Municipal Finance Caucus (Mar. 4)

Mike & Co. —

In half an hour, the BLS jobs report for February is due to be released.  If you’d like an update or have any questions, please let me know.

Meanwhile, amid the most fractious campaign in recent history comes an initiative in Congress that sounds, well, incongruous with the cacophany.  A broad and bipartisan group of House members is behind the official launch of a caucus this week dedicated to protecting and expanding the tax exemption enjoyed by municipal debt.

You have to start somewhere and why not with incentives to address the nation’s long-neglected infrastructure with tax breaks — about the only kind of stimulus and jobs measure that can garner bipartisan support?   More on the new Municipal Finance Caucus below.




A New Caucus

On Tuesday, Reps. Randy Hultgren and Dutch Ruppersberger announced that they have formed the Municipal Finance Caucus to protect the tax-exempt status of municipal debt and reexamine the way it is treated in financial regulations.  In 2015, Hultgren and Ruppersberger sent a letter (reprinted below) to House leadership opposing the President’s proposed 28 percent cap on tax deductions for municipal bonds, signed by over 120 of their colleagues.

Their announcement coincided with the National Association of State Treasurers’ legislative conference in D.C. The same group drafted another letter, signed by more than 600 state and local officials, which urges the leaders of the House Ways and Means Committee and the Senate Finance Committee to reject curbs to the muni exemption.

Who’s in it?

Right now just the founding representatives have declared their official membership, but it’s foreseeable that some of the 120 representatives that signed the letter to House leadership in 2015 will join as well.  It’s also seen a s likely that some Senators will want to join the caucus, but the founders haven’t made clear if bicameral membership is a priority.

Is it Bipartisan?

Since 2013 Hultgren and Ruppersberger have led bipartisan efforts to draft letters of support for municipal bonds.  The signatories to these letters include members from both sides of the aisle.  Rep. Ruppersberger focuses mostly on local government and is pretty moderate. Rep. Hultgren is a more orthodox conservative Republican.

What’s the Purpose?

The Caucus plans to defend municipal bonds’ tax exempt status and advocate for regulatory changes which favor those bonds.  Proposals to limit the tax-exempt status of these bonds have been floated in recent years.

In addition to calling for the bonds to maintain their tax preferred status, the Caucus will push for the passage of HR 2209, legislation considering municipal bonds as a High Quality Liquid Asset (HQLA) – a particularly contentious issue because of the disagreement over how flexible these liquidity rules should be from a systemic risk perspective.

Positions Taken to Date

The Caucus founders have opposed Obama’s 2015 proposal to cap municipal bond tax exemption at 28 percent. Rep. Hultgren is also a co-sponsor of HR 2209 – the bill to set the liquidity for municipal bond assets at Level 2A (see Update, Feb. 18).  Hultgren said the liquidity rules are an example of how regulators misunderstand municipal bonds, specifically the frequent serial structure of the their issuances.

Many investors flock to municipal bonds for security. But some federal regulators trying to shore up thebanking system aren’t convinced the bonds would be easy to sell in a crisis.

Division of Opinion

Division of opinion on HR 2099 falls along unusual lines, with Wall Street, Congress and municipal officials challenging bank regulators’ skepticism toward municipal debt.   At issue are new rules aimed at ensuring banks can raise enough cash during a financial-market meltdown to fund their operations for 30 days. The requirements mean banks have to hold more cash or securities that are easily sellable.

Regulators don’t think it is the place of Congress to second guess how they size up securities. Fed Chairwoman Janet Yellen, at a congressional hearing Feb. 11, said legislation would “interfere with our supervisory judgments.”

Big banks such as Citigroup Inc. and Wells Fargo & Co. have sprung into action in lobbying Congress, along with municipal leaders who fret the rules will diminish bank bond-buying which could raise borrowing costs on infrastructure projects.

Hultgren also said the caucus will work to update the number of projects that could be financed by qualified small issue manufacturing bonds, a type of private-activity bond whose proceeds can be used to finance manufacturing facilities for small- and mid-sized manufacturers. The tax code provisions on small industrial development bonds have not been changed since the 1980s, he said. Hultgren sponsored a bill last year entitled “The Modernizing American Manufacturing Bonds Act,” which was focused on expanding opportunities for qualified small issue manufacturing bonds, particularly by changing the national volume cap set by Congress.

What can be achieved?

Caucuses such as this one don’t have the best reputation when it comes to getting things done.  But rules relating to the liquidity value of capital is one of the few policy  areas of any kind where there is bipartisan agreement.  Municipal bonds, in particular, have a universal appeal because of their direct link to local and state infrastructure projects.  At the very least, the caucus will spark some discussion about the best way to both reform existing methods for funding infrastructure investment and find new ways to fund it.

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