CDFA Legislative Front
April 2008
Interest in CDFA Legislative Agenda Continues to Grow
- Municipal Market Takes Center Stage at Congressional Hearing -
Even with Congress on recess for the last two weeks, it has been a month that saw much discussion of bond issues on Capitol Hill as CDFA moves ahead with two issues on its legislative agenda. Recent developments in the municipal market concerning monoline insurers, rating agencies and auction-rate securities have highlighted the importance of strengthening the use of municipal bonds.
Congress has been especially interested in legislation that helps the housing market, infrastructure and job creation. Since the passage of the stimulus package, Congress has been debating what form that the long-term economic stimulus packages should take. Congress has also become more aware of the important role that municipal bonds play in the economy as evidenced by two committee hearings regarding the industry in recent months.
Continued Interest in CDFA’s Definition Change on IDBs
CDFA legislative counsels John McMickle and Eric Silva have remained active in working with Congressional offices regarding the proposed change to the definition of manufacturing to allow new economy and high-tech companies to use low-cost industrial development bond (IDB) financing.
The proposed change would allow for companies who produce both tangible and intangible property to use IDBs. The changing economy in the United States is providing new and exciting employment opportunities in the area of software development and biotechnology. The tax-exempt bond finance programs operated by state and local development finance agencies do not extend to these important and growing sectors of our economy.
CDFA members and staff has been very active contacting their delegations in support of the legislation. This has led to CDFA strengthening key relationships in the Senate Finance Committee and House Ways and Means Committee on both sides of the aisle. The feedback has been overwhelmingly positive, as Congress is eager to find new ways to create jobs and economic growth.
It is expected that in the coming weeks and months there will be additional bills that focus more on long-term economic stimulus. These bills, along with a handful of tax bills, will offer potential vehicles for CDFA’s proposed legislation.
CDFA is still requesting its members to contact the appropriate congressional offices to voice support. Contact Brian Anderson at CDFA to assist.
Financial Services Committee Active on Municipal Bond Issues and FHLB Legislation
On March 12, the Financial Services Committee held a hearing on the current issues affecting the municipal bond market. Chairman Barney Frank, D-MA, has been very vocal about the need to ease the burden on local issuers.
Two major topics discussed were how the insurers and raters have been affecting the municipal market. As the credit ratings of insurers have decreased, issuers have begun to question the need for municipal insurance.
The hearing also examined how municipal bonds are rated. Currently, municipal and corporate bonds are rated separately. Issuers feel the current system makes municipal bonds appear more risky than they really are.
H.R. 2091, the bill pertaining to the Federal Home Loan Bank issuing letters of credit on small-issue bonds, may be headed to a vote in the Ways and Means Committee in the near future. The FHLB letter of credit legislation was again discussed as a potential credit enhancement remedy to help issuers with small-issue private-activity bonds. The House bill has seen increased co-sponsorship in recent weeks after the two Financial Services hearings gave the legislation a positive push.
A letter from Financial Services members was sent to their colleagues in Ways and Means urging them to vote on the measure soon and offer some relief to the municipal market. The mainstream press has also begun to cover the issue as the Associated Press and Bloomberg (among others) have run recent articles about the legislation.
The small-issue bond deals were already having problems obtaining affordable insurance on non-rated transactions. The current climate in the marketplace has made insurers and banks even more risk adverse. This has further restricted access to the market for many issuers.
Rep. Paul Kanjorski, D-PA, chairman of the Financial Services subcommittee on capital markets, has been one of the most vocal supporters of the FHLB proposal. The FHLB offers an alternative to bond insurance for IDBs and other small-issue tax-exempt bonds. In mid-February, Rep. Kanjorski held a subcommittee hearing on bond insurers that included testimony about FHLB letter of credit legislation.
To view testimony and statements from the hearing >>>Read More
Anyone with questions about the FHLB letters of credit legislation is asked to contact FHLB Pittsburgh’s Bill Miller (bill.miller@fhlb-pgh.com) at 412-288-5142.
CDFA continues to support this legislation because of the positive impact it could have on IDB issuance.
To view the CDFA press release reaffirming support for FHLB legislation >>>Read More
Municipal Insurance Reforms Being Considered
Besides the FHLB legislation, Congress and market experts are considering other solutions to the recent market problems. Many issuers are pushing for a standard rating system that puts municipal issuers on the same scale as corporate issuers.
The possibility of the monoline insurers splitting their businesses still exists as well. Doing so would shield municipal issuers from the losses caused by the sub-prime mortgage situation.
California treasurer Bill Lockyer has suggested creating a new insurer in the state of California. Lockyer is looking into using the state’s largest pension funds to form a bond insurer. The proposal is currently only in the exploratory phase. Lockyer has been among the most vocal advocate for the overhaul of the current insurance system.
Additionally, Financial Services members are discussing the possibility of a federal “backstop” to address problems with liquidity in the market. Such a regulator for the municipal market would perform many of the duties the Securities and Exchange Commission currently oversees. It would also provide liquidity for the market like the Federal Reserve Board does in other markets.
Gulf Opportunity Zone Bond Deadline Passes This Month
According to current legislation, bond proposals have until April 22 to market $4 billion worth of Gulf Opportunity Zone Bonds that have already been approved.
The GO Zone bond program was authorized in 2006 by Congress to give issuers affected by Katrina and other hurricanes additional bonding authority. The legislation authorized $7.9 billion in new bonds. Current market conditions have slowed the process in recent months.
If Congress does not give an extension, the money set aside for the program would revert to the competitive bond pool in each state instead of being designated for the hardest hit counties.
GAO Issues Report on Tax-Exempt Bonds
The Government Accountability Office released a report last month examining the uses of tax-exempt bonds. The report asks Congress to consider whether private facilities should maintain their tax-exempt status.
Matters of compliance with issuance costs and other administrative concerns were also raised in the report prepared for the Senate Finance Committee. GAO recommends the IRS should establish standard practices for deciding whether a bond issuance conforms to tax requirements.
The report is not expected to draw significant interest on Capitol Hill.
To read the full GAO report >>>Read More
National Infrastructure Bank Still Being Discussed
The Senate Banking Committee continues to consider legislation to create a national infrastructure bank. The bank would be authorized to issue up to $60 billion of taxable tax-credit bonds to finance publicly owned infrastructure projects.
Congress does not appear ready to increase the federal gas tax to fund new projects so the new infrastructure bank could be a suitable alternative. A committee vote on the legislation could come this month.