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HomeMy WebLinkAboutResolution No. 4435, Support of the Preservation of Tax-Exempt Financing Commission Memorandum REPORT TO: Honorable Mayor and City Commission FROM: Anna Rosenberry, Administrative Services Director Stacy Ulmen CMC, City Clerk SUBJECT: Resolution No. 4435, Support of the Preservation of Tax-Exempt Financing MEETING DATE: April 15th, 2013 MEETING TYPE: Consent RECOMMENDATION: Approve Resolution No. 4435 supporting the Preservation of Tax- Exempt Financing. BACKGROUND: The Government Finance Officers Association (GFOA) is urging its members to work with state and local elected leaders to contact members of Congress and Senators to ask them to preserve the important financing tool of the Municipal Bond Tax Exemption. The International City Manager’s Association (ICMA) has sent a letter to Senate Leadership urging them to not eliminate or cap the current deduction for municipal bond interest as a part of any tax reform legislation (see attached.) The National Association of Counties (NaCO) has taken a similar position. As Congress and the White House are in the process of developing budget deficit reduction and tax reform proposals, the tax exemption on municipal bond interest remains a target. If the exemption is not preserved, interest rates on municipal bonds will rise. For the City of Bozeman, the burden of these higher borrowing costs would fall on both property tax payers (Bonds for Parks, Trails, Open Space; future Police Stations; future Pool Facilities, etc) and on our utility customers (as future Water and Sewer Revolving Loan borrowers.) As you are well aware, we struggle every year to cut costs for property tax and utility rate payers. If the Tax Exemption is not held in place, local governments expect to see higher interest rates on municipal bonds, increasing taxes for local residents. The effect of a specific rate increase in this scenario is difficult to estimate. However, generally speaking, the additional interest cost can be calculated between different interest rate scenarios: Once adopted, we will deliver the resolution to members of our Montana Congressional delegation, and the GFOA. For instance, with the City’s voter-approved plans to issue $15 Million for Parks, Trails and Open Space projects: Total Interest Costs if $15 Million issued at 2.0% for 20 years = $3.3 Million Total Interest Costs of $15 Million issued at 3.0% for 20 years = $5.1 Million The additional interest costs ($1.8 Million, in this particular scenario) charged to city property owners would provide no additional park or trails land – but, would simply be added borrowing costs that must be repaid by our community. 37 FISCAL EFFECTS: The fiscal effects of adopting this Resolution of Support are minimal. If Congress and the President were to repeal the tax exemption on municipal bond interest, the future borrowing costs to City residents would increase substantially. ALTERNATIVES: As suggested by the City Commission. Attachment: Resolution No. 4435 Coalition Letter to Senate Leadership on Municipal Bonds 38 Page 1 of 3 COMMISSION RESOLUTION NO. 4435 A RESOLUTION OF THE CITY COMMISSION OF THE CITY OF BOZEMAN, MONTANA, IN SUPPORT OF THE PRESERVATION OF TAX-EXEMPT FINANCING WHEREAS, tax-exempt municipal bonds are the primary means by which state and local governments finance three quarters of the critical infrastructure of our nation, including roads, bridges, hospitals, schools, and utility systems; and WHEREAS, through the tax exemption, the federal government continues to provide critical support for the federal, state and local partnership that develops and maintains essential infrastructure, which it cannot practically replicate by other means; and WHEREAS, the municipal tax exemption has enabled state and local governments to finance more than $1.65 trillion in infrastructure investment over the last decade; and WHEREAS, this tax exemption is part of a more than century-long system of reciprocal immunity under which owners of federal bonds are, in turn, not required to pay state and local income tax on the interest they receive from federal bonds; and WHEREAS, municipalities benefit from this tax exemption through substantial savings on the interest cost of borrowed money; and WHEREAS, tax exempt bonds benefit state and local governments who need the support of investors to finance critical infrastructure, taxpayers across the country who depend on this infrastructure for reliable transportation systems, schools, public health facilities, energy, clean water and affordable housing, the federal government, who gets quite a bargain on their partnership with state and local government to provide the nation's infrastructure through the 39 Resolution No. 4435, Support of the Preservation of Tax-Exempt Financing Page 2 of 3 exemption; and investors who buy bonds for many reasons, including the safe nature of these financial products; and WHEREAS, municipal bonds are the second safest investment, aside from U.S. Treasuries, with state and local governments having nearly a zero default rate; and WHEREAS, 72.4 percent of the total outstanding municipal debt is held by individual investors, either directly or through mutual funds and money market funds (Source - 2010 Thomson Reuters); and WHEREAS, Congress and the President have proposed legislation to reduce or repeal the tax exemption on municipal bonds; and WHEREAS, these proposals to reduce or repeal the tax exemption would have severely detrimental impacts on national infrastructure development and the municipal market, raising costs for state and local borrowers and creating uncertainty for investors; and WHEREAS, if the proposal to cap the exemption on municipal bonds at 28 percent had been in place over the last 10 years it would have cost state and local governments an additional $173 billion in interest costs; and WHEREAS, total repeal of the exemption over the last decade would have cost state and local governments over $495 billion in additional interest costs; and WHEREAS, the municipal tax exemption has a long history of success, having been maintained through two world wars and the Great Depression, as well as the recent Great Recession, and it continues to finance the majority of our nation’s infrastructure needs for state and local governments of all sizes when no other source exists to do so; 40 Resolution No. 4435, Support of the Preservation of Tax-Exempt Financing Page 3 of 3 NOW, THEREFORE, BE IT RESOLVED that the City of Bozeman opposes any efforts by Congress and the White House to reduce or repeal the federal tax exemption on interest earned from municipal bonds; and BE IT FURTHER RESOLVED that we oppose any action that would reduce or repeal the exemption on tax-exempt bond interest, and affirm that there should be no legislative action to apply any changes retroactively to current outstanding bonds; and BE IT FURTHER RESOLVED that a copy of this resolution shall be sent to our Congressional Representatives and key members of the Administration. Effective Date. PASSED AND APPROVED by the City Commission of the City of Bozeman, Montana, at a regular session thereof held on the 15TH day of April, 2013. ___________________________________ SEAN A. BECKER Mayor ATTEST: ________________________________________ STACY ULMEN, CMC City Clerk APPROVED AS TO FORM: ___________________________________ GREG SULLIVAN City Attorney 41 1 March 19, 2013 The Honorable Harry Reid The Honorable Mitch McConnell Majority Leader Minority Leader United States Senate United States Senate Washington, D.C. 20510 Washington, D.C. 20510 Dear Majority Leader Reid and Minority Leader McConnell: As the Senate prepares to consider the fiscal year 2014 Concurrent Budget Resolution, we are writing to raise a serious concern regarding the future treatment of tax-exempt municipal bonds as part of any upcoming tax reform efforts. The current Senate Budget Resolution suggests the possibility of a cap being placed on tax expenditures – which could include the exemption for interest earned on municipal bonds. Tax-exempt municipal bonds were included in the United States tax code in 1913. They remain the primary method used by states and local governments to finance public capital improvements and public infrastructure projects that are essential to creating jobs, sustaining economic growth and improving the quality of life for Americans in every corner of this country. Tax-exempt municipal bonds are the main financing tool used to meet public infrastructure needs – including highways, bridges, local streets, public transit, airports, water and sewer, general acute-care hospitals, primary and secondary schools, and county jails. Please consider the following:  Muni bonds are currently funding over $3.7 trillion worth of essential infrastructure. Ninety (90) percent of infrastructure muni-bonds financing went to schools, hospitals, water and sewer facilities, public power utilities, roads and public transit over the last 10 years  In 2012 alone, more than 6,600 tax-exempt municipal bonds financed more than $179 billion worth of infrastructure projects Eliminating the deduction or including it as part of any cap on deductions would increase the borrowing costs that public entities will have to pay for infrastructure improvements. The effect will be increased costs to the public for infrastructure and therefore less funding for teachers, fire and police officers, hospital workers, librarians, and construction and maintenance workers. Any change to the tax-exempt status of municipal bonds will ultimately result in less overall infrastructure spending, fewer jobs and dampened economic activity. The Federal government plays a critical role in the financing of public infrastructure projects through municipal bonds – an appropriate role given the public benefits that result from these projects. Therefore, as you consider the fiscal year 2014 Concurrent Budget Resolution, we urge you to make clear that any comprehensive tax reform does not eliminate or cap the current tax-exempt deduction of municipal bond interest. Airports Council International – North America American Association of Airport Executives American Association of State Highway and Transportation Officials American Concrete Pavement Association American Concrete Pressure Pipe Association American Council of Engineering Companies 42 2 American Federation of State County and Municipal Employees American Federation of Teachers American Public Power Association American Public Transportation Association American Public Works Association American Road and Transportation Builders Association American Society of Civil Engineers American Sport Fishing Association American Traffic Safety Services Association Associated Equipment Distributors Association of Equipment Manufacturers Association of Metropolitan Planning Organizations Chesapeake Bay Foundation Construction Management Association of America Council of Infrastructure Financing Authorities Distribution Contractors Association Food and Water Watch Government Finance Officers Association International City/County Management Association International Economic Development Council International Public Management Association of Human Resources International Union of Operating Engineers Laborers’ International Union of North America National Asphalt Pavement Association National Association for County Community and Economic Development National Association of Clean Water Agencies National Association of Counties National Association of County and City Health Officials National Association of County Behavioral Health And Developmental Disability Directors National Association of County Collectors, Treasurers and Finance Officers National Association of County Engineers National Association of Development Organizations National Association of Federally Impacted Schools National Association of Health and Educational Facilities Finance Authorities National Association of Local Housing Finance Agencies National Association of Regional Councils National Association of State Auditors, Comptrollers and Treasurers National Association of State Treasurers National Association of Towns and Townships National Community Development Association National Council of State Housing Agencies National Latino Farmers and Ranchers Trade Association National League of Cities National School Boards Association National Urban League National Utility Contractors Association National Waterways Conference, Inc. Portland Cement Association The Associated General Contractors of America The Council of State Governments The National Grange U.S. Conference of Mayors Water Environment Federation 43