Susan Gaffney

Director, Federal Liaison Center

GFOA

News From WashingtonNews From Washington

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Government Government Finance Finance Officers Officers

AssociationAssociation

• Get Involved!

• GFOA President-Elect, Chris Morrill

• Committee Applications: Summer

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OverviewOverview

• Federal Budget• Headlines Creating Legislative Interest

– Public Pensions– Bankruptcy– Municipal Bond Market

• 3% Withholding• Tax Legislation• Implementation of the Dodd-Frank Act• SEC Activities

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The Cliff: Temporary Federal Aid to States (FY ’11 totals include both ARRA & Education Jobs Funds)

Source: Recovery Act data come from GAO Report to Congress, September 2010

Federal Outlays

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$60.0

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$120.0

2009 2010 2011 2012 2013 2014 2015 2016

In Billions

Fiscal Year

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Federal Budget: FY11Federal Budget: FY11

• H.R. 1473: Slashed nearly $40 billion from Federal Programs– CDBG ( Community Development Block Grant) will be funded at

$3.3 billion, $600 million less than fiscal year 2010– HOME program loses nearly $200 million in funding– Federal Highway Program is cut by nearly $900 million, while

funding for high speed rail would be eliminated– Nearly $1 billion in cuts to workforce training programs

• Measure Includes $528 million for the National Infrastructure Investment Grants Program

• Choice Neighborhoods and Sustainable Communities Programs Each Funded at $100 Million

• $700 million for President Obama’s Race to the Top Education Reform Initiative

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President’s Proposed FY12 President’s Proposed FY12 Budget: Budget:

• $3.7 trillion Proposed Budget for FY 2012– Freezes federal spending– Tax increases for high income earners

• State and Local Govt. Reductions:– Cutting $300 million from the Community Development Block Grant

Program– $350 million cut to Community Service Block Grant– $2.5 billion cut to Low Income Home Energy Assistance Program (LIHEAP)– $600 million cut in public safety grant programs that assist state and local

govt. law enforcement– $947 cut to grants for State Clean Water and Drinking Water Revolving

funds• Funding Increases in Transportation and Education

– $556 billion six-year surface transportation reauthorization proposal– $30 billion for National Infrastructure Bank– $900 million funding for a new round of “Race to the Top” education grants

• Permanently reinstate the Build America Bonds (BABs) program at a lower 28% subsidy rate

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House FY 12 ProposalHouse FY 12 Proposal

• $3.5 Trillion in Total Spending• Returns Non-Discretionary Spending to Pre- FY08 levels

– Low-Income Home Energy Assistance Program to historical levels: Acceptance of President’s Proposal

• $4 Trillion in Program Cuts/10 years– Community Development Block Grants: Reduced sharply from

more than $4 billion to $1.5 billion– 2/3 Affect Low Income Programs

• Repeals Health Care Law• Changes Medicaid Into Block Grant Program• Highest Individual and Corporate Tax Rate = 25%• Changes to Medicare Program

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Do They Come Together?Do They Come Together?

• The Battle of the Bulge: FY12

• Debt Ceiling Limit

• Do Tax & Entitlement Reforms Get Addressed?

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Headlines = LegislationHeadlines = Legislation

• Legislation Allowing States to File for Bankruptcy• Federal Public Pension Disclosure Standards• No Bailout for States• Muni Bond Disclosure/Tower Amendment

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Headlines = LegislationHeadlines = Legislation

• Congressional Hearings– House Oversight Committee– House Judiciary Committee– Senate Budget Committee– Senate Finance Committee

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Public PensionsPublic Pensions

• The Public Employee Pension Transparency Act, H.R. 567 and S. 347 – Federal Reporting of Public Pension Liabilities

• Riskless Return Model

– If a public pension fund does meet these standards to the Treasury’s satisfaction, any government that is served by the fund will not be able to:

• Issue tax exempt bonds• Receive BABs or other direct subsidy bond payments

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No Bailouts!No Bailouts!

• S. Res 188

• No State Bailouts Resolution– Bans federal bailouts of financially struggling

states– Fed govt should “take no action to redeem,

assume, or gurantee State debt”

• Senator Kirk (IL) and 15 other Senators

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Munis / Tower AmendmentMunis / Tower Amendment

• Prohibits SEC and MSRB from directly or indirectly requiring issuers to file documents with those entities prior to the sale of bonds.

• SEC May Want:– Greater control of muni accounting standards– More timely disclosure– Interim Disclosure Requirements

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3% Withholding3% Withholding

• 3% Withholding and Annual Reporting Requirement on Government Payments• Begins January 1, 2013• Applies to Governments That Spend > $100m/year on

Goods and Services• Governments must withhold 3% of payment made to all

vendors (with some exemptions) and remit that 3% to the federal government

• All Payments to All Vendors Must be Reported Annually to the IRS

• Unfunded Mandate

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3% Withholding3% Withholding

• IRS Final Regulations [26 CFR Part 31.3402(t)]– $10,000 Threshold– Existing Contracts Exempt if Not Materially Modified– Proposing all Contracts > 1/1/2014 Abide by Law– Determining $100,000,000 Threshold

• All payments, including under $10,000 except salary & fringe benefits

• Average four of the five accounting year ending in 2011 or the FY ending in 2011

• No penalties in place until 1/1/2014 for failure to withhold as long as entity has made good faith effort to comply

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3% Withholding3% Withholding

• IRS Final Regulations– Payment Card Transactions Exempt Until

Additional Guidance is Developed– $10,000 Payment-by-Payment Threshold– Requirements Only apply to Prime Contractor– Govt. Entity Must Withhold Even if Payment

Agent is Used

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3% Withholding3% Withholding

• IRS Final Regulations: Exemptions– Other govt. entities, tax-exempt organizations, tribal

govts, and foreign govts – Interest Payments– Purchase or Lease of Real Property– Public Assistance / Welfare Payments– Payments to a govt. employee

• Reimbursement of travel expense to employee– Grant Funds– Loan Gurantees– Stock / Bond Purchases– Debt Repayment

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3% Withholding3% Withholding

• Reporting Requirements– Form 945:– Form 1099 - MISC

• Deposits– Follow Employment Tax Rules

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Repeal 3% Withholding Repeal 3% Withholding LawLaw

• S.89 and S.164: No VA Co-Sponsors• H.R.674

– Rep. Connolly– Rep. Moran– Rep. Rigell– Rep. Wittman

• CBO: Delay implementation for 3 years• Website RepealWithholdingNow.com

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Tax LegislationTax Legislation

• Major Tax Reform– Gang of Six Five (including Sen. Warner)– Eliminating Tax Exemption on Municipal

Bonds• President’s Deficit Commission• Wyden-Coats Legislation

– Eliminating State and Local Tax Deductions– Changes to Property Tax Deductions– When?

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Tax-Exempt BondsTax-Exempt Bonds

• Expired ARRA Bond Provisions– BABs– Recovery Zone Bonds– Bank Qualified Debt $30 Million Limit– Private Activity Bonds Exempt from AMT– Federal Home Loan Banks Member Banks Able to

Offer Letters of Credit

• What to Expect in 2011– H.R. 992 - Reinstate ARRA Bond Provisions– S. 1016 - Permanent $30M BQ Limit

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Pre-Emption of State and Local Pre-Emption of State and Local TaxesTaxes

• Federal Pre-Emption of Communication Taxes – H.R.1002

• Digital Goods Legislation H.R.1860 and S.971• Simplifying Business Activity Taxes – H.R.1439• Federal Pre-Emption of State and Local Hotel &

Rental Car Taxes/Fees• H.R.1864 – Prohibits States from Applying Their

Income Tax on Nonresident Workers, < 30 days• Allowing Local Governments to Participate in

Federal Offset Program • VA members on House Judiciary Committee:

– Rep. Forbes, Rep. Goodlatte, Rep. Scott

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Pre-Emption of Pre-Emption of Telecommunication TaxesTelecommunication Taxes

• H.R.1002 Wireless Tax Fairness Act of 2011– Pre-empt for 5 years S/L Governments Ability to Tax

Wireless Communications at a Higher Rate Than Other Businesses

• Legislation would preempt state and local taxing authority and represent a federal intrusion into historically-protected state and local tax classifications

• Lead other industries to seek similar special federal protection from state and local taxes and could create a direct threat to the fiscal health of state and local governments

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Internet Sales Tax CollectionInternet Sales Tax Collection

Federal Legislation?– Provides for Mandatory Collection of Taxes on

Remote Sales

• States Looking to Solve Problem, Independent of Federal Action– New York’s Amazon.com law

• VA Activities

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Dodd-Frank ActDodd-Frank Act: What it Means for State : What it Means for State and Local Governmentsand Local Governments

• Municipal Advisors• Uniform Ratings• Increased Oversight of Credit Rating Agencies• MSRB Changes• GASB Funding• Regulating Derivatives Market• Asset Securitization Definition• Municipal Securities Studies• Office of Municipal Securities

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SEC Municipal Advisor RuleSEC Municipal Advisor Rule• SEC Proposed Rule Defining “Municipal Advisors”• All New SEC and MSRB Municipal Advisor Rules Would

Apply• Elected Officials and Government Workers Exempt From

Definition• SEC Proposes Including Appointed Members of State

and Local Governing Boards, Where Bond and Investment Issues are Discussed, to Be Defined as Financial Advisors

• Would Also Include Members of Public Pension Boards• GFOA Opposes this Broad Definition

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Regulation of Municipal Regulation of Municipal AdvisorsAdvisors

• MSRB Regulation of Financial Advisors, Swap Advisors, Guaranteed Investment Contract Brokers, Solicitors, Finders, Third Party Marketers, Public Pension Placement Agent, and other Market Intermediaries

• Rules Seek to Prohibit Fraudulent and Manipulative Practices, Require Fair Treatment of Municipal Entities, Restrict Real and Perceived Conflicts of Interest, and Provide for Professional Standards and Continuing Education

• MSRB Registration Required • Fiduciary Duty Standard Mandated for Both Dealer and Non-

dealer Advisors

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Rating AgenciesRating Agencies• Must Use Consistent Rating Requirements

Across all Products

• Subject to Greater Liability

• SEC has Two Years to Mitigate Conflicts of Interest

• References to Credit Ratings Will be Removed from Federal Regulations

• Impact on State and Local Governments

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Additional MSRB AuthorityAdditional MSRB Authority• Changed From “Protect Investors” to

“Protect Investors and Municipal Entities”

• MSRB may develop information systems with ability to charge reasonable fees (except on issuers and obligated persons)

• Ability to charge “commercially reasonable fees” for subscription products

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MSRB Board CompositionMSRB Board Composition• The new law changes the composition of the MSRB Board,

requiring that it be composed of a majority of public members as of October 1, 2010

• MSRB Board must include at least one bank, one broker-dealer, one municipal entity, one issuer, one investor (institutional or retail), one municipal advisor and one member of the public

• All must have knowledge of the municipal securities industry • VA Board Members:

– Sheryl D. Bailey   Deputy County Administrator for Management ServicesChesterfield County, Virginia

– John E. PetersenProfessor of Public Policy and Finance, George Mason UniversityArlington, Virginia

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Enhanced MSRBEnhanced MSRB• Ability to provide guidance and assistance to fellow

regulators in the enforcement of, and examination for, compliance with MSRB rules

• Ability to assess regulated entities for late submissions of data or other information pursuant to MSRB rules

• Fine sharing with SEC and FINRA• FINRA required to seek guidance regarding MSRB rule

interpretations • Provides for enhanced communication between MSRB

and FINRA regarding enforcement activities

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GASB FundingGASB Funding• Allows SEC to Direct FINRA to Establish a Fee on Bond

Issuances to be Collected by its Members (Dealers) to Fund the GASB– Does NOT provide SEC or FINRA with direct or

indirect oversight over GASB budget or agenda– Fees can only be used to support GASB efforts to

establish accounting standards according to GAAP – Fees provided to GASB’s will be equal to their budget,

as approved by the FAF• Forthcoming Proposal: In May, SEC Directed FINRA to

establish fee

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Derivatives Provisions Derivatives Provisions • Effective October 1, 2010, all swap advisors of state and local

governments and other governmental entities (such as governmental pension funds) must be registered with the SEC; this includes swap dealers serving as advisors

• The MSRB will have the authority to write rules for swap advisors, such as rules on professional qualifications, pay-to-play, fiduciary duty and fair dealing

• State and local governments and other governmental entities must have advisors that are independent of their swap dealers to provide advice on the fair pricing and appropriateness of the swap transactions

• Information reporting is required for all swaps  

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Asset SecuritizationAsset Securitization

• Language in the Act does NOT provide municipal securities with a FULL exemption of asset backed securities requirements/definition

• Agency Rulemaking has proposed excluding municipals from Asset Backed Securities

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Studies: Muni MarketStudies: Muni Market• GASB Funding: Completed 1/2011

– GASB is Underfunded

• Municipal Bond Trading Transparency: Due 1/2012

• Issuer Disclosure and the Tower Amendment: Due 7/2012

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Office of Municipal SecuritiesOffice of Municipal Securities

• Office of Municipal Securities Elevated to Report Directly to the SEC Chairman

• Duties Include:– Administer SEC rules affecting municipal

market– Coordinate with MSRB on rulemaking and

enforcement

• SEC Internal Study Questioned Formation of Office

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SEC ActivitiesSEC Activities

• SEC Field Hearings: Municipal Securities– Two Held in 2010– Additional Hearings Likely in 2011– Changes to SEC Rules (e.g., 15c2-12)

• Material Events Notices• Applies to Variable Rate Debt• Eliminates ‘Materiality’ Definition

– Legislative Requests• Tower Amendment• Direct Oversight Over Issuers

• SEC Muni and Public Pension Enforcement Office• Greater SEC/IRS Cooperation

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MSRB - EMMAMSRB - EMMA

• New Voluntary Fields, May 23• Follow GASB or FASB• Within Your CDA it States You Will Submit Annual

Filings 120 or 150 Days After End of Your Fiscal Year

• GFOA BP Recommends Not Entering This Info

• Submit Links to Financial and Budget Information on Your Own Web Site

• Submitting POS Documents• Submitting Advance Refunding Documents

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Changes to Money Market Changes to Money Market Mutual Funds RegulationsMutual Funds Regulations

• Proposal to Eliminate Reference to Ratings

• Stable vs. Floating NAV

• SEC Roundtable, May 14

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Regulatory IssuesRegulatory Issues

• Treasury/IRS Issues– Issuers Holding Own ARS, May Work Through IRS

VCAP – Relaxing Arbitrage Rebate Rules– BABs Oversight

• Receiving BABs Subsidies (June 30 Webinar)

– IRS Compliance Questionnaires: Advance Refundings

• Debt Ceiling & SLGS– SLGS Window Closed

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What Can You Do What Can You Do NOWNOW??

• Reach Out to Senators and Representatives to Support Repeal of 3% Withholding Law

• Reach out to Senators and Representatives and Oppose Nunes/Burr Legislation

• Reach out to Senators and Representatives About the Importance of Tax-Exempt Bonds

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Federal Liaison CenterFederal Liaison Center

• Staff and Issues of Expertise:

– Susan Gaffney: taxes, municipal bonds, budget, banking, and general outreach

– Barrie Tabin Berger: pensions and retirement, health care, communications, budget

202-393-8020