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Bond practices come under fire.

House Energy and Commerce Committee Chairman John Dingell (D-Mich.) and Chairman Ed Markey (D-Mass.) of the Subcommittee on Telecommunications and Finance last week joined with other key members of the House in calling for investigation and hearings on the "adequacy of the current laws and regulations applicable to the issuance and sales of municipal securities."

Dingell and Markey wrote to three different agencies to request investigations and recommendations to Congress within 45 days with regard to amending federal laws or increased federal regulation and preemption of local and state authority over the municipal bond market.

The letter from Dingell and Markey comes on the heels of investigations into possible political influence peddling involving municipal bond sales by the State of New Jersey and New York City, and in response to a report from the General Accounting Office to House Intergovernmental Relations Subcommittee Chairman Edolphus Towns (D-N.Y.) criticizing the Internal Revenue Service's enforcement efforts on tax exempt municipal bonds.

The actions in Congress occurred as the administration was on the verge of issuing revised arbitrage and rebate mandates for state and local governments to implement the restrictions imposed upon cities' and towns' issuance of traditional municipal bonds under the 1986 Tax Reform Act. That law, for the first time ever, imposed severe restrictions on municipal issuance of government obligation and revenue bonds, mandated extensive tracking of "illegal arbitrage," and required rebates to the Internal Revenue Service of any "excess arbitrage" or interest earned on the principal of bonds or notes. Last year states and local governments rebated $300 million to the IRS under those laws.

Dingell and Markey wrote that in light of the "alleged illegal payoffs, influence peddling, conflicts of interests, and questionable sales practices," the different agencies should advise Congress about the need to repeal the Tower act, which prohibits the Securities and Exchange Commission from mandating cities and towns to file disclosure statements.

Repeal of the Tower act would almost certainly impose still another level of federal regulations and unfunded costs on state and local governments access to borrowing funds to meet local capital needs.

At the same time, Towns indicated he intended to hold hearings about the GAO criticisms of the IRS. The report stated that the IRS's bond enforcement program lacks adequate manpower and resources. A Towns aide said the report indicates "that there has probably not been as vigorous oversight from Congress as there should have been."

The GAO report indicates that the municipal bond market has many incentives for avoiding compliance with federal tax laws, and that the federal tax-exempt bond laws and regulations are so complex and burdensome that they create incentives for abuse. The GAO said cities can reap huge profits from arbitrage-driven transactions, but are unlikely to face stiff penalties from the IRS.

The report did not provide estimates of the cost to cities of trying to comply with the federal arbitrage and rebate mandates, the cost of sending rebates to the federal government instead of meeting local capital needs, or the cost of enforcement of the complex regulations to the federal government.
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Author:Shafroth, Frank
Publication:Nation's Cities Weekly
Date:Jun 7, 1993
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