Municipal Bond Rule Languishes After Two Years in Legislature

The following is an excerpt from an article in 

The New York Times
Tuesday, August 14, 2012

Municipal Bond Rule Languishes After Two Years in Legislature

By MARY WILLIAMS WALSH

Financial reform was supposed to help protect local taxpayers from getting burned by municipal bond deals. But a measure that would require municipal bond advisers to put the interests of taxpayers first has been bogged down in a rule-making quagmire in Washington for nearly two years.

What’s more, a House bill, sponsored by Representative Robert J. Dold, Republican of Illinois, would eliminate the measure.

As part of the wide-ranging regulatory changes that followed the financial crisis of 2008, the Dodd-Frank Act included a provision that would make municipal advisers “fiduciaries,” meaning they must show an undivided loyalty to the communities that hire them, putting local residents’ interests ahead of their own.

That’s a much higher standard than the one for the banks that underwrite municipal bonds. The law in that case takes for granted that underwriters are looking out for their own interests in bond deals, and requires only that they deal fairly and not mislead.

Making advisers fiduciaries would be “the first time in the history of the securities laws that issuers of the securities have been protected,” said Robert W. Doty, president of AGFS, a consulting firm in Sacramento. He is a registered municipal adviser and favors the fiduciary mandate. But before that provision can take effect, the law calls for the Securities and Exchange Commission to define “municipal adviser.”

The S.E.C. proposed a definition 20 months ago, but it was swiftly beaten back by the banking, brokerage and engineering industries, among others. Opponents argued that the S.E.C. was overreaching and that they were already regulated and should not be given a new mandate.

In addition to serving as fiduciaries, municipal advisers would have to register with the commission, meet professional standards and allow periodic inspections. As fiduciaries, they would have to speak out when they see something amiss, even if it means going against powerful political forces and financial incentives.

Mr. Dold’s bill, introduced last summer, now has 35 other sponsors from both parties. In addition to ending the fiduciary mandate, it would exclude banks and other financial institutions from being deemed municipal advisers, even though bankers often do advise municipalities. A group of engineers that provide cost-benefit studies for municipal energy projects, typically financed with bonds, has also been calling for its members to be excluded.

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The Bankruptcy Cliff

Excerpt from the The New York Times
Sunday, February 19, 2012

Jefferson County, Ala., Falls Off the Bankruptcy Cliff


By MARY WILLIAMS WALSH

ONE county jail here is so crowded that some inmates sleep on the floor, while the other county jail, a few miles down the road, sits empty.

There is no money for the second one anymore.

The county roads here need paving, and the tax collector needs help.

There is no money for them, either.

There is no money for a lot of things around here, not since Jefferson County, population 658,000, went bankrupt last fall. There is no money for holiday D.U.I. checkpoints, litter patrols or overtime pay at the courthouse. None for crews to pull weeds or pick up road kill — not even when, as happened recently, an unlucky cow was hit near the town of Wylam.

“We don’t do that any more,” E. Wayne Sullivan, director of the roads and transportation department, said of such roadside cleanup.

This is life today in Jefferson County — Bankrupt, U.S.A. For all the talk in Washington about taxes and deficits, here is a place where government finances, and government itself, have simply broken down. The county, which includes the city of Birmingham, is drowning under $4 billion in debt, the legacy of a big sewer project and corrupt financial dealings that sent 17 people to prison.

If you want to take a broad view, the trouble really began with the Constitutional Convention of the State of Alabama in 1901. The document that emerged there — written to empower business interests and disenfranchise African-Americans and poor whites — gives towns and counties little authority over local issues. Local taxing power rests with the state, though state lawmakers are loath to wield it today, in an age of anti-tax populism. Last summer, the Supreme Court of Alabama struck down a tax that was a crucial source of revenue for Jefferson County, finally pushing the county over the brink.

Officials here have only begun to grapple with the implications of life under Chapter 9 of the federal bankruptcy code, a municipal form of debt adjustment, rather than reorganization or liquidation. Until now, the most famous example was Orange County, Calif., which filed for Chapter 9 in 1994, after risky investments went horribly wrong. Many local governments are struggling to pay their bills these days, but hardly any have filed for bankruptcy. Notable exceptions include Harrisburg, the capital of Pennsylvania, Vallejo, Calif., and Central Falls, R.I.