DALLAS -- Texas Treasurer Kay Bailey Hutchison last week asked Congress to amend the tax code to let small issuers keep their bank-qualified privilege when they use bond pool programs.
Supporters say such an amendment could generate revenue for the federal Treasury by lowering borrowing costs and reducing debt issuance by small issuers.
The tax code allows banks to deduct 80% of the cost of purchasing and carrying bonds sold by any entity that expects to borrow less than $10 million per year. Issuers lose the bank-qualified benefit when they participate in pooled issuance, unless the pool authority expects to issue less than $10 million a year.
In Texas, Ms. Hutchison's plan could boost the demand for a new, but never used, $750 million tax-exempt bond bank program designed to help the state's 1,054 school districts' finance facilities.
"Texas is developing a school facilities program which would consolidate the issuance of school district debt through a state bond pool," Ms. Hutchison last week told a panel of the Senate Finance Committee's subcommittee on taxation, at a hearing on bills drafted by various senators to ease tax law bond curbs. "Clearly, the state would be able to offer greater interest savings if small issuers could transfer their bank deductibility to the bond pool."
Ms. Hutchison's proposal is not included in any of the senators' bills.
Prospects for her idea are still murky because it is not clear whether Congress will draft a tax bill this year that could include such changes to the tax code. Even if there is a tax bill, lawmakers are operating under tight budget constraints and would be required to offer revenue-raising items to offset the costs of such a measure to the federal government, unless the Joint Tax Committee were to agree that the proposal would increase federal revenue.
Samuel Shapiro, treasurer of Maine, told the subcommittee changing the rule for bond banks also would benefit other states that operate such banks, including Maine, Indiana, New Hampshire, Vermont, and Michigan.
"Denying bank eligibility to local governments who use the pool increases costs for many who have no choice but to use the pool and fractures pool participation for all," Mr. Shapiro said.
The proposed change in the tax code "would benefit the small issuer and the federal government because there would be fewer bonds issued," said Texas Assistant Deputy Treasurer John Bell.
While Congress has been skeptical of tax code revision that cost the federal Treasury, Mr. Bell said the proposal could generate new revenues as fewer bonds are issued, because the efficiencies of a pool would decrease the demand for new debt.
Prospects for Ms. Hutchison's idea are still murky because it is still not clear whether Congress will draft a tax bill this year that could include such changes to the tax code. Even if there is a tax bill, lawmakers are operating under tight budget constraints and would be required to offer revenue-raising items to offset the costs of such a measure to the federal government unless the Joint Tax Committee were to agree that the proposal would increase federal revenue.
Backers of the plan also say that, at the very least, it is revenue neutral because the bank-qualified privilege already exists.
"For the U.S. Treasury, fewer tax-exempt bonds means a decrease in the supply of tax-exempt investments and a lower interest rate on such investments," Texas officials noted in a report submitted to the committee.
Ms. Hutchison said in her testimony that officials in Alaska, Michigan, Maine, Vermont, New Hampshire, Indiana, and Colorado are interested in the proposal.
Texax began supporting the idea in late April when the state's Bond Review Board outlined the proposal in a letter to the state's congressional delegation.
The plan could bolster interest among Texas schools in using the controversial bond bank program. But that could hurt the state's financial advisory business.
Texas-based brokerages have opposed the program because a bond bank could eliminate the need for their services. However, they have said their clients -- small issuers, in particular -- still might get better interest rates on their own.
The proposal pitched by Ms. Hutchison could change that by allowing the five to 35 basis points savings that small issuers get from the bank-qualified privilege to be passed through to a pool program.
"If that happens, it would be tough to compete," said an investment banker. "The bank-qualified benefit is a big reason for small issuers to not use the bond bank."
In fact, last year in Texas, bank-qualified issues accounted for 80 school issuers totaling $238.7 million is about one-third of the $779 million in school bonds issued in 1990, according to Securities Data Co./Bond Buyer.
Texas has also asked the Internal Revenue Service to allow the state to use the Permanent School Fund to give all bonds issued by the bond bank a triple-A rating.
The Texas Education Agency this spring asked the IRS to approve a broader use of its guarantee fund -- a pool of assets pledged to back debt -- which was exempted from arbitrage curbs last year by the IRS, a victory that took five years to win.
Now, obligations issued by the school bond bank are likely to carry the state's double-A rating. Meanwhile, nearly all Texas schools are eligible for a triple-A rating by having their debt guaranteed by the Permanent School Fund.
However, the school bond bank program has stalled until the court fight over the new Texas school finance law is resolved. A hearing on the matter has been set for today in Austin.
In fact, Mr. Bell said, the debate over a fair funding formula may lead to a role for the bond bank, though he does not expect the program to begin until 1992.