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In focus: 'let cities play by the same rules.'

Congress and the administration have an opportunity to let cities play by the same rules as the private sector this year. The opportunity could save cities hundreds million of dollars.

While millions of families and businesses are refinancing their outstanding debt this year to save money by benefiting from lower interest rates, cities and towns have found the complex federal rules a costly barrier to similar benefits. The different rules for local governments prevent local leaders from saving hundreds of millions of dollars and either reducing local taxes or meeting local needs or unfunded federal mandates.

The federal governments rules and regulations affecting municipal borrowing are so complex--and the penalties for violating the rules so great--that attempting to make the smartest leadership decisions to benefit local taxpayers can only be accomplished through reliance on an expensive army of bond counsel, investment bankers, accountants, and financial consultants. All too often the expense of relying on this outside help eliminates the incentives and benefits of refinancing.

Earlier this year, municipal officials had hoped that President Bush would sign the tax bill, which contained a number of provisions to simplify and reduce the cost of financing municipal improvements and operations, especially for smaller and medium sized cities. Although the administration had not proposed the changes, it was mostly supportive of simplification.

But when President Bush vetoed the tax bill, it left in limbo efforts to help communities reduce existing and new financing costs just at a time when record numbers of homeowners ad corporations were taking advantage of the extraordinary opportunity.

Now the administration faces a different decision: what to do when the so-called arbitrage rebate rules expire on May 12.

These rules, through which the federal government has already collected over $100 million from hard-pressed state and local governments, were published in May of 1989 to govern how cities and towns may invest the proceeds of tax exempt bonds and notes they issue and how much of the investment return they are mandated to rebate to the federal government.

The rules, which were temporary, were issued to implement the extraordinary changes mandated on municipal finance under the 1986 tax reform act and applied to traditional public purpose bonds issued by cities after September 1, 1986. Under federal law, the Treasury is prohibited from having temporary regulations outstanding for more than three years.

Therefore, the Treasury will have to decide whether to let the current temporary regulations expire and then propose new--perhaps simpler, more understandable, more sensible, and more workable--rules, or whether to reissue the rules in final form.

Because the rules affect so much municipal debt issued in 1986 and 1987, when municipal bond interest rates were much higher--ranging in some cases from 10 to over 13 percent compared to today's long-term municipal rates of 6-7 percent--simplifying the rules and eliminating some of the middlemen could produce enormous savings for municipalities.

Corporations refinanced nearly $50 billion in long-term corporate bonds and notes just in the first two months of this year to take advantage of lower interest rates. Cities issued nearly $40 billion--nearly half of which was used to refinance existing debts. But unlike families and businesses, communities are limited both by the enormous transaction costs and by the limitation on advance refunding enacted in 1986.

Maybe--just maybe--the federal government could help. For a change and some change.
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Copyright 1992 Gale, Cengage Learning. All rights reserved.

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Author:Shafroth, Frank
Publication:Nation's Cities Weekly
Date:Apr 27, 1992
Words:556
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