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Local Governments Are Affected by Changes, Too …

By: John Harris

Historically, banks have been major sources of credit for local governments. Whether through short-term lending or bond purchases, banks have recognized the responsibility and benefit of providing capital to community entities. Municipal governments are commonly among the largest economic enterprises in any given market. This fact gives local banks incentive to understand some of the recent changes faced by our local governments.

Municipal borrowers face uncertainty

The credit crisis significantly curtailed municipal borrowing. To attempt to cure the credit crisis, several new forms of borrowing were created by the American Recovery and Reinvestment Act including, among others, Qualified School Construction Bonds (a type of tax credit bonds), Recovery Zone Economic Development Bonds, and Build America Bonds. The act included an expansion of authorization for various tax credit bonds.

The Qualified School Construction Bonds and other tax-credit bond programs were less used due to an unpopular tax credit stripping guideline and therefore not as helpful as hoped. However, Recovery Zone Economic Development Bonds and Build America Bonds, which are subsidized taxable bonds, have been popular with community banks and resulted in expanded and improved markets for municipal bonds. These programs expired at the end of the year but provided much needed support.

Earlier this year, the Obama administration recommended that the Build America Bond program be made permanent, although with a lower subsidy than the previous 35 percent rate. This proposal did not materialize. In contrast, the recent proposal for a renewed stimulus plan, which focuses on infrastructure investment and payroll tax cuts, is slated to earmark as much as $50 billion dollars to help, among other things, modernize public schools and community colleges.

And though no particular direction is clear regarding future support of municipal capital needs, needs still exist. Given the understanding by community banks of their local markets, relationships with those political subdivisions having capital needs can become a crucial aspect of community support.

Municipal advisors

Unintended consequences often accompany well-intended actions. Another of the Dodd-Frank Act provisions requires registration of any company or individual that gives advice to a municipality on, among other things, investment strategies defined as plans or programs for the investment of the proceeds of municipal securities. The term “advice” is not defined in the act or in the implementation rule.

There is broad concern among commercial banks that the proposed rule expands coverage beyond the term “proceeds” in the act, meaning that anyone providing any type of advice to a municipality regarding any of its funds whether or not from proceeds of municipal securities would require registration. Registration with both the SEC and the Municipal Securities Rulemaking Board would have to be obtained not only by the bank but also by individual employees giving advice.

Potentially, community bank employees providing financial advice to local governmental bodies such as school districts, local commissions and advisory bodies would have to be registered. Often, bankers are called upon by the community for their expertise. Serving in voluntary roles, they are acting in the spirit of community involvement. While they normally receive no direct benefit other than the betterment of the communities in which they live, it is possible their registration would be required.

The MSRB rule proposals filed with the SEC would create a number of new duties and obligations related to municipal advisors. Therefore, entities that are, or might be, municipal advisors should pay close attention to the proposed rules and consider whether aspects of the proposed rules would have an effect on operations. Indeed, because the SEC has yet to issue a final rule on the definition of a municipal advisor, firms that are not certain whether they will be considered municipal advisors should aggressively consider the impact of these rules. 

John Harris is vice president in the Capital Markets Group at Country Club Bank, Kansas City.

Copyright (c) October 2011 by BankNews Media.