March 10, 2016
Washington State Treasurer James McIntire wants Treasury and the Internal Revenue Service to create a safe harbor for competitive sales of muni bonds in their re-proposed issue price rules.
In a brief interview on Wednesday, McIntire, the president of the National Association of State Treasurers, said the agencies’ re-proposed regulations on issue price last June would adversely affect competitive sales, a view he said he shares with other state treasurers.
McIntire’s concerns, which he detailed in a three-page letter he sent to Treasury and IRS officials in February that was not publicly released until Wednesday, come as dealer and issuer groups also have complained about how the proposed rules would impact competitive sales and have pressed for relief for these transactions.
In his letter to agency officials, McIntire warned that his state’s competitive sale of a total of $673 million of general obligation refunding bonds — $528.8 million of Series R-2016B various purpose general obligation refunding bonds and $144 million of Series R-2016C motor vehicle fuel tax general obligation refunding bonds — in January would not have been able to comply with the rules and would have caused problems with the investment of proceeds if interest rates had been higher.
McIntire called competitive sales a “very valuable tool” in keeping borrowing costs at a minimum.
“There is no reason the IRS should want to disincentivize us from using competitive sales to get the lowest cost for taxpayers,” McIntire told The Bond Buyer. “The reality is we end up paying somewhat higher prices for bonds or getting lower prices from negotiated sales.”
The state’s GO refunding bonds were sold on Jan. 20, an unexpected volatile day where the Dow Jones Industrial Average dropped more than 500 points and oil prices dropped to a low of $26. McIntire’s office estimated that only 26% of the Series R-2016B bonds were sold within one trading day to dealers and customers and only 8% of the Series R-2016C bonds were sold during that time.
Under the re-proposed issue price rules, the issue price, which determines the bond yield that limits the yield of invested proceeds, is the price at which the first 10% of the each maturity of bonds is sold to the public. If 10% isn’t sold on the sale date, the issue price is the initial offering price if the lead underwriter certifies to the issuer that no underwriter filled an order from the public after the sale date and before the closing date at a higher price. An exception can be made for market movements.
McIntire argued that due to the volatility that day and the fact that no one was buying bonds, the state would not have been able to meet the 10% requirement for each maturity. In fact, state officials looked on the Municipal Securities Rulemaking Board’s EMMA site and found that the actual par amount of trades greater than or equal to $5 million are not required to be reported until five days after the trade date. Therefore, the state had no way to immediately determine the bond yield to make sure the yield of the investments of proceeds was not higher.
Noting interest rates are very low right now, McIntire told the Treasury and IRS officials, “In different markets, markets, it would have been problematic if we had to wait to establish the issue price needed to calculate arbitrage yield and confirm that the escrow yield did not exceed the arbitrage yield.”
McIntire said his office annually issues roughly $2.5 billion in tax-exempt general obligation bonds, nearly all of which are issued in electronic competitive sales.
Several market groups, including the Government Finance Officers Association and Bond Dealers of America, also have expressed concern over the adverse impact issue price rules could have on competitive deals. The BDA in December recommended Treasury and the IRS rework issue price rules to state that if 25% of bonds are sold after a competitive underwriting at initial offering price, then that would establish each maturity’s issue price.
NAST also wrote a letter to the IRS in September that calls for the inclusion of a safe harbor provision in competitive deals. John Cross, the associate tax legislative counsel for Treasury, has previously said the department is open to providing relief from issue price rules for competitive sales.