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HomeMy WebLinkAbout02/16/2016 10 Municipal Bonds Tax Exempt Status; Letter of Support 10 I 1 410,111 1 it BUSINESS OF THE CITY COUNCIL YAKIMA, WASHINGTON AGENDASTATEMENT Item No. 10. For Meeting of: February 16, 2016 ITEM TITLE: Resolution supporting retention of tax exempt Status of Municipal Bonds and authorizing the City Manager to execute a letter of support SUBMITTED BY: Cindy Epperson, Director of Finance and Budget SUMMARY EXPLANATION: The City participates in the Government Finance Officers Association (GFOA). GFOA has a Federal Government Relations component, and we recently received a request for action at the Federal level. Federal lawmakers are considering removing the income tax exemption on municipal bond interest, which has been in place since very early in federal income taxation. This action would make municipal financing more expensive by increasing the interest rate that investors are willing to accept, because they would have to pay income tax on the interest earnings. The attached resolution would formalize the City's opposition to this action, and authorize the City Manager to sign the attached letter of support to retain the tax exempt status of municipal bonds, to be distributed to the leaders of the House and Senate tax writing committees. ITEM BUDGETED: NA STRATEGIC PRIORITY: Improve the Built Environment APPROVED FOR SUBMITTAL: Interim City Manager STAFF RECOMMENDATION: Adopt the Resolution BOARD /COMMITTEE RECOMMENDATION: ATTACHMENTS: Description Upload Date Type IResolluition supporting t.ax exempt status of 1 /28/2016 IResollutlion bonds D LeUer of Support 1/28/2016 IResollutlion RESOLUTION NO. R -2016- A RESOLUTION supporting retention of tax exempt status of municipal bonds and authorizing the City Manager to execute letter of support. 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 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 muni 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; and WHEREAS, the City Council has considered this Resolution at a regular public meeting; has provided opportunity for members of the public to comment regarding this issue; and following such public meeting, and having considered all testimony and comment received, the City Council finds and determines that approval of this Resolution supporting the retention of tax exempt status for municipal bonds is in the best interests of residents of the City of Yakima and will promote the general health, safety and welfare; now, therefore BE IT RESOLVED BY THE CITY COUNCIL OF THE CITY OF YAKIMA: Section 1. The City of Yakima City Council opposes any efforts by Congress and the White House to reduce or repeal the federal tax exemption on interest earned from municipal bonds; and Section 2. The City of Yakima City Council opposes 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 Section 3. The City Manager is hereby authorized to execute a letter substantially in the form of the letter attached hereto as Exhibit "A" and incorporated herein by this reference expressing the City Council's actions herein, and to deliver such letter and a copy of this resolution to the addressees therein and to any other interested person or agency. ADOPTED BY THE CITY COUNCIL this day of February, 2016. ATTEST: Avina Gutierrez, Mayor Sonya Claar Tee, City Clerk EXHIBIT "A" March 2, 2016 The Honorable Kevin Brady The Honorable Sander M. Levin Chairman Ranking Member Committee on Ways and Means Committee on Ways and Means United States House of Representatives United States House of Representatives 1102 Longworth House Office Building 1106 Longworth House Office Building Washington, DC 20515 Washington, DC 20515 The Honorable Orrin G. Hatch The Honorable Ron Wyden Chairman Ranking Member Committee on Finance Committee on Finance United States Senate United States Senate 219 Dirksen Senate Office Building 219 Dirksen Senate Office Building Washington, DC 20510 Washington, DC 20510 Dear Chairman Brady, Ranking Member Levin, Chairman Hatch, and Ranking Member Wyden: As leaders in state and municipal government, we are writing to stress the importance of maintaining the current tax exemption for municipal bonds. It has been estimated that at the combined state and local levels, we must spend $3.6 trillion by the year 2020 to meet our infrastructure needs, and the importance of building and maintaining our public infrastructure has never been more apparent.i Tax exemption of interest on municipal bonds was implemented more than 100 years ago at the dawn of the U.S. income tax system, and we strenuously oppose any reduction or elimination of this tax exemption. Any such change will inhibit our ability to make critical infrastructure investments. Proposals to change this commitment to tax -free municipal bonds would not only be costly for state and local taxpayers, but also result in fewer projects, fewer jobs and further deterioration of our infrastructure. Three quarters of all public infrastructure projects in the United States are built by the states and local governmental entities and tax - exempt bonds are the primary financing mechanism for these essential projects. Municipal bonds have a very strong repayment record — much higher than corporate bonds — allowing state and local governments to borrow responsibly for capital projects, and providing a safe and reliable investment option for our citizens. Tax - exempt municipal bonds finance highways, bridges, transit systems, airports, water and wastewater systems, schools, higher education facilities, and many other basic infrastructure projects. Tax - exempt bonds bring affordable capital to these projects, saving an average of 25 to 30 percent on interest costs compared to taxable bonds. In an age of constrained federal and state budgets, the ability to save billions of dollars on infrastructure financing is critical for state and 1 "Failure to Act, The Impact of Current Infrastructure Investment on America's Economic Future." Page 7, Report, American Society of Civil Engineers, January 15, 2013. http: / /www.asce.org /uploadedFiles/ Infrastructure /Failure_to_Act/Failure_to_Act Report.pdf local governments and their taxpayers. If issuing affordable debt is no longer an option and unfunded projects begin to further mount, state and local governments will have to seek additional infrastructure support at the federal level through federal highway legislation and other sources. Simply put, any change to the tax treatment of municipal bonds will have a serious impact on the cost to state and local governments of financing critical infrastructure projects. Yet proposals have been offered by both parties to limit the long -lived tax exemption for these bonds. The cost savings state and local governments realize through tax - exempt municipal bonds occur because investors are willing to accept a lower rate of interest in exchange for that interest being exempt from taxation. If the tax - exemption is capped or eliminated investors will demand a higher interest rate on municipal bonds thereby increasing the cost to municipal issuers. As a result, municipalities will have to either curtail infrastructure projects or raise taxes on sales, property or income. Additionally, if changes to the tax treatment of these bonds are enacted, a tax risk premium will be built into interest rates demanded by future investors. The potential impact of the change is more than theoretical: in December of 2012 the municipal bond market experienced a spike in rates as investors recognized a cap on exemption was under consideration.2 We urge you to take into account the consequences that any change in the taxation of municipal bonds will have on the taxpayers in every state and reject any proposed changes to the tax deductibility of municipal bond interest. Thank you for your consideration of our concerns. Sincerely, and on behalf of the City Council of the City of Yakima, Washington Jeff Cutter Interim City Manager cc. City Council 2 Tax - Status Threat Fuels Worst Losses Since Whitney: Muni Credit. December 21, 2012 http : / /www.bloomberg. com /news /articles /2012 -12 -21 / tax - status - threat- fuels- worst - losses - sincewhitney -muni- credit