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Campaign contributions and municipal bonds.

Lately there has been discussion in the press and proposals by members of Congress to regulate campaign contributions to state and local elected officials. In early June the U.S. Securities and Exchange Commission sent a letter to roughly 70 broker/dealers nationwide seeking detailed voluntary information on their political contributions. Other municipal bond topics also are heating up and these issues are discussed in a related Federal Focus article "Federal Regulation of the Municipal Bond Market".

For many years the Government Finance Officers Association has been a strong supporter of disclosure in the municipal bond market. We began developing the Disclosure Guidelines for State and Local Government Securities in 1974, published them in 1977, and have updated and expanded this industry standard several times. In addition, through our Certificate of Achievement in Financial Reporting program and other efforts we are encouraging the reporting of information in the secondary market.

The issue at hand, however, relates to the giving of political contributions to elected officials involved in the underwriter selection process and the effect, if any, on the issuance of municipal bonds. The Government Finance Officers Association does not have a public policy position on the issue of campaign reporting; however, it has longstanding support for ethics in government, including the promulgation of the GFOA "Code of Professional Ethics," which includes a conflict-of-interest clause.

Various federal officials have concluded that political contributions to state and local elected officials are influencing the issuance of municipal bonds, especially in connection with negotiated sales. GFOA is interested in hearing from its members and learning if this is a problem in your jurisdiction, and, if it is, how you propose solving it.

Campaign contribution reporting is regulated by laws in all the states, the District of Columbia and in individual cities. We expect that GFOA members are strong supporters of state laws which require campaign contribution reporting and promote the integrity of our electoral system. But, is there a need for the federal government to duplicate the campaign contribution reporting laws that already exist? The information is already made public, and we should carefully weigh the costs of another federal mandate on state and local governments to collect and produce information that political candidates already provide to election commissions and similar agencies. Even if you conclude that duplicate reporting is needed, the question then becomes who should do the reporting: the contributor, the elected official or the governmental body?

Recently the Municipal Securities Rulemaking Board has announced that it will be proposing a rule directed at underwriter and broker/dealer reporting of campaign contributions. GFOA's review of the proposed rule will focus on the desirability and usefulness of potentially duplicative campaign contribution reporting, the costs of reporting and whether these costs will be passed on to state and local governments.

A particular concern we have is a serious misunderstanding about the purpose of disclosure in the municipal market and its relation to the reporting of political contributions. Last month, the chairman and the ranking minority member of the U.S. House Banking, Finance and Urban Affairs Committee, Representatives Gonzalez and Leach, introduced H.R. 2464. This bill would require underwriters and others to report political contributions to the Securities and Exchange Commission and it would repeal outright the so-called Tower Amendment.

Repealing the Tower Amendment as a response to concerns about political contributions confounds us. The Tower Amendment is a section of the federal securities laws that deals with disclosure in the municipal market, that is, the provision of financial and other relevant information about the issuer of securities to investors in those securities. It does not deal with political contributions and is not a means of informing taxpayers about the government decision-making process. Therefore, suggestions to change the current voluntary system of municipal bond disclosure as a response to political contributions is, in our opinion, inappropriate and unresponsive to perceived problems. Repeal of the Tower Amendment would simply clear the way for the imposition of complicated federal standards governing every aspect of the municipal disclosure process and impose new federally mandated costs on state and local governments with no demonstrated benefit in terms of investor protection or improved access to capital. More importantly, the repeal of the Tower Amendment would represent a serious disruption of our federal system of government. By granting new powers to the federal government to regulate the issuance by state and local governments of their securities, the delicate balance between the legitimate national interest in investor protection and the right of states under our system of federalism to govern their own affairs would be imperiled.

State and local officials are sensitive to the appearance of conflicts of interest in the bond issuance process. State and local governments have worked aggressively to reform the system of campaign finance by enacting extensive campaign finance laws. As a result, there have been relatively few reported instances of improper behavior in our market where approximately 10,000 issues are sold each year involving tens of thousands of public officials. Thus, we must question the need for federal involvement in the regulation of political contributions to state and local government officials. This is an area best regulated at the state and local levels of government.

Furthermore, the U.S. Congress has had difficulty getting its own house in order with regard to campaign finance reform. Yet, as with so many other areas, it appears willing to regulate state and local governments and impose more unfunded mandates on them.

If there is a need for additional campaign contribution reporting, then let the underwriters and broker/dealers report on the contributions of their firm and employees. Campaign contribution reports do not belong in the official statements that accompany the issuance of tax-exempt securities. If campaign contributions to state and local officials are a problem, let the sun shine on either the current reports made by candidates or on reports that are made by contributors. This way the public and the press can see the list of contributors and hold public officials accountable for their decisions.

Clearly, the municipal market is not in a chaotic condition that would warrant some of the radical changes that are being discussed in Washington, D.C. In fact, the market is known for its strength and vitality as exhibited by its remarkably low default rate.

JEFFREY L. ESSER is Executive Director of the GFOA.
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Title Annotation:the influence exerted by campaign contributions on the issuance of municipal bonds
Author:Esser, Jeffrey L.
Publication:Government Finance Review
Date:Aug 1, 1993
Words:1063
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