By Larry Jones
June 29, 2009

Dallas Mayor Thomas C. Leppert told members during the Metro Economies Committee meeting that the global credit crisis has adversely affected local access to the municipal bond market and driven up the cost of borrowing for many cities. He also said the enormous growth in remote sales over the Internet continues to erode the tax base of state and local governments. These two issues were the focus of the June 13 committee meeting at which members adopted 17 resolutions and heard from three speakers who provided an update on proposed legislation addressing problems in the municipal bond market and remote sales.

Sean Egan, co-founder of Egan and Jones Ratings Firm, stated that his rating firm was different from Standard and Poor's (S&P), Moody's or Fitch Ratings in that it is not paid for by the issuers but individual investors. He said municipalities are experiencing difficulty "rolling over their debt." The two main reasons he provided were: (1) there is skittishness in the market and (2) the ratings assigned by the major ratings firms (such as S & P, Moody's and Fitch) have been conservative. On the rating issue, he explained that there have been few defaults on municipal bonds over the last 20 years. And in those few cases of default, the recovery rate has been very high. In spite of that, municipal ratings over the years have been depressed.

On average, municipalities receive lower ratings than their corporate counterparts even though the data show that the risk of default on municipal bonds is lower than the default rate on bonds in the corporate sector. Consequently, Egan said municipalities have had to pay higher interest rates in the bond market than corporations. The problem, he explains is "about the money," in that the rating industry is structured so that rating firms in municipal finance get paid twice: once by the issuer and again by monoline insurer. And he said they are not about to change. To address this problem, he believes the structure of the rating industry should be changed. He recommends setting up an independent buyer-owned credit rating firm that would be empowered to challenge the major rating firms when they receive unfair ratings.

Jim Segel, the lead congressional staff for Rep. Barney Frank (MA), chair of the House Financial Services Committee, told mayors that four bills have been introduced to address concerns in the municipal bond market. The first one addresses credit rating agencies by requiring that the same standards be used to rate municipal and corporate bonds. A second bill addresses financial advisors to municipalities. He explained that many general obligation issuers and other municipal issuers have been listening to financial advisors who may have had conflicts or who may not have had the expertise they need to properly serve as advisors. The bill would require financial advisors to municipalities to have a certain amount of expertise and the Securities and Exchange Commission would be charged with the responsibility of regulating them. He pointed out that there is a good chance these two bills will move through committee and to the House floor by the August recess. The other two bills, one that would create a liquidity facility and the other that would create a government sponsored reinsurance program for monolines, may not move as quickly because the problems may not be as severe today as they were three months ago.

Tim Lay, a partner with the law firm of Spiegel and McDiarmid in Washington (DC) who has represented many municipalities in communications law suits, told mayors that state and local governments rely heavily on sales and use taxes which make up a significant portion of their total revenues. A remote sale takes place when a seller in a different state sells goods and services to a buyer that resides in your city. When this happens, state and local governments can not require out-of'state sellers to collect their taxes. Two previous Supreme Court decisions make clear that state and local governments do not have the authority to force out-of'state merchants to collect their taxes. This problem first surfaced back in the 1960s with catalogue sales. As remote sales moved to the Internet, states and localities have witnessed significant erosion in their sales and use tax revenues.

Lay said in 2002, a number of states joined together to form a compact to simplify and streamline the collection and administration of sales and use taxes. Although great progress has been made in that many states have joined the compact (the streamlined sales tax project), Congress must approve legislation to give state and local governments the authority they need to require out-of'state sellers to collect their taxes.

He pointed out that no legislation has been introduced at this time. The longer introduction is delayed, the greater the difficulty the bill is expected to encounter in achieving approval. Congressional staffs have mentioned two key issues that are delaying introduction: (1) communications industry has been successful in inserting a controversial provision in the draft legislation requiring the centralized collection of communications taxes at the state level: and (2) vendor compensation or reimbursing companies for collecting state and local taxes (vendors currently collect local taxes without charge and do it for the privilege of doing business in the local area). Local governments strongly oppose these provisions because they would erode their communications tax base.

The Metro Economies Committee adopted the following resolutions:

The committee also discussed and adopted the following 17 resolutions.

• White House Office of Urban Affairs — urges that U.S. Conference of Mayors supports the efforts of the White House Office of Urban Affairs to advocate and implement an agenda that strengthens the ability of metropolitan areas to thrive.

• Local Fiscal Emergency Stabilization — urges the Administration and the United States Conference of Mayors to work in partnership to provide for a Local Fiscal Emergency and Stabilization program account to ensure that our cities have the financial and economic tools, and program funding and flexibility to sustain the essential public services and safety net programs. (This resolution was adopted with the caveat that a cost analysis be attached to it.)

• Federal Infrastructure Bank — urges support for the enactment of legislation to create a new, streamlined Federal Infrastructure Bank to help revitalize the nation's public works and economy, and Congress to appropriate $5 billion in 2010 and such sums as may be authorized to support this effort in future years.

• "Greening" the Tax Code and Promoting Coordinated Federal Investment in Cities — urges the Administration and Congress to reform and "green" the tax code by eliminating or significantly reducing tax preferences to entities emitting large quantities of greenhouse gases; to create a Green Zone Investment Tax Credit and a Green Housing Tax Credit that will encourage transit-oriented development and other development that can help reduce per capita carbon emissions; and to create a demonstration program in a select number of cities wherein key federal agencies can work with cities and their metropolitan partners to negotiate local "sustainable development" investment strategies that coordinate multiple federal agency actions and funding.

• Urging Congress to Inject Additional Capital into the Banking System and Provide Relief to Public Employee Retirement Systems — uges Congress to adopt H.R. 710 or similar legislation to provide relief to financial institutions, public pension plans, and their sponsors. (This resolution was adopted with the caveat that a cost analysis be attached to it.)

• Solutions for the Municipal Surety Bond Crisis — urges Congress and the Administration to work with mayors to immediately develop workable solutions to address the problem of providers of surety bonds receiving varying degrees of rating downgrades which threaten to put municipal bonds in technical default.

• Plan to Allow Cities to Access Traditional Market Interest Rates for Bonds — urges the U.S. Treasury Secretary to implement a plan that will allow cities affected by the credit crisis to access traditional market interest rates for bonds.

• Ability of Cities to Access Appropriate Financing for Critically Needed Municipal Bonds — urges Congress to enact legislation facilitating the ability of cities to access appropriate financing for critically needed municipal projects.

• Support for Amendments to the False Claims Act to Protect Municipalities and Affiliated Public Entities — urges Congress to amend the False Claims Act to protect the essential public services provided by local governments from the crippling liability of the Act; to exempt local governments from realtor lawsuits just as states are treated; to, at a minimum, either remove or substantially lower the harsh per claim civil penalties and treble damages that can be leveled against local public entities under the Act; and if the remedies mentioned are not feasible, to approve other measures that will mitigate the impact of the FCA on local governments and their affiliate entities.

• Require the Earned Income Tax Credit to be Calculated by the Internal Revenue Service to Better Accommodate Working Families and Individuals — calls on Congress to reform the process of applying for the Earned Income Tax Credit by requiring the Internal Revenue Service to provide the calculation for EITC, so that the benefits available to lower income families and individuals will be increased, simplified, and easier to access.

• Support for Mayors' National Dollar Wise Campaign — urges mayors and cities to join the Mayors' National Dollar Wise Campaign and make a commitment to increasing their citizens' financial literacy; to participate in the sixth-annual Dollar Wise Week, September 26–October 3, 2009; cities with a summer youth employment program are urged to participate in the Dollar Wise Summer Youth Campaign and incorporate a component on financial education; and the federal government is urged to set aside a portion of fees levied against financial institutions for the support of financial education initiatives.

• Support for Consumer Overdraft Protection Fair Practices Act — calls on Congress to enact the Consumer Overdraft Protection Fair Practices Act to help restore confidence in the banking system and encourage unbanked and underbanked Americans to deposit funds and begin to meaningfully use the mainstream financial system.

• Create a Tax-Linked Matched Savings Program — urges Congress to introduce and enact a tax-time matched savings bill, the Savers Bonus Act of 2009, which would promote savings at tax-time by providing a dollar for dollar match to help encourage savings among low income individuals and families. (This resolution was adopted with the caveat that a cost analysis be attached to it.)

• Supporting the Creation of an Urban Innovation Fund — urges the White House to create an Urban Innovation Fund which would be used to invest in new and innovative antipoverty initiatives in cities across the country.

• Redefining Veterans Day and Memorial Day — urges support for the Beyond Tribute initiative in its effort to engage the American public on Memorial Day and Veterans Day by encouraging businesses and consumers to contribute to charitable organizations whose purpose is to assist wounded veterans.

• Supporting the Department of Defense Employer Support of the Guard and Reserve Organization — urges employer support for the Guard and Reserve (ESGR)to promote a culture in which all American employers support and value the military service of their employees.

• Calling for Federal Action to Spur Economic Recovery of Small Businesses — calls for increasing the limit on small business loans from $2 million to $3 million, and increasing the maximum guarantee amount from $1.5 million to $2.7 million so more businesses can take advantage of the Small Business Administration 7 (a) program; temporarily eliminating or sharply reducing SBA lender fees; and allowing market-base loan pricing so that inflexible SBA loan caps are not discouraging banks from making loans.