* Ongoing debate about federal debt poses concerns
* Local issuers risk higher cost of borrowing
* Tax-free status estimated to cost US Treasury $140 bln
By Lisa Lambert
WASHINGTON, Jan 17 More than two weeks after
U.S. lawmakers reached a budget deal that preserved the tax
exemption on the interest paid on municipal bonds, mayors from
across the country remain worried the exemption could be at
Muni bonds are critical to local governments, as they are
used to fund project ranging from bridges to schools to
And with Washington about to take up the debate on the
federal debt ceiling and still needing to address spending cuts
that the New Year's agreement avoided, the tax treatment of muni
bonds is at the forefront of concern for many.
"What isn't really sexy but is incredibly important to us is
the tax exempt status of municipal bonds," Scott Smith, the
mayor of Mesa, Arizona, said at a press conference on Thursday.
"Remember, municipal bonds aren't just for cities. Our
universities, our special districts, our improvement districts,
our states rely on this financing technique to fund, if not
hundreds of billions, then trillions of dollars of
infrastructure," he added.
The tax-free status of municipal bonds costs to the U.S.
Treasury around $140 billion a year, according to some
"We recognize now that we've sort of passed one semi-fiscal
cliff ... that there's going to be sort of expeditions looking
for other sources of revenue," said Smith.
Since a proposal in February 2012 by President Barack Obama
to limit tax breaks for high-income earners on interest paid by
municipal bonds, the $3.7 trillion municipal bond market has
been on edge about a possible change.
In December, during negotiations to contain the
federal budget deficit, the bond market took a big hit on the
possibility of a bipartisan agreement over the elimination of
the tax exempt status of municipal bonds.
HIGHER COST OF BORROWING
Investors will often accept lower interest payments on muni
bonds because of their tax-exempt status, which also keeps
borrowing costs down for issuers.
With a cap on how much can be exempted "it becomes more
expensive for us to borrow money and lessens the amount of money
we have to invest in infrastructure," Philadelphia Mayor Michael
Nutter told the same press conference, which kicks off the
annual gathering of the U.S. Conference of Mayors.
The mayors this week are taking their concerns to the
members of Congress sparring over how to balance the budget.
Nutter said he had spoken directly to Vice President Joseph
Biden and staff at the White House.
Mayor Joseph Riley, of Charleston, South Carolina, told the
conference his city recently sold $54 million in revenue bonds.
"If you adjust the rate down, probably that $54 million
would have been $43 million," he said about the impact of a tax
exemption limit. "What that is, that's the difference in
infrastructure expenditure and investment that a city makes."
Stephen Benjamin, the mayor of Columbia, South Carolina, and
a former bond lawyer, said he had pressed his state's delegation
in Congress to preserve the current exemption. He said there was
significant risk posed in the "several swirling discussions"
regarding tax reform, deficit reduction, the debt ceiling and
other federal fiscal issues.
"It's important to note that 85 percent of people who invest
in municipal bonds earn less than $250,000 a year. This is not a
rich man's investment tool," he said.
"You can talk about investment, you can talk about
infrastructure and jobs, but the reality is that this is a shift
of from the federal government to local governments, and to our
taxpayers and to our rate payers," he added. "People who are
modest of income will have to bear the brunt of this."