By Frank Keegan | State Budget Solutions

Frank Keegan

CHICAGO — National Conference of State Legislatures members meeting here ended their first day with even more bad news about municipal bonds, debt interest that takes more than 20 cents of every dollar they spend each year and that pays for essential public works, among other things.

Some of the other things could be a problem.

Frank Shafroth, of the Municipal Securities Rulemaking Board, warned legislators at NCSL’s “The Future of Tax-Exempt Financing” that federal deficit reduction efforts could threaten the traditional tax exemption for municipal bonds even though that exemption is based on original, fundamental constitutional principles.

“This year they’re (Congress) caught in a vice. They need to reduce rates and reduce expenditures,” Shafroth said. “Their position is tax exempt bonds are a gift to the wealthy.”

But he pointed out that 38 percent are held by “households,” 32 percent by mutual funds and the rest by insurance companies, banks and only 7 percent by “other.”

The majority of municipal bonds traditionally have been used to finance long-life capital projects, such as public utilities, roads, bridges, schools and other essential government structures.

However in recent years, bonds have been used for other things and by agencies other than state and local governments. That raises questions about their tax exempt status.

Some of the other things have lead to criminal charges and prompted new and proposed laws and regulations.

Last month, the Government Accounting Standards Board called for public comment on “a proposed statement that provides guidance to state and local governments that offer nonexchange financial guarantees and for governments that receive guarantees on their obligations.”

These deals are not like traditional municipal bonds, but as “financial guarantees represent potential claims on a government’s resources … .,” according to GASB.

Just last week, the Securities and Exchange Commission issued a report proposing new laws and more regulations to insure transparency and accountability in municipal bond markets.

Shafroth told legislators, “The more information, disclosure, the better,” because “this country is financed on bonds” issued by state and local governments that build most of the “infrastructure” that makes government possible.

The American Civil Engineering Society estimated as of 2009 that more than $2.2 trillion in essential public structures in America must be refurbished or replaced within five years.

Loss of tax exempt status, or increased interest rates for any reason, would increase costs to ratepayers and taxpayers who must pay principle and interest on the bonds.

Frank Keegan is editor of Statebudgetsolutions.org a project of sunshinereview.org. The State Budget Solutions Project is non-partisan, positive, pro-reform, proactive and anchored in fundamental-systemic solutions. The goal is to successfully engage political journalists/bloggers, state officials and opinion leaders in a new way of thinking about state government and budgets, fundamental reforms, transparency and accountability.

frankkeegan@statebudgetsolutions.org