Photo by MG Bralley
U.S. Senator Jeff Bingaman introduced legislation today aimed at helping localities build essential infrastructure at a lower cost to New Mexicans.State, county, and local governments have long relied on bonds to pay up-front for essential infrastructure enhancements – schools, hospitals, public utilities, roads, and public housing – that they pay back through future revenues. But the credit crunch has severely curtailed demand for municipal bonds, forcing municipalities to raise the interest rates they pay in order to attract investors. Some municipalities, unable to pay today's high rates, have put off projects altogether. Considering the shocking financial sector developments in recent weeks, the situation is likely only to get more difficult for municipalities.
Bingaman's Municipal Bond Market Support Act of 2008 will enhance demand for municipal bonds by allowing banks a greater role in purchasing them, which in turn will down the interest rates that municipalities must pay.
"Municipalities have been innocent bystanders to Wall Street's troubled financial state, which is making it difficult for them to affordably borrow for such important projects as building roads, schools, and hospitals. By allowing banks to play a greater role in the bond market, more capital will be available to municipalities, particularly small and rural ones, at lower interest rates," Bingaman said. "This bill is aimed at helping ensure that New Mexico localities can continue to make necessary investments."
Tax laws regulating municipal bonds were last amended in 1986, and provide that banks can purchase municipal bonds only from municipalities that issue $10 million or less in debt each year. But that figure has not increased in over two decades, and today, many small municipalities need to issue more than $10 million in debt each year in order to meet their capital needs. Bingaman's bill will raise that limit to $30 million, enabling banks to purchase bonds from a greater number of municipalities. Additionally, the legislation will create a "safe harbor" that enables banks to invest up to two percent of their assets in municipal debt. Taken together, the moves will make it possible for states and municipalities to borrow at a lower-interest rate at a time when capital is tight.
Failing to raise the bank-qualified level from the amount set in 1986 has had real consequences for New Mexico communities. For instance, many small hospitals and healthcare facilities cannot take advantage of today's small-issuer exception because they borrow through statewide authorities that issue bonds on behalf of multiple institutions, thereby exceeding the $10 million limit. If the $10 million limit had instead been $30 million, then many health care facilities in New Mexico's rural communities would have been able to secure funding to acquire additional hospital equipment, among them, Sierra Vista Hospital in Truth or Consequences; the Prairie Meadows assisted living facility in Clovis; and the Las Cruces Mental Health Center in Las Cruces. For each of these entities, the prospective borrower was instead forced to seek alternative, higher-cost capital options – or could not secure funding to complete the transaction.
Deborah Gorenz, program administrator for the New Mexico Hospital Equipment Loan Council, applauded Senator Bingaman's legislation. "This legislation will assist rural hospitals and healthcare facilities in obtaining cost-effective financing for smaller projects," Gorenz said, adding that capital budgets for smaller healthcare entities are not usually large enough to make issuing revenue bonds feasible. "Senator Bingaman's legislation will provide an opportunity for prospective healthcare borrowers to work with their local banks to obtain more affordable financing through private placement transactions. This type of legislation is especially important to a state such as New Mexico where so many of our hospitals and healthcare facilities are small and rural."
Among other New Mexico cities that would benefit from the increased limit is Las Cruces, which has had five debt issues in the last five years that exceeded $10 million. The city estimates that the difference in rates (with a higher limit on bank qualified debt) would be about 20 basis points (0.20%) -- a savings that would be passed on to the taxpayers in the community.
Community bankers in New Mexico expressed enthusiasm about the prospect of being able to make greater investments in New Mexico's cities and towns. "New Mexico's community banks are committed to our local communities to achieve affordable financing for critical infrastructure projects," said Jerry Walker, Executive Director of the Independent Community Bankers Association of New Mexico, based in Aztec. "We applaud Senator Bingaman for working to enhance community banks' ability to reinvest in our communities by purchasing their municipal bonds."
The bill, which largely mirrors a bill already introduced in the House, has been endorsed by at least ten national organization, including the National Association of Counties; National League of Cities; U.S. Conference of Mayors; and Education Finance Council.
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