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Washington wrap-up - 1991 annual report.

With the Gulf War over and attention shifted to the domestic scene, Congress developed a major case of consternation as members struggled with limitations that they had imposed on themselves the previous year with the Omnibus Budget Reconciliation Act of 1990. Action was delayed on many bills because an acceptable offsetting revenue, required by that budget agreement, could not be identified.

During the final days of the first session of the 102nd Congress, concern about the lingering recession generated a flurry of proposals promising middle-income tax relief and economic stimulus. On the night before Thanksgiving, Congress finally went "over the river and through the woods," adjourning until January, although committees in both the Senate and House held hearings on tax proposals in December.

During 1991 the GFOA Federal Liaison Center focused on numerous proposals affecting state and local governments, including sales practice rules for government securities; protection of tax-exempt bond financing; tax code simplification; Social Security coverage for part-time, temporary and seasonal employees; tax-exempt bond regulations; revision of pension distribution rules; taxation of electronic fund transfer; and continuation of pass-through bank deposit insurance for Section 457 deferred compensation plans.

The following is a summary of major issue areas in which GFOA was involved with an explanation of how the issues were resolved or their current status.

Legislative Activities

Government Securities Act (GSA). GFOA is largely responsible in having Congress recognize the need for sales practice rules in the government securities market. In early May, John Bilafer, vice chair of GFOA's Committee on Cash Management, testified before th Subcommittee on Telecommunications and Finance on behalf of GFOA and five other organizations about the reauthorization of the GSA.

Two other GFOA representatives appeared before Senate and House sub-committees on the same topic. Senate action on S. 1247 reauthorizing the GSA of 1986 came in July, shortly after Robert Stout, finace director of Ridgefield, Connecticu, and a member of the GFOA Committee on Accounting, Auditing and Financial Reporting, testified before a subcommittee of the Senate Committee on Banking, Housing Urban Affairs on the need for sales practice rules in the trading of federal government securities. In September Richard B. Dixon, GFOA President and chief administrative officer for the County of Los Angeles, appeared before the Subcommittee on Oversight of the House Ways and Means Committee during hearings scheduled after the revelations about the admitted abuses of Salomon Brothers.

A comprehensive government securities reform bill was not intorduced into the House until the closing days of the session. Representative Edward J. Markey (D-MA), chairman of the Subcommittee on Telecommunications and Finance of the House Committee on Energy and Commerce, is the chief sponsor of H.R. 3927, which now enjoys bipartisan subcommittee support. The House bill extends the Treasury Department's current rulemaking authority until October 1, 1996, and provides authority for sales practice rules to be issued for both bank and nonbank brokers and dealers.

Although new relemaking authority expired with the GSA on October 1, there should be little resulting impact on investors. Regulations already in effect will continue, as will their enforcement.

Tax-exempt Bond Relief and Simplification. GFOA members were active in urging their representatives to cosponsor H.R. 710 and S.913, companion bills introduced by Representative Beryl F. Anthony, Jr. (D-AR) and Senator Max Baucus (D-MT) to provide relief from some of the overly restrictive provisions affecting the ability of state and local governments to finance critical infrastructure projects. The list of House cosponsors passed the initial target of 75 by the end of the year -- evidencing strong congressional support. As there was no major tax bill 1991, action on arbitrage rebate and other tax-exempt bond relief had to waid for 1992. With talk of a mjor tax bill in 1992, prospects for enactment of bond relief brighten.

Senate Finance Committee Chairman Lloyd Benstsen (D-TX) and House Ways and Means Chairman Dan Rostenkowski (D-IL) introduced tax simplification bills (H.R. 2775, H.R. 2777 and S. 1394), including some provisions in H.R. 710 and S.913. In late July, Lynn Hampton, a member of the GFOA Executive Board, testified on behalf of GFOA and 18 other public interest groups before the Subcommittee on Select REvenue Measures of the House Ways and Means Committee supporting these tax simplification bills as an important first step. Again, the lack of a major tax bill thwarted these efforts.

GFOA has objected to one section in the proposed simplification legislation dealing with the tax treatment of large partnerships which would treat as taxable interest earned on state and local bonds, unless at the end of each quarter of the taxable year at least 50 percent of the value of partnership assets was in such bonds.

Pension Simplification. Tom Anderson, executive director of the School Employees Retirement System of the State of Ohio, testified on behalf of GFOA and 11 other groups on pension simplification legislation (H.R. 2742) that would reinstate Section 401(k) plans for state and local government employees. The main purpose of his presentation was to press for relief from the limits on pension plans in Section 415 of the tax law.

Infrastructure Financing. Legislative proposals in support of infrastructure financing reappeared in the 1991 session. Senator Pete Domenici (R-NM) reintroduced legislation (S.90) which would create a new category of tax-exempt bonds to finance facilities for sewerage, solid waste disposal, furnishing of water or to achieve compliance with federal mandates. Representative Frank J. Guarini (D-NJ) introduced legislation (H.R. 2172) which would permit use of tax-exempt bonds for recycling facilities and would ease restrictions as an incentive for other types of environmental infrastructure projects. Both bills contain proposals for tax-exempt bond relief. Neither bill was passed, but Rep. Guarini has asked the General Accounting Office for a study of the issues involved. As the cost of implementing federal environmental mandates escalates, these or similar bills are sure to attract more attention. Also, an advisory committee to the Environmental Protection Agency is studying financing issues and suggesting changes.

Extension of Mortgage Revenue Bonds and Small-issue IDBs. A dozen Internal Revenue Code provisions were due to expire on December 31, 1991, including the small-issue industrial development bonds and mortgage revenue bonds programs. Congress passed H.R. 3909 to extend the provisions six months until June 30, 1992, and the President signed the bill in mid-December (P.L. 102-227). House Ways and Means Committee Chairman Dan Rostenkowski vowed to end the annual "twilight of the extenders" and announced that he intends to have the committee vote "up or down" in 1992 on whether to make each provision permanent. Hearings were scheduled for late January 1992 before the Ways and Means Committee.

Banking Legislation. A stripped down banking bill was enacted (P.L. 102-242) that provides authority for the nearly insolvent Federal Deposit Insurance Corporation (FDIC) to borrow up to $70 billion from the Treasury, permits regulators to seize banks that fall below certain capital levels and bars the FDIC from covering deposits greater than $100,000 when a bank fails. The legislation also restores deposit insurance for both employer-sponsored retirement plans and deferred comprnsation arrangements (Section 457 plans), but directs such deposits to strong financial institutions. This was a major legislative priority for GFOa.

Electronics Fund Transfer User Fee. The GFOA took a lead role in successfully opposing the imposition of a user fee on electronic fund transfer (EFT). The proposal put forward by Senator Joh Kerry (D-MA) and Representative Joseph Kennedy (D-MA) would have funded the bailout of financial institutions by imposing a fee on all large-dollar EFT payments. The apparent simplity of the proposal and the amount of revenue it would generate may lead to its revival in the second session of the 102nd Congress.

Highways and Mass Transit. H.R. 2950, a compromise highway and mass transit bill, was cleared in the waning hours of the session. The six-year, $151 billion measure (P.L. 102-240) would revanp and expand federal surface transportation programs. Highway programs were authorized for $119.5 billion and mass transit programs for $31.5 billion. The measure also authorized the release of money from the Highway Trust Fund which had been frozen since October 1 when the previous authorization expired. To help pay for the program, 2.5 cents per gallon of the 1990 nickel gas tax has been extended until 999.

Federal Regulation of the Municipal Bond Market. In April, Jeffrey S. Green, deputy general counsel of the Port Authority of New York and New Jersey and then chair of GFOA's Committee on Governmental Debt and Fiscal Policy, appealed to the Senate Subcommittee on Securities for a voluntary system of municipal bond disclosure. The hearing was conducted by Senator Chris Dodd (D-CT) who was examining the fiscal condition of state and local governments and federal regulation of the municipal bond market.

Regulatory Activities

Medicaid Amendments. The battle over Medicaid matching funds ended in a compromise (H.R. 3595) that permits state and local governments to continue present funding methods through October 1, 1992 (P.L. 102-234). The compromise put off the effective date of controversial federal regulations and at the same time prohibited states from modifying their Medicaid programs to use certain funding sources to match federal funds. After that date, health care provider donations will be disallowed from the federal match. Intergovernmental transfers, donations from charitable organizations and "broad-based provider taxes" generally would be eligible for federal matching. No more than 25 percent of a jurisdiction's Medicaid funding can be derived from provider taxes. Another provision limits expenditures to reimburse hospitals that serve a disproportionate number of Medicaid patients to 12 percent of a state's total annual Medicaid program expenditures with a hold-harmless provision until expenditures equal 12 percent.

Arbitrage Rebate Regulations. In April 1991, the Internal Revenue Service (IRS) released for comment modifications to the arbitrage rebate regulations issued in 1989. In written comments, GFOA praised the modifications, but urged the IRS to dump the original regulations and adopt a meaningful safte-harbor provision that would 'free the majority of plain-vanilla government issuers from the onerous burdens fo rebate compliance."

Rebate Overpayment Procedures. October 22, 1991, marked the fifth anniversary of the Tax Reform Act of 1986 which requires state and local governments to rebate to the U.S. Treasury arbitrage (the interest earned on the reinvestment of money they acquire through the sale of municipal bonds pending their actual use in paying contractors). Because arbitrage rebate payment generally are made every five years, payments will be increasing, as will the possibility of overpayment. GFOA wrote Representative J.J. Pickle (D-TX), chairman of the House Subcommittee on Oversight of the Ways and Means Committee in connection with a hearing on taxpayer rights. GFOA said it wanted to alert the committee to the need for the issuance of clear procedures from the IRS on the return of overpayment resulting from innocent mistakes. In response to the GFOA letter, IRS official indicated that they will include such procedures in future regulatory projects.

Reimbursement Regulations. In July, comments were submitted to the IRS by GFOA attacking proposed reimbursement regulations. In August, GFOA past president Virginia Rutledge testified on behalf of 11 state and local government organizations on the unworkability of the proposed regulations. The IRS postponed the effective date of the rules covering tax-exempt bond reimbursements from September 8, 1991, until 30 days after the rules are issued in final form to give the agency time to consider revisions to overcome the problems identified by the testimony and written comments. Final regulations are expected in early 1992.

Social Security for State and Local Government Workers. On June 28, the IRS released final regulations for the payment of Social Security taxes for part-time, seasonal and temporary state and local government employees. Employees had to be covered by a retirement plan or Social Security by December 31, 1991.

Money Market Funds. The Securities and Exchange Commission (SEC) adopted an amendment to Rule 2a-7 that imposed new quality and diversification standards on money market funds and protection to investors, including state and local governments. Similar rules are being studied for tax-exempt money market funds and a proposal may be forthcoming from the SEC in early 1992. GFOA has provided comments to the SEC concerning technical problems with the application of such standards to tax-exempt funds.

Municipal Securities Information Library (MSIL). In June, the SEC approved the creation of an electronic central repository for official statements to be run by the Municipal Securities Rulemaking board (MSRB). Underwriters are required to provide to the MSIL copies of official statements for most issues. A proposal for an electronic continuing disclosure information system was put on hold by the SEC, and the MSRB was directed to modify the proposed system to accept hard-copy submissions from issuers.

Other Activities

Public Finance Network. With the addition of the National Association of Independent Colleges and Universities (NAICU) and the Capital Formations Committee of the National Council of Higher Education (NCHELP), the Public Finance Network (PFN) has grown to include 42 public interest groups. Circulation of the bimonthly Network News was expanded to include all of the House and Senate offices. Interviews with House Ways and Means Committee Chairman Dan Rostenkowski and Representative Beryl F. Anthony, Jr. were featured in two issues. Statewide public finance networks, varying in level of organization and activity, have developed in several more states, including Oregon, Florida, Ohio and Pennsylavania. The Florida network held a day-long workshop in Orlando in early November with more than 100 people in attendance. The workshop featured speakers on disclosure, arbitrage rebate, reimbursement regulations and related issues. Efforts continue to communicate the importance of tax-exempt financing to those who are interested in public works, education, environmental ussies and transportation, including support for the formation of a congressional caucus. GFOA is a major contibutor to the PFN, providing significant staff support.

Infrastructure and Public Finance Caucus. House and Senate lawmakers announced the formation of an Infrastructure and Public Finance Caucus at the U.S. Capitol on November 20, 1991. Founding members are Representatives Beryl F. Anthony, Jr. and Don Sundquist (R-TN) and Senators Bob Grahm (D-FL) and Christopher and Bond (R-MO). In announcing the caucus the legislators cited the need, at a time when there is a heightened awareness of "our second rate system of infrastructure," for more active involvement by members of Congress in order to attain legislative remedies for infranstructure needs. The aim of the bipartisan, bicameral caucus is to serve as an educational forum and a means to organize other interested members into a more effective force in pursuing a forward-looking infranstructure policy for the country.

Prospects for 1992

As |91 ended, the Treasury still had not issued the long-awaited regulatory proposals on the allocation and accounting of bond proceeds for arbitrage rebate requirements, transferred proceeds requirements for refunding and the tqo-year spendout for exemption from rebate. Proposed rules are expected in 1992.

A tax bill expected early in the session to address economic growth, savings incentives and tax fairness may well be the vehicle to extend permanently some if not all of the expiring provisions and to address simplification of the tax code and arbitrage rebate.

other infrastructure needs should increase interest in tax-exempt frinancing, including such issues as the volume cap, definition of governmental bonds, the application of the alternative minimum tax on tax-exempt bond interest and restoration of the bank interest deduction.

The furstration of states and localities in complying with federal pension distribution rules will help maintain interest in some modification to Section 415. Another emerging pension issue is congressional interest in setting reporting, disclosure and fiduciary standards for state and local government retirement systems.

Prepared by GFOA's Federal Liaison Center members JOANNE FIELD, CATHY SPAIN and RUTH WALLICK.
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Title Annotation:Government Finance Officers Association
Author:Field, Joanne; Spain, Cathy; Wallick, Ruth
Publication:Government Finance Review
Date:Feb 1, 1992
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