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Washington, DC - House Financial Services Committee Chairman Barney Frank and House Ways and Means Subcommittee Chairman Richard E. Neal today introduced two new legislative initiatives to provide equal treatment for municipal bonds. The first bill, H.R. 6308 the Municipal Bond Fairness Act, will eliminate the ability of the rating agencies to use separate standards for municipal bonds and other bonds. The practice of using a separate scale that the industry has employed for many years has in many cases caused high quality general obligation bonds to be rated lower than comparable corporate bonds. This legislation would eliminate that unfair situation by requiring those credit rating agencies that choose to seek designation as a nationally recognized statistical rating organization (NRSRO) to use rating symbols consistently for every security to which they are assigned.
A companion bill, the Municipal Bond Market Support Act, would increase demand for certain municipal bonds—and therefore lower borrowing costs for issuers—by raising the bank qualified limit for small issuers to $30 million (from $10 million), which has been unchanged since 1986. The new limit would also be indexed to inflation. Bank qualified bonds are those bonds banks are eligible to purchase without disallowing a portion of their interest expense deduction.
The legislation would also encourage financial institutions to purchase other municipal bonds by allowing them to hold up to 2 percent of their total assets in tax-exempt securities without disallowing a proportional amount of their interest expense deduction. Non-financial companies already benefit from this safe harbor.
“As a former mayor of Springfield, Massachusetts, I know first hand how important municipal bonds are to our nation’s cities. They are critical when it comes to the maintenance and development of the local infrastructure. Exploring ways to ease their issuance is a good idea,” said Congressman Richard E. Neal (D-MA).
“One of the most damaging and unfair aspects of the financial crisis is the negative effect it is having on our inability to deal with our infrastructure problems. Specifically, it is an outrage that mistakes and indiscretions in the private financial sector have contributed to an increase in the interest rates that state and local governments have to pay for important projects. Full faith in credit general obligation municipal bonds are not getting the credit they deserve in the market place for the degree of security they offer the investor,” said Chairman Frank (D-MA).
"In the last 50 years, only one city has ever defaulted on a municipal bond. These general obligation bonds not only carry the full faith and credit of the municipality and its taxpayers, they are used to improve our communities --- investing in schools, infrastructure and public works,” said Rep. Emanuel Cleaver (D-MO). “These are solid investments, backed by the good people in cities and towns across the country and history tells us they are 99.99 percent responsible in their repayment. There is no safer investment and this unfair credit rating structure is costing taxpayers millions if not billions."
“For years municipalities across the country have been forced to pay billions of taxpayer dollars to insure bonds that have nearly no chance of defaulting. This legislation will finally allow cities to be rated on their true merits,” stated Rep. Mike Capuano (D-MA).
Municipal Bond Fairness Act
The bill would make it a requirement of NRSRO status that ratings on securities and money market instruments reflect the risk the investors will not be repaid according to the terms of the securities. This would not apply to complementary ratings, or those created to measure discrete aspects of a security’s risk. In addition, the legislation requires the SEC to create a standard of performance measurement and use the results to help guide the Commission’s decision on when to initiate and examination of an NRSRO.
The bill also addresses municipal bond insurers by directing the Secretary of the Treasury to collect information on the financial stability of that industry and provide a regular report to Congress on its findings. Specifically, the bill will do the following:
Title I:
- Defines credit ratings issued by NRSROs and applied to securities and money market instruments as reflecting the risk an investor will not be repaid.
- Complementary ratings such as those under development to measure volatility or other aspects of risk are not affected.
- Requires NRSROs to apply rating symbols consistently for all securities to which they are applied.
- Requires the SEC to create a system to measure NRSRO accuracy and consider the results when deciding whether to conduct examinations.
Title II:
- Directs the Treasury Secretary to collect information on the municipal bond insurance industry related to firms’: Financial soundness, concentration of risk, risk management, performance under stress scenarios and underwriting standards.
- Treasury would make a report to Congress annually.
Municipal Bond Market Support Act :
This bill would increase demand for municipal bonds by:
- Changing the definition of small issuer in the Internal Revenue Code from one that issues no more than $10 million in tax-exempt bonds annually to one that issues no more than $30 million. Banks can hold such bonds without disallowing a proportional amount of interest expense deduction.
- Provide a safe harbor for financial firms to hold up to 2 percent of total assets in tax-exempt municipal bonds without being required to disallow a portion of their interest expense deduction.
H.R. 6308
H.R. 6333
Moody's-Rated Issuers and Defaulters
National Association of Health and Education Facilities Finance Authorities (NAHEFFA)
Regional Bond Dealers Association (RBDA)
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