warning the group has no authority over GASB and that its actions threaten the independent standards- setting process.
"They have no legal or other authority to call or force a reassessment," said Robert J. DeSantis, the FAF's president and chief operating officer. DeSantis said the FAF is responsible for GASB, that the 1984 structuring agreement called for FAF to reassess GASB five years after it was created, and that the FAF did that and was pleased with the group.
The FAF also voluntary reassessed the GASB in 2003, and again expressed confidence in the organization, DeSantis added. "Whenever you have anyone call for a reassessment ... they're certainly challenging the independent standards setting process," he said, suggesting the GFOA is "standard-shopping."
DeSantis said it "is ironic" that the GFOA wants government accounting standard setting to be transferred to FASB, because in recent years governmental groups embarked on a project to get muni bond issuers to pay bond fees to help fund GASB specifically because they did not want government funding of the group. FASB receives government funding.
"I think they're misguided and misinformed and I think they have a different agenda than what they're conveying on their Web site," GASB chairman Robert Attmore said, referring to the GFOA. "I don't think they enjoy dealing with an independent standards-setter."
DeSantis said that representatives of the FAF and GFOA are expected to meet in April to discuss the GFOA complaints and the FAF's views on these matters.
In the Q&A notice on its Web site, the GFOA said its executive board voted in December "to begin to work together with the other major state and local government organizations to reassess the GASB's continued role as the authoritative accounting standard-setting body for state and local governments."
GASB has "move[d] beyond the traditional boundaries of accounting and financial reporting" and has embarked upon "a seemingly endless list of projects that appears destined more to complicate financial reporting than to provide additional information of real value to decision makers," the GFOA said.
The finance officers group acknowledged that the "immediate stimulus" for its action is "GASB's insistence on proceeding toward the establishment of a formal project on [non-financial] performance measurement reporting," called "Service Efforts and Accomplishments Reporting" or SEA.
Under this project, which GASB has not yet formally put on its agenda, GASB would suggest guidelines for the voluntary reporting by governments of performance measures.
MAINTENANCE MODE FOR GASB?
But the GFOA said in its notice that "other factors were of equal if not greater importance" in its deciding to take action against GASB, including GASB's recent guidance on sales of future revenues and pollution remediation.
"After operating for more than 20 years ... GASB has essentially completed the major tasks that it was originally created to accomplish, [such as the] financial reporting model," the GFOA said. "The GASB's success has left it with something of a dilemma. Either the board must transition into more of a 'maintenance mode' and focus primarily on addressing the demand for accounting guidance as it arises naturally in practice, or the board must actively seek creative new outlets for its standard-setting energies.
"The GFOA naturally favors the first option because it believes that the notion of cost benefit requires that the supply of accounting standards be justified by real demand," the finance officers group continued. "The GASB, on the other hand, clearly seems to have opted for a more 'supply-driven' approach, which presumes that demand for the board's services is essentially limitless.
"Thus, the GASB appears in recent years to be attempting more and more to find an accounting solution to every financial problem," the finance officers said. "Thus also the GASB's insistence that its charge extends not just to accounting, but to all aspects of accountability, thereby staking out a claim to set future reporting standards for virtually all aspects of public administration, both financial and nonfinancial.
"All of these developments have led the GFOA's executive board to conclude that the GASB's time has now come and gone and that some other vehicle would better meet the authentic need of state and local governments for accounting standards," the group said.
The GFOA said there is precedent for this kind of action.
"In 1984, the GFOA called an end to the distinguished career of the National Council on Governmental Accounting because the GFOA had come to believe that the GASB offered a more effective means of achieving its goal of improved accounting and financial reporting for state and local governments," the group said. "After almost 25 years, the GFOA now believes a similar change from the GASB to the FASB is in order for this same reason."
FASB ADVANTAGES
One advantage of moving to FASB is that the group sets standards for many different types of businesses and is so busy it has created a special emerging issues task force "to meet pressing demands for practical guidance from various quarters," the GFOA said. "In such an environment, the challenge of 'supply-driven' standard setting is much less likely to emerge than in the case of a board concerned solely with a single type of entity, [such as] state and local governments.
"Another practical advantage would be to eliminate unnecessary differences in accounting standards between the public and private sectors," the group said. "For example, is it really necessary for derivatives to be accounted for differently in the public sector?
"In an age of global capital markets, the movement now is clearly toward a convergence in accounting standards. Minimizing unnecessary differences between public and private sector accounting is an important and inevitable step in that direction," the group said.
The GFOA said it does not plan to move ahead by itself, but instead is seeking support from the seven other major state and local government groups and NASACT. The seven groups are: the National Governors Association, the National Conference of State Legislatures, the National League of Cities, the National Association of Counties, the U.S. Conference of Mayors, the Council of State Governments, and the International City/County Management Association.
But some of these groups are reluctant to go along with the GFOA.
NASACT executive director Kinney Poynter said his group's executive board in December confirmed its support for GASB as the independent standards-setting body for state and local governments.
Robert J. O'Neill, Jr., executive director of the International City/County Management Association, said yesterday, "I don't think we're ready to go to the position where GFOA is. We would need to have a lot more conversations with both the GFOA and GASB about the implications of moving from GASB to FASB."
The SEC's interest in obtaining changes at the FAF and Levitt's call for dramatic changes in the accounting standards process "could complicate those discussions," O'Neill said.
LONG HISTORY
GFOA's action caps a long history of complaints with GASB. In May 1999, GFOA members voted to authorize their board to consider cutting off funds for GASB if it moved forward with a controversial infrastructure reporting standard as part of its Statement 34, a new financial reporting model for state and local governments. At that time, GFOA contributed about $400,000 per year to GASB's budget, which totaled about $3.5 million. Today, GFOA directly and indirectly contributes about $300,000 to $350,000 to GASB, whose budget has grown to about $6.2 million.
The infrastructure reporting standard, which GASB eventually adopted, requires governments to include infrastructure in their financial statements for the first time. Infrastructure such as roads and bridges are treated as capital assets and their costs have to be allocated over their useful life.
Part of GASB's rationale for the standard was that governments sometime postpone repairs and maintenance, leaving potentially huge costs for future administrations. But governmental officials protested the requirement was too burdensome. GFOA members called GASB "militant accountants" and "arrogant" at that time.
GFOA members also were upset when GASB issued final derivatives reporting guidance with an immediate effective date in 2003. The guidance called for state and local governments for the first time to disclose, in the notes to their financial statements, detailed information about the terms and risks of their derivatives contracts, such as interest rate swaps and swaptions.
In 2004, the GFOA was so angry with former GASB chairman Tom Allen, it refused to let him speak and refused to speak to him at an executive board meeting, instead insisting on speaking only to Attmore, who was to replace Allen and was also present. At that meeting the GFOA board pressed GASB to provide it with more information about its budget and strategic plan.
In more recent years, the GFOA has been battling with GASB over a derivatives hedge accounting proposal that government officials contend is markedly different from corporate accounting standards and governmental tax standards. The National Association of Bond Lawyers warned GASB last year that its proposed derivatives accounting standards could cause muni bond issuers to violate their bond covenants and could render as misleading the annual financial statements they have filed with national repositories.
But some state and local officials fear the GFOA's proposal to move government accounting into FASB may be dangerous idea coming at a time when the SEC is becoming more involved in the FAF and when Cox has called improvements in muni disclosure and accounting. Cox contends that the municipal market has grown in complexity and is more like the corporate market, particularly with the increased use of derivatives.
GASB and FAF officials think the GFOA's main motive for calling for a reassessment of GASB is to show its displeasure over the board's movement towards Service Efforts and Accomplishments reporting. Jeffrey Esser, the GFOA's chief executive officer, has told GASB and FAF officials that his organization does not think the project falls with GASB's jurisdiction.
But the FAF took a vote on the issue late last year and agreed that the project falls within GASB jurisdiction, DeSantis said. Attmore said that years of research have shown that citizens want this kind of information from their governments.
Meanwhile Esser said this week that the GFOA wants to continue, with NASACT, to elect three of the FAF trustees. "Our view is that we only have three of 16 trustees and they are representatives of the public."
When former SEC chairman Arthur Levitt tried to get FAF to restructure its trustee selection process to ensure it would have at least five at large trustees, "We convinced Levitt that the three trustees from the government are considered public representatives," Esser said, adding, "They are elected and appointed public officials."
The GFOA is not urging that government accounting be treated more like corporate accounting, he said, adding, "We're suggesting that governments and not-for-profits are very similar and ought to be dealt with similarly by FASB."
Asked if he thinks GFOA will be able to get other groups to go along with his group's proposal to put GASB out of business, he said: "We're just trying to initiate the dialogue at this point and time."
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Trends in the Region: D.C.'s IRB Mastermind Looks Back On 13 Years and $5B
Posted on Monday, March 26, 2007
By Andrew Ackerman
Of the hundreds of projects Michael Vincent Hodge helped finance during the 13 years he ran the District of Columbia's industrial revenue bond program, he is most proud of the Newseum, a $500 million interactive journalism museum under construction in the downtown core here.
In three bond sales tied to the Newseum project between 2002 and 2006, the district has sold $346 million of tax-exempt, variable-rate revenue bonds on behalf of the Freedom Forum, a nonpartisan 501(c)(3) foundation that is building the 250,000-square-foot museum on a prime lot of land along the Pennsylvania Avenue presidential inauguration parade route.
When completed next fall, the project will contain the museum, the foundation's headquarters, a conference center, a restaurant, retail stores, and about 100 units of housing. The complex bond transactions tied to the project reflect the advent of a sophisticated economic development team in the city that district officials say Hodge is largely responsible for.
Through the IRB program, the city sells tax-exempt bonds on behalf of issuers who would otherwise not have access to the muni market. The district does not back the debt.
Between fiscal 1994 and 2007, which started Oct. 1, the program brought to market 136 deals totaling about $4.9 billion of debt, including about eight deals that are pending and slated to price later this year.
"Lee Majors has nothing on Michael," said Tony Bullock, who was a communications director for former Mayor Anthony A. Williams, referring to the star of the 1970s television show "The Six Million Dollar Man."
Hodge, who was director of the revenue bond program and chief operating officer for planning and economic development with the office of the deputy mayor, left the district government in January to become a partner at Ballard Spahr Andrews & Ingersoll LLP here. He reflected on his 20 years working for the city over lunch earlier this month.
Under Hodge's leadership, which began in late 1993, the revenue program grew from just one $72.7 million deal in fiscal 1994 for Georgetown University to nearly 30 deals in fiscal 1999, when the city issued about $895.4 million of revenue bonds for several issuers. For the past three fiscal years, the program has averaged about $500 million in issuance.
Unlike other cities where the economic base is more in manufacturing and industry, the district is based more on educational, cultural, and professional institutions. That's reflected in the list of issuers, which include Washington-based academic institutions such as Georgetown, American University, and Howard University, multiple charter schools - of which Hodge is an ardent supporter - and cultural foundations such as the Smithsonian Institution and the Carnegie Endowment for International Peace.
But there were obstacles to ramping up the program. The district in the 1990s was in financial turmoil and for years, the conduit program fell short of its potential because it was too expensive for all but the most well-heeled borrowers, Hodge said. Participants were required to pay the city annual fees equivalent to 200 basis points on the outstanding balance of each of their deals.
Initially, Hodge reduced the fee to a flat one-time payment of 150 basis points, then later to 50 basis points.
"The notion, which proved correct, was that this would result in higher loan volume," he said.
Hodge also was instrumental in easing the path for deals by altering the district's approval process - shortening the time it takes to get through all needed reviewers from nine months or more to as little as 60 days.
Because the district's home rule charter is part of federal law, federal legislation was necessary to change it to expand the permitted uses of revenue bonds - such as tax-increment financing and the use of payments in lieu of taxes. In 1998, the city drafted and Congress passively approved amendments to the home rule act that enabled the district to pursue TIFs and PILOTs and other "special" tax revenue pledged to the repayment of debt service of its revenue bonds.
Simultaneously, Congress approved the DC Revitalization Act that designated the city an enterprise zone and authorized EZ-bond finance for up to $15 million of tax-exempt bonds per borrower. The law, which is reauthorized annually, allows the financing of commercial development projects in empowerment zones and so-called renewal communities that are exempt from the federal private-activity bond volume cap.
Since the program began, the city has sold about $200 million of EZ bonds for for-profit businesses.
"I'm real proud of what's been accomplished," Hodge said, noting the expansion of the financing tools the district can use to leverage economic development. "The city's on good track now to use these tools on neighborhoods that have been waiting for a long time."
Though Hodge is a political independent, his name is similar to a person who was closely aligned with former Mayor Marion S. Barry in the mid-1990s. The other Michael Hodge, who ran a political action committee in the 1994 mayoral election, was fined $1,600 for violating district campaign finance laws. He was later alleged to have been involved in a complex scheme to funnel Barry campaign funds to the brother of Barry's then-wife.
"Ever since he was in the news, I've told everyone my name is Michael Vincent Hodge," Hodge said, emphasizing his middle name.
A consummate behind-the-scenes operative, Hodge said he had no ambitions to run for city office or take a cabinet-level position.
"There are people who put their faces out there and people who get things done," he said.
Hodge came to the district in the late 1970s after working several jobs in Boston and Baltimore and a stint in the Army, from which he was discharged in 1970. He gravitated toward education, working for education reform projects in New Jersey before enrolling in a graduate program in education at Rutgers University. At the end of the 1970s he was tapped to run the national office of a school finance reform project based at the National Urban Coalition in Washington.
He began working for the District of Columbia Housing Finance Agency in the early 1980s. Urged on by a partner at Ballard Spahr, he worked part-time at the agency while studying at night for his law degree for five years at Georgetown University Law Center. He received his degree in 1989.
After he took over the IRB program in December 1993, he ran it virtually by himself until 1998, when he finally hired two assistants. Today, it now has five full-time employees who work for deputy mayor for economic development and planning Neil O. Albert.
While the city's focus under Williams, who stepped down as mayor Jan. 2, was arguably on large developments downtown and over $535 million of tax-supported revenue bonds to finance a new baseball stadium for the district's Major League Baseball club, Hodge praised an effort championed by new Mayor Adrian M. Fenty to use small TIF deals on neighborhood projects to spur development in blighted neighborhoods
Before Hodge left the program at the beginning of the year, he created a new fee scale to facilitate smaller transactions that are likely to prevail in those neighborhoods. Under the scale, the city would charge an annual fee of just 25 basis points for deals of $15 million or less. (c) 2007 The Bond Buyer and SourceMedia, Inc. All rights reserved.
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Legislation: Senate OKs Budget With Two-Year AMT Patch
Posted on Tuesday, March 27, 2007
By Alison L. McConnell
The Senate on Friday approved a fiscal year 2008 budget resolution with a two-year "patch" of the alternative minimum tax, setting the stage for a conference with House budget writers after that chamber takes up its version tomorrow.
The House plan, approved by the budget committee last week, contains a "deficit-neutral reserve fund" for AMT relief in the short and long term. Republicans have lambasted the Democratic proposal as a tax increase in disguise, since it counts on revenue from expiring tax cuts and the AMT in future years. Neither chamber's budget plan lines up with President Bush's proposal, which would patch the alternative minimum tax through 2007.
Budget talks this year cover a wide range of tax issues such as the much-maligned AMT, which applies to more taxpayers every year because its exemption levels are not indexed to inflation. Permanent repeal would drain hundreds of billions of dollars from federal coffers, and lawmakers have annually patched the tax with extensions of temporary relief measures.
The AMT, which applies to interest earned on tax-exempt private-activity bonds held by individuals and corporations, engenders a significant basis-point premium on those bonds because of the additional tax liability it imposes on bondholders, municipal market groups have argued.
That relative yield advantage for AMT bonds has decreased, however, because of overall industry spread-tightening and speculation on imminent reform of the tax, according to Matt Fabian, a senior analyst with Municipal Market Advisors.
Due to the staggering cost of AMT reform and the dependency of future spending plans on projected AMT revenues, MMA believes year-to-year patches will be Congress' rule of thumb at least until after the 2008 elections. In the longer term, a permanent fix is more likely -- and there is, on the surface, bipartisan support for change -- but related tax rate increases to offset the repeal are also likely, Fabian wrote yesterday in MMA's weekly outlook report.
"Taxpayers currently subject to the AMT will likely need to keep paying the tax in the foreseeable future, and wealthy taxpayers not yet paying it are still very likely to be added to its rolls," he said in the report. "We thus see value in AMT muni paper on a fundamental basis, even if relative yield advantages have slimmed."
And market participants are paying attention to proposals for AMT relief or reform: "The feedback I get is that people want to hear about two things: AMT and default studies," Fabian added.
President Bush released his budget plan more than six weeks ago. Beyond the one-year AMT patch, he proposed repealing the private-activity bond volume cap for water and sewage facility bonds and extending the qualified zone academy bond program through next year.
The House's budget resolution contains a two-year, $22 billion tax-credit bond program for school construction and improvement. The measure mirrors past proposals from House Ways and Means Committee chairman Charles Rangel, D-N.Y., and Rep. Bob Etheridge, D-N.C., who for years have advocated expanded bonding for schools.
The provision is similar to "America's Better Classroom Act," which Rangel proposed in 2005 but which never became law. It would allow state and local governments to issue up to $11 billion of taxable tax-credit bonds in 2008 and 2009 for the construction, rehabilitation, or repair of public school facilities, or for the acquisition of land on which such facilities were to be constructed.
The House budget would also extend the optional deduction for state and local sales taxes. Once the chamber approves a version of the legislation, it will meet with Senate negotiators in conference to hammer out a compromise.
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Legislation: House Panel: Alternative Minimum Tax Repeal Must Be Priority in 2007
Posted on Thursday, March 08, 2007
Source: Bond Buyer
By Alison L. McConnell
Calls to eliminate the much-maligned alternative minimum tax rang out yesterday on Capitol Hill as lawmakers, tax officials, and lobbyists at a House subcommittee hearing all denounced it as bad tax policy.
The AMT, which applies to interest earned on tax-exempt private-activity bonds and for years has been a favorite target of advocates of a simpler federal tax system, is receiving plenty of attention in the 110th Congress, which will have to approve another "patch" as part of President Bush's 2008 budget to prevent its application to millions of new taxpayers this year.
Panelists testifying before the House Ways and Means Committee's subcommittee on select revenue measures, which is chaired by Richard Neal, D-Mass., agreed that the federal budget deficit makes it difficult to contemplate the repeal of a tax that brings in so much revenue -- $22 billion in fiscal year 2006, $67 billion in 2007, and $250 billion in 2017, if nothing is done about the tax, according to Eric Solomon, assistant secretary for tax policy at the Treasury Department.
Solomon acknowledged at the hearing that a long-term solution could be considered as part of fundamental tax reform, but pointed out that the AMT's implications for the short term necessitate a fix, or "patch," before such reform can be completed.
Before participating in the hearing, ranking subcommittee member Rep. Phil English, R-Pa., introduced two bills that would repeal the individual and corporate AMT. He had introduced similar bills in the 109th Congress, but they died when the two-year session ended in December.
"The AMT has punished millions of middle-class Americans each year with a tax intended for a handful of the highest-level earners," he said in a statement, noting that while "there is considerable congressional support for getting rid of the individual AMT, the case for repealing the corporate AMT is equally great."
Beyond private-activity bonds, the corporate AMT applies to interest earned on some governmental and 501(c)(3) bonds held by corporations. Muni market groups have advocated a repeal of both the individual and corporate AMT, which they say forces a significant basis-point markup on municipal bonds subject to the tax.
An increasing number of taxpayers become subject to the AMT each year because its exemption levels are not indexed to inflation. Senate Finance Committee chairman Max Baucus, D-Mont., and ranking member Charles Grassley, R-Iowa, have said fixing the AMT is one of the panel's top priorities this year. They introduced a bill in January that would permanently repeal the individual AMT.
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February 2007
Regulation Panel: Counsel Can Protect Issuers From Investment Legal Woes
Posted on Thursday, February 08, 2007
by Alison L. Mcconnell and Lynn Hume
MassDev Nearly Doubles Its Bonding From FY 2006 Pace
Posted on Thursday, February 08, 2007
by Michelle Kaske
Hill Takes Over as Head of ACA Financial's Muni Business
Posted on Wednesday, February 14, 2007
by Matthew Hanson
GO Zone Deals Get Green Light
Posted on Friday, February 16, 2007
by Tedra DeSue
Regulation: NABL to Provide Guidance to CDFA On Industrial Development Bonds
Posted on Tuesday, February 20, 2007
by Alison L. McConnell
Regulation Panel: Counsel Can Protect Issuers From Investment Legal Woes
Posted on Thursday, February 08, 2007
Source: Bond Buyer
by Alison L. Mcconnell and Lynn Hume
Bond counsel cannot be responsible for policing municipal bond transactions, but they can take steps to protect their issuer clients and themselves from the tax and securities law problems that may arise from bond-related investment contracts and derivatives, market participants said yesterday.
Moderating a panel of lawyers and advisers who discussed investment and swap pricing during a teleconference sponsored by the National Association of Bond Lawyers, Kristin Franceschi, a lawyer at DLA US LLP in Baltimore, said bond lawyers cannot verify that the price of an investment or swap is fair market value.
"Most of us went to law school because we weren't good at math," she joked. "We have absolutely no intent of trying to do that; we don't have the training, the resources; much less the access to information. We can't be the policemen of this entire process."
"You can't look for the fair market price of a guaranteed investment contract, which is a negotiated contract, in the Wall Street Journal," agreed Neil Arkuss, a lawyer at Edwards Angell Palmer & Dodge LLP in Boston, who was on the panel.
But Arkuss and other tax lawyers and advisers on the panel warned bond counsel to watch for certain potential problem situations, as well as any "red flags" that arise. They should ask questions, obtain answers and document their inquiries to show they engaged in due diligence, the panelists said.
"We're evolving to follow the market -- new products, new structures, and new regulations over time. Essentially now we have more and more sophisticated financial products, different bidding processes, the negotiation of interest rate swaps, and things are moving faster and faster," Franceschi said. "Maybe we're at a point where we need to be increasingly aware of any irregularities in our bidding processes and [spend] a little more time asking our diligence questions."
NABL decided to hold the teleconference after the Justice Department and Securities and Exchange Commission last year initiated parallel criminal and civil investigations of investments and derivatives in the municipal bond market, looking for anti-competitive practices and disclosure failures.
NABL held the teleconference to provide a general overview of Justice Department criminal investigations and the roles the Internal Revenue Service and SEC play in them, as well as to discuss the issues arising from transactions and some of the best practices that can be used to deal with them.
The IRS has long been concerned about improper bidding for GICs and other investments that are acquired at prices above fair market value, which causes them to bear artificially lower yields. In those cases, arbitrage, or the spread between the bond and investment yield, is passed to the investment provider rather than rebated to the federal government.
The tax code's arbitrage regulations for tax-exempt bonds provide issuers with a "safe harbor" for ensuring the prices of the GICs will be treated as fair market value, but only if strict bidding rules are followed. To comply, issuers among other things must obtain at least three competitive bids.
Financial advisers and attorneys participating in the NABL teleconference discussed several sets of circumstances in which issuers may find themselves outside the safe harbor -- sometimes legitimately, sometimes not.
In some cases, despite the best efforts of a bidding agent, only one or two bids are received. That can occur when the universe of bidders "starts small," according to George Majors of Bond Logistix LLC in Los Angeles. Sometimes bond insurers have restrictive requirements for contracts, or the particulars of a transaction narrow the group of prospective bidders.
Less benignly, sometimes a favored bidder is given a "last look" in the bidding process, allowing it to see other providers' bids and beat the highest bid, or the bidding agent excludes potential bidders with or without the issuer's knowledge. The bidder might want to limit its workload, or aim to give a favored firm a greater chance of winning the bidding process. In addition to running afoul of the law, the issuer also may not receive the best rate -- a bad business result, Majors said.
An erroneous bid containing a mistake made by the bidder could result from a clerical or computer error and bring the bid far below other offers. While that could mean significant savings for an issuer, the mistake could cause problems down the road and should be pointed out to the bidding party, Majors said.
In other cases, an issuer could receive "non-conforming" bids that do not meet the specifications provided in bid solicitation materials. If a non-conforming bid is the winner, the issuer and counsel must decide whether the nonconformity is "material." If it is not, they may opt to accept the bid. If it is material, they can disqualify the bid, or determine that a re-bid process should be conducted.
Courtesy bidding is another problem issuers and counsel should watch for, where the bidding agent solicits bids from certain parties, knowing that there may not be enough bids to satisfy the safe harbor requirements, Majors said.
"You have to be careful out there," Arkuss said, noting that if bond counsel is for whatever reason unconvinced that the bidding process is satisfactory, the only thing to do is to re-bid the transaction or seek expert help.
"Any time there's something out of the ordinary happening, there's going to be someone who benefits from it financially," Majors added. "You need to hire someone who's got that financial analysis skill to get to that."
Market participants pointed out during the session that tax code rules for derivatives, such as interest rate swaps, are less stringent and lack specific bidding requirements, creating more leeway in the process.
Where abiding by the rules is something financial advisers generally want to do, their fundamental fiduciary role is ensuring that their clients get the best deal in terms of a swap's terms, structure, and price, noted Peter Shapiro of Swap Financial Group LLC.
In some cases "the rules help that, sometimes the rules get in the way, [and] sometimes the rules are unclear," but above all else participants should follow good judgment and document why their judgments were made, he said.
For example, Shapiro said, it is not uncommon for an issuer to want to bid out a swap but also give the senior manager on the bond deal the chance to take the swap if it can equal the best bid.
Shapiro suggested ways to ethically deal with this situation. If the deal is large enough, it can be divided into different pieces and the manager can take one piece if it matches the best bid; or in a two-tiered process, the preferred bidder competes in the original round of bidding and if its first bid is within one or two basis points of the best bid, it would be given a chance to exceed the best bid on the table.
Errol H. Brick of Killarney Advisors Inc. in New York City stressed that the perception of a fair bidding process is critical. "If bidders feel you are favoring a particular bidder, you're not going to get good bids," he said. "Participants have to believe they have a reasonable prospect of winning the transaction. A bidding pool with 50 bidders is going to get very little interest in the marketplace."
Arkuss said bond counsel should watch for whether a transaction participant "is wearing more than one hat" or whether the same investment or derivatives providers are always winning the bids brokered by certain bidding agents. "The IRS agent is going to say, 'Didn't that cause you to have further conversation?' " he said.
To guard against bad advisers, brokers, or bidding agents, they should also look for firms that work for both the dealer community and the issuer community. If a firm is actively in the business of serving dealers, it is much more likely to have conflicts of interest, Shapiro said.
Perry Israel, who runs his own firm in Sacramento, said bond counsel should recognize their limitations and not hesitate to call on experts when they are trying to figure out if something is a problem.
"The bond counsel practice still is a certificate practice ... but in doing that, you can't just take a certificate from anyone that signs at the bottom. You have to ask the questions that go behind the certificate," he added.
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MassDev Nearly Doubles Its Bonding From FY 2006 Pace
Posted on Thursday, February 08, 2007
Source: Bond Buyer
by Michelle Kaske
The push to build more affordable housing and an increase in borrowing for industrial development projects has driven the Massachusetts Development Finance Agency to nearly double its bonding pace through the first half of its fiscal year, agency officials said.
MassDevelopment sold about $877.8 million of debt during the first half of fiscal 2007, which began July 1. That's just shy of the $908.3 million volume figure the agency brought to market in all of fiscal 2006, and nearly twice the $467 million of bond sales during the first half of that year. Similarly, the number of deals increased to 51 during the first six months of fiscal 2007, up from 43 deals in the first half of fiscal 2006, according to MassDevelopment documents.
On the housing front, MassDevelopment has seen increased interest from developers in multi-family, rental housing. The agency's total rental housing bonds for the first six months of fiscal 2007 escalated to $165 million in six issues from only $28.7 million of volume in two sales during the same period the year before.
This increase is due to developers returning to rental projects as the for-sale housing market has softened while the state's long-running Chapter 40B program allows developers to enter the tax-exempt bond market via certain conduit issuers like MassDevelopment or the Massachusetts Housing Finance Agency, if 25% of the new units are reserved for lower income households.
"Demand for new rental housing has remained strong for several years, even through the run up in for-sale housing prices," MassDevelopment president and chief executive Robert L. Culver said in an e-mail. "However, development of new rental housing was overlooked as condominium and single-family development became more profitable. The cycle has turned, and developers are once again focused on rental development, and permitting mechanisms like Chapter 40B, which is conducive for MassDevelopment bond financing."
Also boosting the agency's volume is an increase in industrial development bonds, with MassDevelopment selling $28.6 million of manufacturing bonds during the first half of fiscal 2007, more than double the $13 million total of sales for the same period in fiscal 2006.
Before Jan. 1, only companies with capital expenditures of less than $10 million could borrow funds using IDB financing. The federal government increased the capital expenditure cap to $20 million at the beginning of this year, allowing more companies to take advantage of the tax-exempt bonds. MassDevelopment anticipates selling an additional $100 million of IDBs within the next three to nine months, with eight manufacturers included in the IDB program that did not previously qualify.
Knowing the federal government would change the cap, the agency reached out to potential borrowers who could benefit with IDB financing.
"We anticipated the increase in the industrial development bond capital expenditure limit and stepped up our calls on manufacturers last summer," Culver said. "Because more manufacturers now qualify to participate, we expect to continue to see our pipeline grow."
MassDevelopment's education volume also grew to $540.8 million of bond sales for the first half of fiscal 2007, up from $283 million sold during the first six months of fiscal 2006. The change reflects a $225.8 million Harvard University issue that priced in July, the school's first sale with the agency in three years, MassDevelopment spokesman Adam Bickelman said.
In looking towards fiscal 2008, the agency hopes to use new state legislation that allows more flexible financing for public-private developments through special assessment bond programs, according to Bickelman.
MassDevelopment serves as a conduit issuer for private companies, non-profit organizations, real estate developers, and educational institutions throughout the state.
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Hill Takes Over as Head of ACA Financial's Muni Business
Posted on Wednesday, February 14, 2007
Source: Bond Buyer
by Matthew Hanson
Peter Hill, who left the top public finance spot at JPMorgan in August, started work Monday at a much smaller outfit -- ACA Capital Holdings Inc., one of the newer competitors in the financial guaranty industry.
Hill takes the helm of the municipal finance business at ACA Financial Guaranty Corp., the company's single-A rated bond insurer, and will also sit on the executive committee that helps guide overall firm strategy.
Ruben Selles, the former head of ACA's muni unit, retired on Friday.
Hill said that he was looking for a chance to work at a firm where his work would be more integral to the firm's bottom line and that he saw little room for further promotion at JPMorgan.
"JPMorgan, the merged entity with Chase and with Bank One, is in many ways a much bigger, stronger, more viable company than JPMorgan pre-merger in the 1990s," Hill said. "But I also had a yearning to be a little more on the creative side, where my impact would be much more direct to a firm's results."
In August, Bill Johnson replaced Hill at JPMorgan, in a move that suggested an increased focus at JPMorgan on expanding parts of its public finance business, especially in areas outside traditional muni bond financing. Prior to that, Johnson was president of Paloma Partners, a hedge fund that manages about $2 billion in assets. JPMorgan announced it purchased part of the hedge fund last February.
The past six months have given Hill a chance to relax a bit and reflect on his career. He said he talked to several friends at the financial guarantors during his time off, but that the idea of working for one did not become a possibility until he came across the ACA job.
"The reason that I like this opportunity is that it's very small, relative to the department that I ran," he said. "It's a department of a couple dozen, rather than a couple hundred."
He added that he was impressed with ACA's management, including president and chief executive officer Alan Roseman, who joined the company in May 2004, shortly after ACA pulled the plug on its first attempt to go public.
After raising extra capital to allay the concerns of Standard & Poor's analysts, Roseman's team began to shift the firm's business strategy. With a revamped management team and business focus, ACA returned to the equity markets last year and completed an $89.4 million initial public offering in November.
The revenue ACA brings in from its structured and collateralized debt obligation management business far surpasses that of its municipal finance insurance line. During the third quarter of 2006, municipal finance accounted for $12.3 million in revenue, while the structured and CDO management lines produced $17.3 million and $91.8 million, respectively, according to its most recent earnings statement.
ACA's fourth-quarter and year-end earnings are due out tomorrow.
Hill said he sees the municipal finance division as an integral part of ACA's business going forward and that it serves the investment needs of increasingly sophisticated individual and retail investors.
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"As investors have gotten more sophisticated at the individual and retail level, and you see the absolute mushroom growth of hedge funds, there are a lot of households who want access to something a little more complex -- but not so complex that they can't take the time to understand what they're purchasing," Hill said. "I think that ACA would fill that void."
He added that there could be way to leverage ACA's CDO experience to make CDOs more common in public finance. Merrill Lynch & Co. and Cohen Brothers & Co. teamed up to sell the first tax-exempt CDO last fall.
Clearly, Hill will be dealing with smaller, riskier credits than JPMorgan is known for underwriting. Last year, ACA backed 58 public debt sales worth a combined $494.3 million, according to Thomson Financial.
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GO Zone Deals Get Green Light
Posted on Friday, February 16, 2007
Source: Bond Buyer
by Tedra DeSue
The Louisiana State Bond Commission yesterday approved more than $317 million of Gulf Opportunity Zone bonds for film studio projects, highlighting the state's commitment to investing in the industry.
The commission also approved more than $800 million of debt requests from various issuers, some also stemming from the 2005 GO Zone Act.
The Louisiana Community Development Authority will issue $250 million of tax-exempt revenue bonds to build a multipurpose studio facility in West Baton Rouge Parish. The project includes a sound recording and music facility and a film school.
The bonds will be secured by payments under a loan agreement to be entered into by and between the Pelican Film Fund, Grand Illusions Louisiana, Topaz Productions, the L.A. Institute of Film Recruitment & Staff Training, and the authority. About 4,300 permanent jobs will be created with an annual payroll of $100 million, jobs the recovering state desperately needs.
This request gave some on the commission pause because of the issuance costs, which total $32 million.
The first GO Zone bonds for a New Orleans-area issuer could be for another film studio debt issue approved yesterday. The New Orleans Industrial Development Board will sell $67 million of tax-exempt, variable-rate bonds that would be convertible at any time to fixed-rate debt. No sale date has been determined.
The underwriter is Morgan Keegan & Co. and bond counsel is Adams & Reese.
In a letter regarding the issue, Sharon Perez, the undersecretary for the Department of Economic Development, said the project could enhance opportunities in the film and video industry and create highly trained personnel to support the industry.
According to the Louisiana Film and Video Commission, during 2006, more than $700 million in film production took place in Louisiana.
The Louisiana Public Facilities Authority received preliminary approval to refund $410 million of revenue bonds for Tulane University. Susan Weeks of Foley & Judell, the bond counsel for the deal, noted that about $35 million of the proposed bonds will initially be issued as taxable bonds.
Morgan Keegan will also be the underwriter for this deal.
One of the more controversial items that was approved involved a relatively small amount of debt. The Morehouse Parish Hospital Service District No. 1 wants $3.5 million of certificates of indebtedness to help it with its operations. The problem is the district has experienced years of losses, and State Bond Commission executive director Whit Kling warned the district might not be able to repay the debt. He further noted that the $3.5 million was $1 million more than was originally requested.
State Treasurer John Kennedy questioned hospital officials about their ability to repay the loan. They said the loan would be covered by funds they will receive in October. Without the additional $1 million, they said they would eventually miss their payroll.
Other issues approved include $35 million of public improvement sales tax revenue refunding bonds that will be sold by Baton Rouge and East Baton Rouge Parish. Of the total, about $25.8 million will be GO Zone advance-refunding bonds. Kennedy noted that the state's capacity under the GO Zone Act for advance refundings remains virtually untouched.
The East Baton Rouge Mortgage Finance Authority received final approval to sell $150 million of single-family mortgage revenue refunding notes. Morgan Keegan, again, is the underwriter.
The Jefferson Parish Council's sales tax district received approval to issue up to $120 million of refunding bonds. The deal involves a swap, but the district has not adopted a swap policy as required by the commission. They will have to submit one for the deal to move forward.
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Regulation: NABL to Provide Guidance to CDFA On Industrial Development Bonds
Posted on Tuesday, February 20, 2007
Source: Bond Buyer
by Alison L. McConnell
The National Association of Bond Lawyers will provide technical advice to the Council of Development Finance Agencies as the CDFA renews its five-year-old campaign to convince Congress to expand the definition of manufacturing for purposes of small-issue industrial development bonds.
The issue is one of the CDFA's top priorities for 2007, and the council aims to increase the number of potentially qualified users that can access IDB financing.
Current tax code rules limit the use of small-issue industrial development bonds to a "manufacturing facility," defined as a facility that is "used in the manufacturing or production of tangible personal property, including processing resulting in a change in the condition of such property."
That language excludes "new-economy," technology-based industries such as biotechnology and software, according to the CDFA. Those industries are increasingly important to local manufacturing sectors and should be eligible for IDB financing, the group says.
The 2004 Jobs Act approved a newer, broader definition of manufacturing for other tax code purposes. The CDFA is exploring whether the Internal Revenue Service could issue a regulatory ruling that would conform the IDB manufacturing definition to that expanded definition, it said in the press release.
"Understanding that this change will be very significant, CDFA has sought NABL's input and technical expertise to determine [its] appropriateness," the council said. "CDFA has also begun to discuss this strategy within the industry, and expects to approach the IRS in the next few months to submit a potential request for consideration."
"I am very excited about re-establishing our relationship with NABL," CDFA executive director Toby Rittner said in a press release Thursday. "This is the type of energy and interaction that will help make our legislative priorities a success in the coming year, as well as help support economic development bond deals."
The bond lawyers' association provides technical advice and education to various sectors of the public finance community to support the integrity of the public finance market, according to NABL president Carol L. Lew.
"NABL is attempting to assist in the furtherance of good tax policy by providing technical advice as to how existing Internal Revenue Code provisions, such as those relating to qualified small-issue bonds, can better achieve their intended purpose in light of business and technology changes since the date of enactment," said Lew, who is a partner with Stradling Yocca Carlson & Rauth in Newport Beach, Calif.
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January 2007
Outlook 2007: All Eyes on Tax Regulation
Posted on Tuesday, January 02, 2007
By Alison L. Mcconnell
Anderson's Parting Words
Posted on Wednesday, January 03, 2007
By Alison L. McConnell
Ballard Spahr Hires D.C. Government Veteran Michael Hodge
Posted on Wednesday, January 17, 2007
By Alison L. Mcconnell and Andrew Ackerman
Ways & Means Announces Tax Hearings, Other Priorities for 110th Congress
Posted on Friday, January 19, 2007
By Alison L. Mcconnell
Understanding Ratings
Posted on Thursday, January 25, 2007
By Matthew Hanson
Outlook 2007: All Eyes on Tax Regulation
Posted on Tuesday, January 02, 2007
Source: Bond Buyer
By Alison L. Mcconnell
The municipal bond market will concentrate on forthcoming tax regulations this year, as several crucial projects are in the works at the Treasury Department and the Internal Revenue Service.
While muni market advocates always keep an eye on Capitol Hill happenings -- and indeed will be making inroads and new contacts in the Democrat-controlled 110th Congress, which starts work next week -- most believe working with federal regulators on the development of guidance and rules that affect tax-exempt financing will be paramount in 2007.
The approach follows a year in which most of the market was forced to deal with the fallout from the tax reconciliation bill, which President Bush signed into law on May 17.
Among other things, the Tax Increase Prevention and Reconciliation Act, or TIPRA, requires broker-dealers and other firms to report to the IRS all tax-exempt interest paid to bondholders. To the chagrin of market participants, that provision was enacted with its much-contested retroactive element intact. The Treasury Department provided firms with temporary relief in an Oct. 4 notice that gave firms until March 31 to comply with the new requirement.
The temporary relief also exempted bearer bonds and original issue discount bonds from the interest reporting requirement.
The notice's provision of additional lead time for the market represented a workable transition, according to Jill Hershey, senior vice president of legislative affairs for the Securities Industry and Financial Markets Association.
Hershey said SIFMA hopes to continue to work with Treasury and the IRS on the full implementation of the reporting requirement.
In the meantime, broker-dealer firms and trustees are taking steps to ease the transition and make the interest reporting part of their normal routines. It has not been easy, though. Prior to the TIPRA's enactment, firms making interest payments to bondholders did not necessarily have on record the taxpayer identification numbers required to determine whether certain backup withholding provisions of the legislation were applicable.
After the notice was issued, trustees started sending letters to customers requesting the information and explaining why they needed it, according to Cris Naser, senior counsel for the American Bankers Association.
"Truly, the burden here is all the calls that are going to come in from people saying 'This isn't taxable!' " she said. "There's going to have to be an explanation."
Firms have been trying to figure out whose numbers are already on record, since many customers also have taxable accounts.
"For some shops that's not a big deal, but for Bank of New York and for US Bank that's a huge deal, because they're by far the two biggest players in this industry," she said.
Naser noted that Treasury and the IRS "clearly understood the problem" because many officials there have been on both sides of the industry. "They knew what it was like, especially on the bearer bonds issue, which would have been a killer for us," she said. "We can't give you information we never had any reason to collect. The retroactivity was just horrendous. Treasury really bent over backwards to make this workable."
In addition to working with broker-dealer firms and trustees, federal officials listened to concerns from vendors, namely SunGard, a major processor of all different types of tax payments for broker-dealers, mutual funds, and trustees.
"It was really important that they be brought into the conversation because ... if they couldn't do it, we couldn't do it," Naser said.
While the issuer community is not directly affected, it recognizes that it will take time to implement the new reporting requirement correctly, according to Susan Gaffney, federal liaison director for the Government Finance Officers Association.
"I think it's a back-and-forth process between Treasury and the broker-dealer and bank custodian community," she said. "There's a real willingness on Treasury's side to make it work well for all parties."
National Association of Bond Lawyers president Carol L. Lew, a partner with Stradling Yocca Carlson & Rauth in Newport Beach, Calif., said NABL has not heard significant concerns about the interest reporting requirement that have not already been addressed. "It is important to continue public education regarding the nature of the new restrictions such that all impacted entities can be in compliance, including small local entity payers," she noted.
The TIPRA contained another provision imposing an excise tax and disclosure requirements on all "listed" transactions, nomenclature used by the IRS to denote abusive tax shelters. The retroactive provision applies the tax to all listed transactions regardless of whether they were entered into before they were prohibited, ensnaring a key group of about 15 tax-exempt sale-in, lease-out and lease-in, lease-out deals.
Those particular deals were grandfathered into the system when the IRS banned SILOs and LILOs in the 1990s. In a typical SILO transaction, an issuer sells an asset to a private entity for cash. The firm then leases the asset back to the issuer and deducts its depreciation and interest costs from federal taxes as an "owner" of the asset.
As such, the TIPRA excise tax's retroactivity unfairly penalizes issuers -- mainly transit authorities looking to secure financing for transportation equipment -- who entered into SILOs and LILOs in good faith, even at the encouragement of the Department of Transportation, according to issuers and market groups such as the GFOA.
They have submitted formal comments to Congress and Treasury requesting that the provision be made prospective, which would mean the excise tax would apply only to listed transactions entered into after the TIPRA's enactment. Treasury officials responded in October, saying they planned to develop guidance to clarify the applicability of the tax. It is not clear whether that guidance will be favorable for issuers with outstanding SILO or LILO deals.
The TIPRA also included provisions that require tax-exempt bond issuers to reasonably expect to spend 30% of pooled bond proceeds within a year and to have written loan agreements for at least 30% of proceeds at the time of issuance.
It also requires pool issuers to redeem outstanding bonds with unspent proceeds at the end of loan periods and to count pooled bonds when determining whether they qualify for the small-issuer exception to federal arbitrage rebate rules.
The new rules have not caused too many headaches, since blind pool deals "had pretty much died before the TIPRA came in, because there had been so many audits and in so many cases the pools had failed to originate," said Willis Ritter, a partner with Ungaretti & Harris LLP here.
"Most of us on the legal side think the legislation is useful, helpful, and positive" because it ensures that issuers use legitimate pools that work, he added.
"We understand and support the tax policy concerns that the pooled bond restrictions were designed to address," NABL's Lew said. "Pools are often undertaken because of cost savings and other efficiencies of pooling, and issuers must balance these positives against some of the new restrictions."
Gaffney noted that the GFOA is working to make sure programs such as state revolving funds not adversely affected by the new rules.
On a more positive note for most, the TIPRA also included a provision that sped up a scheduled increase in the capital expenditure limit for small-issue industrial development bonds. That increase, from $10 million to $20 million, occurred on Sunday as a result of the legislation.
The Council of Development Finance Agencies had lobbied hard for the increase after hearing that projects were not going forward because issuers were concerned about bumping up against the $10 million limit, which had been in place for decades. It was previously scheduled to rise to $20 million on Sept. 30, 2009.
The CDFA now hopes to convince Congress to expand the definition of "manufacturing" for IDBs to include biotech, software, technology, and other new-economy manufactures. It also aims to secure an increase in the overall annual IDB cap, which currently sits at $10 million.
The council plans to approach the IRS with a proposal regarding the manufacturing definition early this year.
"IDBs remain a popular and growing form of finance for local and state issuers," the group said in a report published last week. "The change in the capital expenditure limitation ... is having a major impact nationally" and is creating new interest in the small-issue bonds.
"IDBs have created and retained thousands of jobs this past year and CDFA fully expects this to continue in the New Year," said executive director Toby Rittner. "We look forward to working with Congress to enact these improvements and provide economic developers with the added resources for financing manufactures, creating jobs, and spurring local investment."
A&A REGS
Beyond grappling with the various elements of the tax reconciliation bill market participants last year were delivered an enormously important set of proposed rules: the allocation and accounting regulations, which had been in development for nearly a decade.
"The proposed allocation and accounting regulations were one of the most significant tax regulatory developments this year because of their broad impact on many bond issues," Lew said.
Currently, private-activity bonds can finance facilities that have up to 10% private use, or use by non-governmental persons. The proposed rules govern the way tax-exempt private-activity bonds can be used to finance mixed-use facilities, which in addition to governmental use have private use of more than 10%.
The regulations, as drafted, would allow issuers to fund such facilities with a mixture of tax-exempt debt and qualified equity, which can come from taxable bond proceeds or other funds. They provide two elective methods -- the discrete physical portion method and the undivided portion method -- for allocating funds.
NABL, GFOA, the National Council of Health Facilities Finance Authorities, and the National Association of Higher Educational Facilities Authorities sent comments to the IRS and Treasury this month applauding the long-awaited release of the complex and highly technical regulations, but also arguing for their simplification. A public hearing on the rules is scheduled for Jan. 11 here.
With the release of the proposed allocation and accounting regulations in late September, two of the seven items on Treasury's guidance plan for fiscal year 2006-2007 were complete, Also that month the department finished overhauling Revenue Procedure 99.35, which outlines procedures used by audited issuers to request an administrative appeal of a proposed adverse determination from the IRS' tax-exempt bond office.
What's left? Long-pending regulations on solid waste disposal facilities and qualified zone academy bonds, a potentially mammoth "cleanup" of the arbitrage regulations, guidance on private use issues related to federally sponsored research and the 1980 "Bayh-Dole" act, and regulations for clean renewable energy bonds, or CREBs.
"I'm hoping it's going to be busy, of course, because the more guidance we get out of the IRS and Treasury the easier it makes it for all of us tax lawyers," said Nancy M. Lashnits, a partner with Snell & Wilmer LLP in Phoenix.
Lashnits said having John J. Cross 3d back at the Treasury Department bodes well for a productive guidance year because Cross "has the ability to move things through the system."
"I don't think their list is particularly ambitious, except for the guidance on arbitrage. That could be a pretty big chunk of time," she said, adding that the solid waste and QZAB regulations "have been on there forever, so whether anything's going to happen this year I don't know. Knowing John a bit, what he cares about is the real meaty stuff. Maybe he can get some of this other stuff through," she said.
Cross, after years in private practice, left Hawkins Delafield & Wood LLP and rejoined Treasury in March as an attorney in the tax legislative counsel office of Treasury's Office of Tax Policy. He replaced Stephen J. Watson, who joined Fulbright & Jaworski LLP last January.
Lew said NABL looks forward to an ongoing dialogue with the department about the remaining guidance projects. The association is further pleased that federal officials are actively requesting comments on important issues, such as record retention requirements, that are not on the guidance plan.
In addition to record retention, Treasury also has requested comments on the definition of "essential government function" as it pertains to Indian tribal bonds. Long a point of contention between federal officials and Indian tribes, that definition has important implications for the ability of tribes to finance certain kinds of facilities with tax-exempt debt.
Federal officials said on Aug. 9 that they planned to propose regulations for tribal bonds that take a narrow view compared to the one supported by tribes and their advocates. Treasury spokeswoman Jennifer Zuccarelli said Friday that the department is reviewing comments received from the industry, but it does not have a timetable for releasing the proposed regulations yet.
In terms of the remaining items on the guidance plan, Cross has said the arbitrage project is the most complicated and may not be complete in this cycle. Overhauling the regulations could include examinations of topics such as electronic platforms for guaranteed investment contract, or GIC, bidding; rebate calculations; long-term working capital; and issue price, and those will take time, he has said.
Private use issues related to federally sponsored research might prove a more straightforward guidance project, according to sources.
The 1980 Bayh-Dole act provides a uniform set of rules that applies when any federal agency enters into a contract, grant, or cooperative agreement for the performance of experimental, developmental, or research work funded wholly or in part by the federal government.
In connection with making those grants, the act provides the federal government with certain rights that must be included in each funding agreement. The so-called Bayh-Dole rights are provisions relating to patent applications, title to inventions, and march-in rights.
Since the federal government often grants money to cities, 501(c)(3) organizations, and other institutions to conduct basic research, and because the research often takes place in facilities built with tax-exempt private-activity bonds, the act has significant ramifications for the muni market.
The tax code places a 10% limit on the private use of such facilities. The federal government is considered a "nongovernmental person," or a private user, for the purpose of the limitation.
NABL argued in a November paper that the inclusion of Bayh-Dole rights in a research agreement should not constitute private use. Under the act, federal agencies are not given authority to direct the applicable research or to control the use or dispositions of research facilities, the association said.
Instead, it provides federal agencies the tools to guarantee that research grants aid the greater public; tools such as the right to obtain title to subject inventions and to require periodic reports on inventions' development.
Lashnits, who was a member of NABL's task force on federally sponsored research's private use issues, said she hopes Treasury "will get out [guidance] quickly, because it seems to be a slam dunk from a policy perspective. There's a pretty straightforward fix there about the Bayh-Dole rights. There's a lot of different factors you have to consider, [but] people have been looking at Bayh-Dole for a while."
Lew added that in 2007, beyond providing additional commentary and assistance to Treasury as it develops guidance, NABL will continue working toward its mission of providing education for, and improving the integrity of, the municipal market. The association is actively working on comment projects that address topics including derivatives, record retention, payments in lieu of taxes, and technical concerns related to the 1982 Tax Equity and Fiscal Responsibility Act, including post-issuance issues.
QUIET ON THE HILL
Regulatory issues may be the main event this year, but market participants are closely watching developments in Washington as New York Democrat Charles Rangel takes over for former House Ways and Means chairman Bill Thomas, R-Calif., who retired at the end of the 109th Congress.
Long the committee's ranking member, Rangel is extremely familiar with public finance issues. He has said a top priority is tackling the alternative minimum tax, which has ensnared millions more taxpayers each year because it is not indexed to inflation. Market groups would welcome a repeal of the tax because it applies to private-activity bonds and some corporations' interest earnings from governmental and 501(c)(3) bonds.
On the Senate side, the Democratic transition is expected to be extremely smooth as Finance Committee chairman Max Baucus of Montana takes over for Charles Grassley, R-Iowa. Grassley will assume Baucus' previous post as ranking minority member on the committee. The two have a strong history of bipartisan cooperation on tax issues.
For much of 2006 it seemed as if the 110th Congress' first item of business would be the so-called tax extenders. Though the measures were politically popular and widely supported, Congressional leaders could not agree on a legislative vehicle -- the tax reconciliation bill, the pension bill, the failed trifecta legislation that also included estate tax reform and a hike in the minimum wage -- with which to combine them for easy passage. At the eleventh hour, however, the House and Senate agreed to a combination tax, trade, and health bill that was later signed by President Bush on Dec. 12.
Muni market participants tracked the legislation's progress because it contained a two-year extension of the $400 million qualified zone academy bond program, which issuers use to finance repairs and renovations to existing school facilities. The law also extended and allocated extra bonding authority to the clean renewable energy bond program, used to finance environmentally friendly power-generating facilities. It provided a two-year extension for the optional deduction for state and local sales taxes and made permanent the grandfather exception from the arbitrage for certain permanent university funds.
In addition to renewing the QZAB program for two years, the combination legislation imposes several new requirements for issuers who use the taxable, tax-credit bonds. It requires them to reasonably expect to spend 95% of the proceeds of sales within five years and to enter into binding contracts with third parties to spend at least 10% of the proceeds within six months.
Under the new law issuers must redeem QZABs within 90 days if proceeds are not spent within the five-year period and must comply with the arbitrage and information reporting requirements that apply to tax-exempt bonds.
Market participants are still sifting through the final legislation and working through its implications, they say. Cyberlearning.org, an arm of the National Education Foundation, is planning a teleconference later this month to help QZAB issuers and advocates understand the new requirements.
OTHER WORRIES
The GFOA's Gaffney said concerns have lingered on the State and Local Government Series securities regulations, which were enacted a year and a half ago. The regulations tightened restrictions on SLGS, which are nonmarketable Treasuries available for purchase by issuers of tax-exempt bonds, primarily for use in advance refunding escrows.
"We're trying to make sure Treasury is aware of the technical issues that have come forward. This is sort of a new problem," Gaffney said. "Let's say I make a subscription; I type in all my [information]. Let's say I type it in wrong. There's no screen that says, 'Is this the right information?' It just goes."
Gaffney said Treasury has handled similar problems on a case-by-case basis, and market groups are trying to find a better, more universal way to address the technical concerns.
On Capitol Hill, tax reform is a dim possibility in 2007. The GFOA remains concerned that Congress will wrestle with tax gap issues instead.
"That's certainly not going away, so we need to be alert to different proposals that may come forward; that address the federal tax gap and what implications they may have for state and local governments," Gaffney said.
"There's a lot in play that maybe hasn't been in play for the past few years. This may provide opportunities for state and local governments that we need to be aware of" and use to ensure federal officials and lawmakers consider the full impact of their proposals, according to Gaffney.
"We will continue to help members of Congress and the administration understand the importance of the tax-exempt bond market; that it really provides the backbone for our community by allowing infrastructure to be built, which is needed for the economic growth of our country," she said. "When there's any adverse regulations or legislation against the market, our mission is to ensure that folks understand that the implications really do hurt state and local governments at the end of the day."
Hershey said tax issues figure prominently in SIFMA's overarching goals for 2007, which include lowering the cost of capital, especially for state and local governments, and ensuring that all Americans, particularly those closest to retirement, have the tools they need to save.
The association also will closely monitor legislation concerned with revenue raisers. "We look forward to working with the tax writing committees of the 110th Congress to establish a healthy environment for investors, issuers, and the industry," Hershey said.
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Anderson's Parting Words
Posted on Wednesday, January 03, 2007
Source: Bond Buyer
By Alison L. McConnell
Indictments from the Justice Department's criminal investigation of the municipal bond market may reveal a wealth of key information about bad practices in the industry, with serious political and regulatory ramifications, according to the Internal Revenue Service's Charles Anderson.
That's because attorneys "willing to look the other way" in exchange for kickbacks often support the firms that rig bids, fix prices, and use other anti-competitive strategies to make illegal profits - firms brought into deals by elected officials to whom they have given political contributions, he said.
Roughly two dozen firms are believed to have been subpoenaed in November by the Justice Department's antitrust division in a wide-ranging probe of alleged bid-rigging and price-fixing for investment contracts and derivatives associated with bond deals done since 1992. The Securities and Exchange Commission is conducting a parallel civil probe that reaches back to 2000.
Anderson, who retires today after a 33-year career with the IRS, has seen a gamut of abuses in bond audits conducted during his tenure as head of field operations for the tax-exempt bond office, or TEB, which made the initial criminal referral that sparked the Justice investigation. In interviews last week he reflected on past frustrations with the agency and discussed what the coming years may bring in the realm of tax enforcement.
Anderson asserted that the IRS' Section 6700 investigations "are going great guns," and said last week that a firm agreed to pay a penalty of almost $15 million to settle one such examination. He declined to identify the firm or elaborate on the case, but said: "We weren't blowing smoke when we said there's a couple hundred million of assessments [pending]. We have had a number of law firms agree to pay settlements."
Section 6700 of the tax code allows the IRS to apply monetary penalties to individuals or firms that participate in abusive transactions. Anderson predicted that wider use of the code section would become even more prominent in the aftermath of the Justice Department investigation, when critical information - currently sealed and not available to the civil side of the IRS - spills out.
Those new details are likely to emerge in criminal indictments by the federal grand jury and could clarify the basis for new Section 6700 adjustments or bond audits, according to Anderson.
"We're going to see information about cases the IRS has not audited yet. We're going to see information about law firms that isn't public knowledge yet. I would expect that the end result will be a whole slew of new 6700 assessments by the IRS," he said.
"I have listened to tape recordings of bankers talking to each other saying, 'This law firm or lawyer will go along, they know what's going on, they'll give us an opinion,' " Anderson continued. "It might take a little time to unwind it all, but I think we've only seen the tip of the iceberg. Ultimately, the same kinds of acts that give rise to 6700 [liability] can also give rise to criminal conspiracy counts against attorneys. I would not be surprised to see bankers and lawyers go to jail."
Anderson predicted that the Justice investigation would likely take about two years. The initial flurry of activity late last fall has quieted, but the next development could be a deal cut between the department and "a couple of bankers with their hands in the cookie jar, who then spill their guts on others in the industry," Anderson said.
"Let's say hypothetically that somebody says, 'Yeah, I was in on the bid-rigging, all these people knew, this politician got a kickback; this attorney got paid this amount because he knew what was going on and looked the other way.' You might get some of that flavor of things if someone gets indicted and pleads guilty," he added.
Anderson and several other market sources who wished to remain unidentified said the investigation would, in addition to revealing major abuses, expose a cycle of pay-to-play practices in local political circles.
"When someone gets in the position to rig bids or fix prices, they generally do it because some political supporter or booster puts them in the position to be in on that deal to start with," Anderson said. "It's not [the IRS'] jurisdiction, but I've seen cases where I know that parties who were in on the bidding also made contributions on their own to politicians. My folks just dealt with whether the bonds are taxable, but clearly we have turned over information to other agencies about these political contacts. What they do with that depends on how it fits into their regulatory scheme."
Similar details emerged two years ago from the federal criminal corruption and pay-to-play case involving Philadelphia officials, the late bond counsel Ronald A. White, and several investment bankers.
The indictments issued against city officials and others from that case detailed examples of pay-to-play practices, referring to, but not identifying by name, investment adviser Chambers Dunhill Rubin & Co., now CDR Financial Products, underwriter Loop Capital Markets LLC, and derivatives and investments provider Investment Advisory Management Group Inc..
CDR, the city's swap adviser, made several contributions to Philadelphia Mayor John Street's campaign and retained White as a consultant, according to the indictments and sources familiar with them. IMAGE provided gifts to White and was selected as financial adviser on a Philadelphia school district deal that was ultimately cancelled.
CDR and IMAGE were two of the three firms raided by the Justice Department and the Federal Bureau of Investigation on Nov. 15 in conjunction with the criminal antitrust investigation.
Looking back over his long career, Anderson said current IRS commissioner Mark W. Everson may have saved the agency from "total disaster" after former commissioner Charles Rossotti "greatly overreacted to congressional kangaroo court hearings about IRS abuse, which was all about politics."
"The message sent out subliminally was that aggressive enforcement was bad," Anderson said. "Agents were actually starting to get paranoid about taking aggressive enforcement actions. Rossotti never sent out any message that the congressional hearings were bullshit. Consequently, the new management teams were largely butt-kissers."
During the late-1990s reorganization that followed the hearings, a whole generation of IRS managers "who have never worked a case, issued a summons, or even understood how to develop potential enforcement cases moved into management and adopted this warmer and fuzzier IRS concept," he said.
Everson "immediately saw the potential disaster" and sent out a clear message that enforcement was priority one. Then, in 2003, he appointed deputy commissioner Mark E. Matthews to reinforce the message, according to Anderson.
"The scrambling around by executives with no enforcement experience to recast themselves as crime dogs was somewhat amusing," he said.
The tax-exempt bond office was fairly insulated from the goings-on and never focused on anything other than enforcement, according to the outgoing field operations manager.
"I am proud that I had a hand in that. Our five field managers are the top investigators in their units - a vast difference from the rest of the IRS, where probably 90% of the managers have never served a summons in their life," Anderson said. "[Former TEB director W. Mark Scott] was a very good buffer to keep me and my folks as far away from the madness as possible."
Scott left the IRS in 2005 for private practice. He has attributed the move to several factors, including a "voluntary" pay cut that resulted from congressional law changes limiting the post-employment activities of government executives, the continuous rotation of "nearly retired" managers through the government entities directorship, and the desire to seek new challenges.
"We got zero support from the former director of government entities, Preston Butcher," Anderson said. "However, [current TEB director Clifford Gannett] ought to get much more support from the new guy, Michael Julianelle. I have known Michael for a long time and he supports aggressive enforcement. I feel good about leaving TEB with good leadership in place."
Anderson said current TEB field managers Derek Knight and Karen Skinder are likely the strongest candidates for his job. Skinder, who works out of Ohio, will be acting field operations manager until Anderson's successor is chosen.
Sources indicate that Knight is the top contender and that Skinder is applying for Gannett's former job as director of TEB's office of compliance and program management. Steven Chamberlin is currently acting in that position.
"If someone with serious enforcement experience, like Derek or Karen, succeeds me, [the tax-exempt and government entities division] should think outside the box and reinvestigate an idea we tried to persuade executives to adopt back in 2000, only to be shot down by the then-exempt organizations examination director Rosie Johnson," he said.
To combat the most serious abuses with TEB and EO implications, TE/GE director Stephen Miller could hire a group of eight to 10 brand-new EO agents and assign them to TEB, along with a manager approved by TEB. That "strike force" could target abusive exempt organizations, mainly in housing and health care-related areas where bonds are issued and where the EO exemption is the main compliance issue, Anderson said, adding that he intends to send a recommendation to Senate Finance Committee members who are interested in better IRS enforcement of abusive exempt organizations.
The abuses often are real estate plays in housing, nursing homes, and senior living - the exempt organizations are fronts for profit property management or real estate operators that bleed out the money via less-than-arms-length management contracts or excessive salaries, he said.
"Frequently, we encounter these but can do nothing unless EO revokes their exemption or does an intensive examination," he said. "Right now the EO examination program is dysfunctional and does not have any senior management expertise or leadership on the order of Derek or Karen. The key to any success will have to be that the EO group reports directly to the TEB field operations manager and not Steve Miller, who I believe is trying sincerely to beef up EO enforcement. I have a lot of faith in Michael Julianelle and whomever succeeds me to make it work."
Anderson also reiterated concerns about administrative appeals for tax-exempt bond issuers, calling the process "greatly flawed." Issuers currently can appeal proposed adverse determinations that their bonds are taxable with the IRS Office of Appeals, which is separate from TEB.
"I have seen cases where appeals officers have made substantial settlement decisions only to have appeals management renegotiate lower settlements due to outside political pressure," Anderson said. "In one case, I even referred it to [the Treasury inspector general] because it was so outrageous. I turned over evidence that appeals' upper management was factoring in an issuer's ability to pay rather than our ability to collect from bondholders. A seven-figure settlement was voided due to an economic downturn in a certain geographical area."
He also said "time and time again" the IRS has lost millions of dollars because appeals management has stalled resolutions and let statutes of limitation expire. It is crucial that they understand that issuers' ability to pay is not a settlement factor, he said.
"What is needed is for appeals to be limited to resolving the determination of taxability, not the settlement of bondholder tax, which is dealt with separately. Doing this preserves everyone's appeal rights and avoids the inefficient structure of the TEB appeals process," Anderson said.
Turning to controversial audit areas, Anderson indicated that a number of new solid-waste audits have been opened. "Ultimately I think we're going to see [U.S. Tax Court] cases, because I think some of the larger paper companies are going to challenge" adverse determinations that bonds are taxable, he said.
And in the tribal bond sector, Anderson said technical advice memoranda recently released by Indian tribes and IRS chief counsel vindicated the audit program's much-maligned stance on tribes' use of tax-exempt financing.
"I think when the technical advice came out, people no longer thought it was just the enforcement folks taking the position" that bonds cannot be issued for commercial activities of tribes, he said.
"Overall, the IRS' hand has been strengthened since those came out. They did take a long time and there's a long history of why that was, which I view as being mainly politics," Anderson said.
About a dozen tribal audits are outstanding, including some in appeals. The market may see private-letter rulings, some publicity about a few more audits, and possibly settlements of a few long-outstanding cases in the coming years, he predicted.
In his retirement Anderson plans to pursue part-time consulting - including tax controversy, risk analysis, and post-issuance compliance work - and will build a house in Pennsylvania next year.
"It's been a good run. I had a good time, and I'm happy about leaving," he said. "I think it's time that somebody younger and smarter takes over."
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Ballard Spahr Hires D.C. Government Veteran Michael Hodge
Posted on Wednesday, January 17, 2007
Source: Bond Buyer
By Alison L. Mcconnell and Andrew Ackerman
Michael Vincent Hodge, a key economic development official for the District of Columbia, joined Ballard Spahr Andrews & Ingersoll LLP this week as a partner in its office here.
Hodge was previously the director of the district's revenue bond program and chief operating officer for planning and economic development with the office of the deputy mayor. He played a significant role in many of the district's economic development projects during his 20-year tenure in the district government.
"Michael is a very well-respected leader in the D.C. community [with] enormous energy and vast experience as a key player in D.C.'s redevelopment over the past two decades," Ballard Spahr chairman Arthur Makadon noted in a press release. "We are delighted that Michael has decided to join Ballard."
Hodge's move was announced two weeks after Adrian M. Fenty succeeded Anthony A. Williams as mayor of the district, and was tied to the timing of the transition. Though Hodge told coworkers last month that he would leave city government, he was not asked to leave by the new mayor, district officials said.
While working for the city, Hodge served as the director of the district's revenue bond program for 13 years and oversaw daily operations of the central office and 11 agencies. He also handled economic development initiatives, including the implementation of commercial and housing development programs supported by issuances of tax increment, payments-in-lieu of taxes, special fund securitization, and conduit bonds and notes, as well as the award of tax abatements and grants, according to the Ballard press release.
"Michael's knowledge of the public sector and all facets of district and other local governments will be a tremendous asset for our clients," said Allan Winn, the managing partner in Ballard's Washington office.
Public finance partner Joe Fanone said Hodge's broad experience will benefit Ballard's real estate and public finance practices in the district and elsewhere. "He is a terrific addition. Michael will assist the firm in its practice with public-private partnerships as well as other areas," Fanone said.
Hodge said in a statement that he was very pleased to be on board.
"I'm joining a team of extremely talented professionals who offer our clients in the district, Bethesda [Md.], and Baltimore confidence that we have the capacity to navigate the maze of legal, regulatory, and finance issues and get the job done on time and within budget," he said.
Hodge holds a master's degree in education from Rutgers University and earned a law degree from the Georgetown University Law Center.
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Ways & Means Announces Tax Hearings, Other Priorities for 110th Congress
Posted on Friday, January 19, 2007
Source: Bond Buyer
By Alison L. Mcconnell
Tax-exempt charitable organizations and foundations, the qualified zone academy bond program, and the federal tax gap will come under the microscope of the House Ways and Means Committee during the 110th Congress.
Those topics were listed when the tax-writing body, newly headed by Rep. Charles Rangel, D-N.Y., held an organizational hearing this week to announce a draft outline of planned hearings and oversight-related activities. One of the oversight hearings will address "current law rules governing the use of tax-credit bonds to finance school construction and renovation, and options to simplify the current complex structure of tax benefits for higher education."
Another will "evaluate overall [Internal Revenue Service] efforts to monitor tax-exempt organization activities, prevent abuse, and ensure timely information to the public about charity activity and finances."
Further detail was not provided in a Ways and Means press release that outlined the committee's priorities for the 110th Congress. Additional hearings may be added to the schedule throughout the session.
Rangel convinced Congress to create the taxable, tax-credit qualified zone academy bond program in 1998 to help underperforming schools. QZABs can be issued to finance repairs and renovations at existing school facilities, but not for new school construction.
The new chairman also expects to hold hearings on IRS audit and collection priorities, technical corrections to tax legislation enacted in the past six years, and the gap between federal taxes owed to the Internal Revenue Service and those actually collected.
The committee is planning oversight hearings on a number of overall budget issues, such as federal debt, the short- and long-term fiscal outlook, and the U.S.'s growing reliance on foreign debt. Hearings with Treasury Secretary Henry Paulson will likely be held after President Bush sends his 2008 budget to Congress Feb. 5.
Subcommittee assignments were also announced at the Ways and Means hearing Wednesday. Richard Neal, D-Mass., will replace David Camp, R-Mich., as chairman of the subcommittee on select revenue measures, which oftentimes handles tax-exempt bond proposals.
Rangel will chair the Joint Committee on Taxation, which links Ways and Means and the Senate Finance Committee. JCT staff assists in the development and analysis of tax proposals, and consult the Treasury Department and the Internal Revenue Service throughout the legislative process.
Other House members of the JCT are Wally Herger, R-Calif., Sander Levin, D-Mich., James McCrery, R-La., and Pete Stark, D-Calif.
The Senate Finance Committee also held an organizational hearing this week and announced its JCT members: chairman Max Baucus, D-Mont., ranking member Charles Grassley, R-Iowa, and Sens. Kent Conrad, D-N.D., Orrin G. Hatch, R-Utah, and John D. Rockefeller 4th, D-W. Va.
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Understanding Ratings
Posted on Thursday, January 25, 2007
Source: Bond Buyer
By Matthew Hanson
For decades, market participants have simply accepted the disparity between municipal and corporate credit ratings.
Common knowledge is that the difference makes it easier to compare municipal credits, but leaves nearly all muni bonds with lower ratings than they would have on a corporate rating scale.
Some of the new investors in the market, however, are calling for a way to bridge this gap.
"Imagine a guy sitting in Thailand trying to compare a U.S. municipal bond to a U.S. corporate bond or a bond issued by the government of Canada," said John Fiebach, portfolio manager at the Pennsylvania-based hedge fund Duration Capital. "The ratings are not really representative of the true risk he's taking if he's doing a comparison just looking at the rating of the bond."
It's a discussion that comes up increasingly more often in a municipal market that now stretches to include hedge funds, arbitrage accounts, foreign investors, and other participants who did not exist just a few decades ago.
"The issuers are paying the rating agencies a lot of money to rate their bonds," said Fiebach, who helped lead a discussion on the issue at a Municipal Analysts Group of New York lunch in November. He added that he worries the current rating scales do not give investors an adequate way to compare relative credit risk.
While Fiebach and other proponents for changes to the credit rating system say it would open the door for many issuers to court a wide range of new investors, others said they worried that it would only create confusion in a municipal market still populated largely by the main-stay institutional and retail buyers.
Prevailing wisdom in the market holds that a muni credit is safer than a corporate credit with the same rating.
For example, it is hard to conceive of any company in California that has more resources to repay bonds than the Golden State itself, even if that company's credit rating is better than the state's. California - which has one of the 10 largest economies in the world - brought in $91.2 billion in tax and license revenue alone last year. Moody's Investors Service rates the state A1, and both Fitch Ratings and Standard & Poor's rate it A-plus.
By comparison, San Francisco-based Wells Fargo & Co., which is rated AA by Standard & Poor's and Fitch, had annual revenue of $35.7 billion last year, according to an earnings statement released last week.
"I almost view it as driving in miles, versus kilometers," said Naomi Richman, chief credit officer of Moody's public finance department. "When you go into Canada, and there's a sign that says 60 kilometers [per hour], you're kind of like, 'Well, how fast is that? What does this mean?' "
Since 1999, a series of municipal default studies has largely confirmed what everyone has assumed for years: municipals are safer than corporates and offer greater chances for recovery when they do default.
In the most recent default study Fitch published, analysts noted that triple-A corporate bonds are almost twice as likely to default as a municipal bonds backed by state general obligation, taxes, or appropriations. The study included all municipal defaults, not just those Fitch rates.
"The relatively low loss rates of municipal bonds versus similarly rated corporate bonds, as well as the disparate credit risk characteristics of the various categories within the municipal sector, speaks to the need for a rethinking of municipal credit ratings," analysts concluded in the report. Fitch is now taking public feedback on whether it should create an extra rating to bridge the gap between corporates and municipals.
"We've gotten calls from investors - really the traditional investors at this point," said David Litvack, managing director at Fitch who helped write a special report on the recent default study. He said he has not heard much yet from European investors and other non-traditional buyers.
CORPORATE EQUIVALENTS
Moody's has already assigned corporate equivalent ratings to seven municipalities under special conditions. The list of issuers with CERs now includes California, Connecticut, Illinois, Oregon, Wisconsin, Detroit, and the Kansas Development Finance Authority.
Moody's is still seeking comments on whether it should expand the use of its CERs. Currently, municipalities can only get a CER if they are either marketing taxable bonds to foreign investors or entering into a swap with a corporate counterparty.
So far, Moody's has gotten mixed feedback on its CERs. It seems the underwriters and other sell-side participants are generally positive, while the bond insurers and other have voiced concern, said Richman, author of Moody's most recent report on the subject.
One of the concerns that Moody's has been struggling with since it published in November a summary of public comments is how best to minimize confusion over which rating is which. Sources around the market said this was also their biggest worry.
"I've heard a lot of complaints from buy-side folks in particular about how many ratings you have to have," said Brad Gewehr, managing director at UBS Securities LLC. "You're going to have to have a corporate rating, a muni rating, a short-term rating, an insured rating, and a programmatic rating. The number of ratings you can hang on a security is pretty limited, based on people's willingness to deal with complexity and the multitude of signals."
But he added that having Moody's, and potentially Fitch, involved in tying the muni rating scale to its corporate cousin makes for consistency. Standard & Poor's does a study of municipal defaults each year, but has found little interest from clients in a product to correlate muni and corporate ratings, said managing director Colleen Woodell.
"What getting the rating agencies involved does is provide a more standard benchmark that market participants in general can use across the whole market, so that you don't have every firm or investor with their own private view," Gewehr said.
ISSUER PERSPECTIVE
Among issuers there seems to be much less talk about the differences between their credit ratings and those of the companies based in their cities and states.
The Government Finance Officer Association's committee on governmental debt management has not discussed the topic, said Patrick Born, the committee's chairman. He said the difference has never bothered him in his role as the chief finance officer for Minneapolis, either.
"Most all of our taxable needs are satisfied in the tax-exempt market, and we are already enjoying a very attractive cost of capital in the tax-exempt market," Born said. "Are we so much better than our triple-A corporate counterparts? Yes. But I think we already enjoy the benefits of the tax exempt market, so I don't spend a lot of time with credit rating envy."
For the Kansas Development Finance Authority, getting the CER on a series of pension bonds issued in February 2004 was a one-time affair. The $500 million taxable bond sale was the largest in the history of the authority, and there is no other similar deal in the pipeline right now, said Jim MacMurray, the authority's vice president for finance. The credit was given a Aa2 municipal rating with a negative outlook by Moody's and a Aaa CER.
MacMurray said that he is satisfied with the borrowing costs the authority can get through the tax-exempt markets with a municipal rating. He added that he, too, worries that confusion could result from changes to the credit rating scales.
"We don't want to create any kind conception where you're saying that it's triple-A and confusing the investor that it's a higher credit on a municipal rating scale," MacMurray said. "You don't want, even unintentionally, to create a misconception of the credit strength of your issuance."
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