Bond mar­ket prefers Se­nate’s ideas for taxes

Ex­emp­tion said cru­cial for gov­ern­ment is­suers

Las Vegas Review-Journal (Sunday) - - FROM THE COVER - By Karen Pierog, Laila Kear­ney and Stephanie Kelly

CHICAGO — The Se­nate Repub­li­can tax bill helped soothe nerves in the mu­nic­i­pal bond mar­ket on Fri­day, just over a week af­ter the House of Rep­re­sen­ta­tives pro­posed changes that would de­crease its fu­ture sup­ply of tax-free debt.

While House Repub­li­cans sought to re­move fed­eral tax ex­emp­tion for pri­vate ac­tiv­ity bonds, an out­line of the Se­nate’s pro­posal re­leased late Thurs­day does not in­clude that pro­vi­sion among its list of rev­enue rais­ers.

“When the Se­nate’s plan came out with no change to the tax ex­emp­tion for pri­vate ac­tiv­ity bonds, I think it gave the mar­ket a chance to take a sigh of re­lief,” said Alan Schankel, a man­ag­ing di­rec­tor at Philadel­phia-based Jan­ney Mont­gomery Scott.

The ter­mi­na­tion of tax-ex­empt PABs in the House bill sent shock waves through the $3.8 tril­lion mar­ket af­ter the Ways and Means Com­mit­tee in­tro­duced it Nov. 2.

Al­most $102 bil­lion of the bonds, is­sued through states and lo­cal govern­ments for de­vel­op­ment projects, air­ports, and non­prof­its like hos­pi­tals, were sold in 2015, ac­cord­ing to Wells Fargo Se­cu­ri­ties. That ac­counted for 27 per­cent of over­all long-term mu­nic­i­pal debt sold that year.

The House plan con­tends that elim­i­nat­ing the ex­emp­tion will raise $38.9 bil­lion for the fed­eral gov­ern­ment be­tween 2018 and 2027.

An­a­lysts have ques­tioned that fig­ure, ar­gu­ing that it was wrong to as­sume is­suers would sell a sim­i­lar amount of tax­able bonds un­der the House plan.

“We feel more com­fort­able about (PABs’) fu­ture long term with the Se­nate bill,” said Tim Fisher, leg­isla­tive and fed­eral af­fairs co­or­di­na­tor for the Coun­cil of De­vel­op­ment Fi­nance Agen­cies.

But Emily Swenson Brock, di­rec­tor of the Gov­ern­ment Fi­nance Of­fi­cers As­so­ci­a­tion’s Fed­eral Li­ai­son Cen­ter, cau­tioned that amend­ments to the Se­nate bill were ex­pected over the week­end and that the sta­tus of PABs will not be clear un­til later.

Like the House bill, the Se­nate’s mea­sure elim­i­nates the al­ter­na­tive min­i­mum tax. That tax is ap­plied to earn­ings from a small per­cent­age of muni bonds sold by is­suers such as air­ports and hous­ing au­thor­i­ties that have sub­stan­tial pri­vate-ac­tiv­ity com­po­nents in their deals.

Both plans end tax-ex­empt sta­tus for ad­vance re­fund­ing bonds, which is­suers in the mu­nic­i­pal bond mar­ket use to take ad­van­tage of lower in­ter­est rates be­fore out­stand­ing bonds can be called back from in­vestors.

Brock said groups are try­ing to ex­plain to Congress that the prac­tice is a big cost saver for state and lo­cal govern­ments, schools and other is­suers.

Is­suers of the bonds are rush­ing to get deals done be­fore year end, said Em­i­lie Ni­nan, a bond lawyer and part­ner at Bal­lard Spahr LLP in Wilm­ing­ton, Delaware.

“I don’t think any­body should be tak­ing com­fort that this is a done deal,” Ni­nan said.

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