GFOA to issuers: let the public know arbitrage rebate is an unfair tax.

The Government Finance Officers Association is urging state and local issuers to publicly complain that they are being unfairly taxed when making their first arbitrage rebate payments to the federal government on tax-exempt bond issues.

The association has sent members that issue municipal bonds what one official called a "kick and fuss" memo that includes a sample press release complaining about the rebate requirements and tips on how to use such a release.

The sample release, which comes as most issuers are beginning to make their first arbitrage payments to the Treasury, alerts the press that the issuer has been forced to send the U.S. Treasury a check because of "obscure and highly discriminatory" provisions in the Tax Reform Act of 1986.

The release describes the provisions and calls arbitrage rebate "a confiscatory tax on state and local governments that should be repealed."

"These are legitimate investment earnings on public funds and the money ought to stay here at home for local benefit rather than be turned over to the federal government in Washington," the release says. It recommends that issuers describe how the funds could otherwise have been used for community projects.

The release suggests that the issuer point out the doubled effect of the requirements: that they are costly and nightmarishly difficult to administer and that they force state and local governments to give up revenues to the federal Treasury Department. The association estimates in the release that nationwide compliance with the requirements could cost state and local governments more than $1.1 billion in the first five years during which they apply.

Under the debate requirements, which became effective on Aug. 31, 1986, for most new governmental bond issues, arbitrage rebate computations must be computed at least every five years for fixed-rate issues. At least 90% of the rebatable arbitrage must be paid to the federal government within 60 days of those fifth-year anniversary computational dates.

Most issuers that sold governmental bonds in late 1986 after the requirements took effect will have made their first rebate payments to Treasury by the end of this year.

Whether or not the Government Finance Officers Association's release will generate a groundswell of complaints and media attention on arbitrage rebate requirements remains to be seen. But even before the association sent out its sample release, the rebate requirements were getting attention from the press in some parts of the country.

In a story titled "Robbing Peter and Paying Paul," Michael Gunstanson, of the Forth Worth Star-Telegram, detailed how municipalities in Texas are having to fork over millions of dollars to the federal government to meet the rebate requirements instead of using those dollars to repair pot-holed street or fund other local programs.

Mr. Gunstanson, relying on local arbitrage rebate consultants, reported that governmental entities in Texas might be forced to rebate nearly $500 million from some 2,000 governmental bond issues sold since 1986.

"Uncle Sam has a plan to put a dent in the federal deficit," he told readers, "but it's coming from the pockets of municipalities across the nation -- and their taxpayers."

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