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Legislative/Regulatory Update –Tax Exempt Bonds

• Michael Decker, SIFMA• Dustin McDonald, GFOA

05/18/2014

The Bond Market: A Legislative & Regulatory Update

Dustin McDonald Michael DeckerDirector, Federal Liaison Center Managing Director, Co‐Head of Municipal Securities Government Finance Officers Association SIFMA

Dustin McDonald Michael DeckerDirector, Federal Liaison Center Managing Director, Co‐Head of Municipal Securities Government Finance Officers Association SIFMA

Sunday, May 18, 2014Sunday, May 18, 2014

Federal Budget Update

FY 2014-15 Spending Agreement

• Level funded most state and local government programs

• Continued cuts to BAB subsidies

The FY’14 subsidy cut level is 7.2% (down from 8.7% last year).

Subsidy cuts through 2024

Overview of Federal Tax Reform

House Tax Reform Objectives

House Tax Reform Focused On:

Simplifying the tax code

Closing loopholes

Reducing rates to 25%

• Cost = $5T over 10 years

• Will require elimination of large portions of the current federal tax code.

House Tax Reform Objectives

How to Reduce Tax Rates to Maximum of 25% In 980 Pages:

Eliminate 228 Sections of the Federal Tax Code

State & Local Tax Deduction($500B over 10 years)

Replace the tax exemption on municipal bond interest

Prohibits Future Advance Refundings Dave Camp, ChairmanHouse Ways & Means CommitteeDave Camp, ChairmanHouse Ways & Means Committee

Senate Tax Reform Objectives

Chairman’s Priorities: Unclear

Concerns About Chairman’s Previous Tax Reform Proposals –

Replace Tax Exemption on Muni Bond Interest with Tax Credit Bonds

Tax credit to issuers = to 25% of interest payment on debt

Ron Wyden, ChairmanSenate Finance CommitteeRon Wyden, ChairmanSenate Finance Committee

White House Tax Reform Plan

Budget deficit reduction

Spending cuts, tax increases

Replace tax exemption with a 28% cap on investor deductions

America Fast Forward

Modeled After BABs (28% Subsidy)

Tax Credit or Direct Pay

Uses: All uses for which tax-exempt muni bonds are currently eligible

Federal Budget Negotiations & Sequestration

Independent studies estimate that:

• Capping the exemption at 28% - 70 basis points

• Eliminating the exemption - 200 basis points

Cost of Cap and Repeal

Tax Exemption - 2014 Advocacy

Continued Collaboration with Public Finance Network Partners Direct Lobbying – House and Senate Committees, Congressional Offices,

White House

Joint Advocacy Letters to Congressional and White House Leaders

Reports, Testimony, Letters, Recommendations – Shared with Tax Writing Committees

What You Can Do To Help – GET ENGAGED!!!!

Draft Advocacy Letters, Resolutions, Talking Points for Membership Use

Securities & Exchange Commission (SEC)

Municipalities Continuing Disclosure Cooperation (MCDC)

March 10, 2014 – Program Launch

Aimed at compelling government bond issuers to self-report violations of federal securities laws

SEC - will offer “standardized, favorable settlement terms to municipal issuers and underwriters who self-report that they have made inaccurate statements in bond offerings about their prior compliance with continuing disclosure obligations.”

Municipalities Continuing Disclosure Cooperation (MCDC)

Issuers and underwriters must self-report by completing a questionnaire and submitting it via e-mail or by fax or mail no later than Sept. 10, 2014

Note: While the SEC is prohibited from regulating government issuers under federal law, the Commission can file enforcement actions against municipal issuers for misrepresentations in bond offerings about their prior compliance with continuing disclosure obligations

GFOA Annual Conference Session on SEC and IRS Enforcement –Wednesday, May 21 10:30 – 12:10

Money Market Mutual Fund (MMMF) Reform

SEC Released Reform Proposal – June 5, 2013

• Alternative 1: Floating NAV

• Alternative 2: Floating NAV +/- Liquidity Fees and Redemption Gates

Core Concerns

• Money management difficulties

• Increase costs to state and local governments

GFOA Advocacy

• Continued coalition advocacy with NAST, NASACT, NACo, NLC, USCM

• Meetings with SEC Commissioners; Targeted congressional meetings

Municipal Advisor (MA) Rule

Approved revised MA Rule – September 18, 2013

Implementation delayed until July 1, 2014

Revised definition excludes state and local employees and appointed board members.

New Concerns - Rule could alter traditional communication between issuers and underwriters. Specifically, how issuers solicit and receive information from underwriters without underwriters having to register as FAs/MAs

• SEC issued FAQ clarification document on January 10, 2014

• GFOA issue brief on rule and related issues.

MA Rule – Key Points

Municipal Advisors have an explicit fiduciary duty to their government clients.

Underwriters and other professionals that do not have a fiduciary duty to issuers will not be able to provide advice to governments unless certain exceptions are met.

Underwriters will be able to communicate with issuers about general market issues, facts and ideas, however, unless an exemption is met, they can not advise a government to take a specific action.

MA Rule – Exemptions

• IRMA Exemption - Issuer has an Independent MA.

• RFP Exemption - Issuer has a RFP out for underwriting services related to a specific transaction.

• Underwriter Exemption – Underwriters may provide advice on the structure, timing, terms of a transaction using this exemption only during the period beginning with when they are engaged for a particular transaction and ending at the end of the underwriting period (letter of engagement).

• GFOA & SIFMA developed model MA and underwriter exemption language for issuers to use in order to ensure compliance with the Rule.

MA Rule – GFOA Best Practices & Resources

GFOA existing Best Practices strongly recommend that governments hire a MA for bond transactions.

GFOA revised three of these best practices this year –

• Selecting and Managing the Engagement of Municipal Advisors

• Selecting and Managing the Engagement of Underwriters for Negotiated Bond Sales

• Selecting and Managing the Method of Sale of State and Local Government Bonds

GFOA Annual Conference Session on MA Rule –

Monday, May 19 10:30 – 12:10

MA Rule – Next Steps

MSRB Developing Additional Regulations on the Rule.

Organizing Guidance Over MAs

• Pending – Rule G-42 – Governs the conduct of MAs with respect to the fiduciary duty of MAs, and would prohibit MAs and their affiliates from engaging in any other transaction in a principal capacity with a client.

• Pending – Rule G-44 - Would require MAs to establish, implement, maintain and enforce written supervisory procedures designed to ensure compliance with the federal securities laws and rules.

Additional MSRB Activity

Electronic Municipal Market Access (EMMA)

Clearinghouse for all municipal bond disclosure documents.

Has been greatly enhanced over the past year.

In addition to the mandated information that must be placed into the system to meet SEC disclosure requirements, governments may now make voluntary postings on the system and develop a web page through EMMA to help investors and the public gain easy access to your government’s financial and budget information.

GFOA Annual Conference Session on EMMA –

Wednesday, May 21 8:30 – 10:10 AM

IRS – Proposed Issue Price/Arbitrage Regs

IRS released proposed regulations on issue price – September 2013

• Changes would replace “reasonably expected” issue price with requirement of actual sale of 25% of bonds to market, and would affect –

arbitrage rebate requirements,

structuring of advance refundings,

and the amount of the costs of issuance that may be funded with bond proceeds.

• Changes could be effective immediately

IRS – Proposed Issue Price/Arbitrage Regs

Next Steps

• GFOA submitted comment letter in December 2013 outlining our concerns with the proposal.

• Reaction uniformly negative among muni market participants.

• GFOA testified at IRS hearing on February 5 outlining our concerns with the proposal.

• GFOA will continue to keep members updated on further action on the proposal and alert you to opportunities to engage IRS with your concerns.

Basel III – Liquidity Coverage Ratio

October 2013 Proposal - Federal Reserve, FDIC & OCC

• Designed to strengthen the banking system through clarifying credit and liquidity standards for banks’ capital requirements (HQLA).

• Would exclude municipal bonds from HQLA, meaning banks could not use municipal securities to satisfy the liquidity coverage requirement.

• GFOA submitted comment letter in January outlining our concerns with the proposal, and making the case that muni securities should be considered HQLA.

• GFOA and SIFMA working with other market participant groups to engage members of Congress to weigh in on our concerns with the proposal.

QUESTIONS?

Federal Tax Reform and Revenue Legislation - 113th CongressFederal Legislative & Regulatory Update