When municipal bond dealers gathered in Chicago last week, speculation around threats to the tax exemption emanating from Washington, D.C. dominated the conversation.
The bankers, joined by analysts, issuers, investors and lobbyists, who gathered for the Bond Dealers of America's annual Municipal Market Structure conference returned repeatedly to what Johnny Hutchinson of Nixon Peabody LLP called "the elephant in the room."
The discussion comes as Congress plots how to pay for the costs of extending the Tax Cuts and Jobs Act and additional tax cuts promised by President Donald Trump on the campaign trail. The muni market worries the tax exemption will be targeted.
Some speculated the industry would know more soon. House Ways and Means lawmakers met in a closed-door, all-day session Monday to talk about the reconciliation tax package, according to Roll Call. It's the first of several meetings — another is set for later this week — where lawmakers may begin to lay out some language. Treasury Secretary Scott Bessent joined for some of the Monday meeting, Roll Call reported.
Despite rampant guesswork among muni participants, the market itself has shown little reaction to the threat. Issuers remain in wait-and-see mode and so far have not accelerated deals even with private activity bonds, which are considered especially vulnerable to Congressional action, BDA panelists said.
Buysiders remain similarly nonreactive so far and pricing differential has yet to emerge. Recent deals from Harvard and Yale, for example, priced without concessions despite expectations that they and similar institutions may be targeted by the Trump administration, said a buysider.
The general consensus among BDA panelists was that something will have to give, although outright elimination of the full exemption is considered less likely than a targeted change, for example by killing tax-exempt PABs.
A proposal floated by President Barack Obama that would have
However, a potential cap on muni bond interest, if applied to existing debt, would have "an instant impact on outstanding munis," including on the balance sheets of banks that hold munis, said one sell sider who asked not to be directly quoted.
"The [Federal Reserve] is very concerned about bank balance sheets ... so I think cooler heads will prevail," the source said.
Capping the amount of tax-exempt bonds that a city or state can issue has been floated as another possibility, the source added.
When it comes to lobbying lawmakers, the focus should be on local impact, panelists said. "We've been horrible as an industry on educating people," said a banker. "People don't know who we are or understand our sector — they believe it's a $52 billion subsidy."
Several panelists noted how in 2017, House lawmakers cut tax-exempt PABs in an early version of the TCJA, with many unaware of the impact it would have on airports and hospitals in their districts.
"That was a big problem in 2017 — we were told bonds were safe, so we were surprised," Hutchinson said. "That's not going to happen this time. We are trying to make sure people make legislative decisions knowing what they're doing."
"I think there will be a huge amount of pressure on doing something on municipal bonds," said Chuck Samuels, a member at Mintz and counsel to the National Association of Health & Educational Facilities Finance Authorities. "If you argue it abstractly it's a no-win. It's the local impact that matters," Samuels said. Senate Finance Committee Chair Sen. Mike Crapo, R-Idaho, "knows every hospital in that state," he noted.
Like others, Samuels said he sees PABs and the health care and higher education sectors as among the most vulnerable.
Jesse Hill, principal, regulatory and government affairs at Edward Jones, said lawmakers are still nailing down final numbers and are reluctant to show their hands.
"It's still a little early for lawmakers, they don't want to share what revenue raisers they're thinking about, but you should be talking to them," Hill said. "It's a very volatile environment," he added. "I guarantee you that this tax bill will die one thousand deaths, revenue raisers will appear and disappear. It's very fluid."
Advocacy by cities and states carries influence in the halls of Congress, several participants said.
"The most important thing is to have the municipalities showing up. Having an issuer being a voice is what's going to keep the exemption," said Bryan Derdenger, managing director, municipal underwriting at Baird, who spoke on a BDA panel on municipal market structure, liquidity and demand.
Derdenger said he recently visited Capitol Hill with a group of 15 to 20 members of the Securities Industry and Financial Markets Association, meeting with lawmakers and staff to press their message. "They're all supportive of it, but I worry about the 11th hour that they may come for it," Derdenger said.
Groups like SIFMA, the Public Finance Network and Government Finance Officers Association have stepped up their advocacy efforts in recent weeks, panelists said.
"There's a very concerted effort to educate lawmakers on the importance of the tax-exemption," said Paul Chatalas, Illinois' director of capital markets and vice chair of the GFOA's debt committee.
Chatalas warned of the pressure that would be put on states and locals if the exemption is eliminated. "It will be a de facto tax increase for every tax-exempt issuer in the United States, or else you issue less and then less infrastructure gets funded," he said.
Separately last week, Austin, Texas Mayor Kirk Watson talked about the importance of tax-exempt bonds on
The complexity of the reconciliation package and Republicans' thin majority add to the threat level, market participants said. The
Despite the challenges, Brad Winges, CEO at Hilltop Securities, said he is "cautiously optimistic the changes will be minor."
However, he added, "even if the market goes taxable, issuers still have to borrow money," Winges said. "We know it would be less efficient but we're still going to have a very robust municipal business."
