Wednesday, April 23, 2014

Treasury Department Creates New Office of State and Local Finance; Public Pension Fund Liabilities will be Included in Focus

The Treasury Department has confirmed that it is creating a new “Office of State and Local Finance” that will broadly monitor the municipal bond market, according to press reports.  A Treasury spokesperson is quoted as saying that “"The office will serve as Treasury's liaison to state and municipal officials and associations, monitor developments in municipal bond markets, support policies to improve the management of public pensions and other liabilities, and develop potential federal policy responses to issues that emerge in municipal financing markets." 

According to The Bond Buyer, the new unit was created as a response to repeated requests from “troubled local governments,” including Detroit, seeking White House assistance, but there was no centralized group capable of coordinating a Federal response.  Puerto Rico’s financial challenges are also cited as another reason for the new unit’s creation.  It is reported that the new office will not have authority to write and enforce rules and regulations for the market like the Securities and Exchange Commission (SEC).  Treasury's existing tax-exempt bond group will also remain separate from the new office. 

"This office will centralize a lot of the work that is already happening across the building," said Matthew Rutherford, the Treasury's assistant secretary for financial markets, to whom the new unit will report.  "It can look at various issues that arise in the municipal marketplace and make sure we understand what's driving them," Rutherford has been quoted as saying.

Kent Hiteshew, who currently oversees public finance for the Northeast region and the housing finance group at JPMorgan, where he has been since 2008, will head up the new operation.  Before that, Mr. Hiteshaw worked at Bear, Stearns & Co. for 18 years, and earlier at Morgan Stanley Inc. and the former Drexel Burnham Lambert.  He is also reported as having previously worked for New York City in various positions, as well as at the U.S. Department of Housing and Urban Development from 1978 to 1980. Hiteshaw will reportedly take over his new role in mid-May.

Response to the Treasury’s actions has been generally positive so far.  For example, Lynnette Kelly, executive director of the Municipal Securities Rulemaking Board (MSRB), which conducts muni research and serves as the repository for issuer disclosures about their bonds and finances through its EMMA website, said she welcomed the creation of the new unit within the U.S. Treasury Department.  Alan Anders, deputy director for finance of New York City's Office of Management and Budget, also told The Bond Buyer that the new office will be very good for issuers.  "The fact that there's a point person at Treasury that we can all contact is very valuable," he is reported as saying.

Hiteshaw’s selection to lead the new unit has also received praise.  He is described by some as a good choice due to his long experience as a public finance banker, as well as someone who has an appreciation for the viewpoints of local governments and financing authorities with which he has worked closely in his career.    The Bond Dealers of America has also expressed support for him, calling his market perspective a complement to existing Treasury staff knowledge about muni tax issues.

However, others have expressed concern.  For example, Frank Shafroth, director of the State and Local Leadership Center at George Mason University in Virginia, is reported as saying the selection of a banker from a major Wall Street firm sends the wrong message, making it appear that the office will look out for Wall Street's interests and not necessarily those of state and local governments.  While a Federal outreach team could provide good resources for local governments, Shafroth told The Bond Buyer, having a Treasury official viewing state and local governments as problematic could eventually lead to what he referred to as damaging overregulation by other regulators.  (Shafroth has been Director of Legislative Affairs and Intergovernmental Relations for the MSRB and was also Director of State and Federal Relations at the National Association of Governors and the National League of Cities.)

On that note, it is well to remember that the SEC, which is the municipal-bond market's primary regulator, also has increased its scrutiny of this sector.  This has resulted in two major consent decrees entered into between the SEC and the States of New Jersey and Illinois involving disclosures in the States’ bond offerings related to their pension plans.  Two, so far.  The SEC is continuing its investigations to determine if investors have been misled about the financial condition of municipal bond issuers in other jurisdictions.

“I must admit that I am somewhat concerned with this development,” said Meredith Williams, NCTR’s Executive Director.  “While I think that the Treasury Department’s interest in providing a better means of coordinating Federal actions in this area, where such Federal involvement may be appropriate and necessary, is probably a good one,” Williams explained, “I share Mr. Shafroth’s concerns with the potential for Federal overregulation.”  Williams said that he has directed NCTR’s Director of Federal Relations, to meet with other interested State and local government organizations in Washington, DC, concerning this new unit, and to seek a group meeting with Treasury Department officials, and Mr. Hiteshaw, as soon as is possible to learn more about the planned activities of this new office.

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