[Congressional Record Volume 154, Number 149 (Thursday, September 18, 2008)]
[Senate]
[Pages S9030-S9031]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By Mr. BINGAMAN (for himself and Mr. Crapo):
  S. 3518. A bill to amend the Internal Revenue Code of 1986 to modify 
the limitations on the deduction of interest by financial institutions 
which hold tax-exempt bonds, and for other purposes; to the Committee 
on Finance.
  Mr. BINGAMAN. Mr. President, one of the credit crunch's most unfair--
but least-discussed--impacts is its severe curtailment of 
municipalities' ability to raise capital for critical infrastructure 
projects. Because municipalities did not engage in the financial 
``innovation'' that led to this situation, they are merely innocent 
bystanders swept up in a national crisis. Congress must take swift 
action to mitigate the credit crunch's impact on U.S. municipalities. 
To do so, I rise today to introduce the Municipal Bond Market Support 
Act of 2008. By relaxing outdated restrictions that prevent banks from 
acquiring municipal debt, the Act will significantly enhance demand for 
municipal bonds, thus aiding municipalities across the Nation--
particularly those in small and rural communities--in financing 
essential infrastructure projects. I thank my friend from Idaho, Mr. 
Crapo, a colleague on the Finance Committee, for joining me in 
introducing this bipartisan legislation.
  Federal policy has long recognized the critical role of municipal 
bonds in enabling communities to undertake critical investments. But 
the liquidity crisis has dried up available capital for bonds, both 
municipal and corporate, at a time when the municipal bond market is 
already reeling from other setbacks. The auction-rate security market's 
collapse, which forced municipal issuers to refinance or convert more 
than $80 billion of their total $166 billion in such securities, has 
already cost municipalities more than $1 billion, thus pushing new 
municipal bond issuance out of reach for many municipalities. 
Meanwhile, when the Nation's two largest bond insurers were downgraded 
earlier this year, the underlying municipal bonds saw a corresponding 
downgrade--a penalty for merely being ``wrapped'' in the downgraded 
firm's insurance.
  Taken together, these forces have driven yields on benchmark, 30-year 
tax-exempt debt to their highest levels since July 2004. These high 
rates have dramatically increased costs for municipalities facing 
interest payments on outstanding floating-rate municipal bonds, while 
making it more costly for municipalities to issue new debt. In the 
first half of 2008, long-term municipal issuance dropped 4.1 percent 
over the prior year, and a further drop is predicted in the second 
half; for new issuances, the interest costs have vastly increased. 
Given the credit crunch's severity, full recovery is probably a long 
way off. The timing could not be less opportune--the financial slowdown 
will cause municipal budget deficits to balloon, just when the need for 
infrastructure enhancements could not be more apparent.
  Our bill, which largely mirrors a companion already introduced in the 
House by Chairman Frank and Chairman Neal of the House Ways and Means 
Select Revenue Measures Subcommittee, would stimulate demand--and 
therefore lower borrowing costs for issuing municipalities--by relaxing 
restrictions on banks' ability to participate in the municipal bond 
market.
  To understand the proposed changes, it is useful to briefly review 
the tax code's current rules regarding banks' holding of municipal 
debt. Prior to 1986, banks were generally permitted to deduct the full 
interest costs they incurred unless a borrowing was incurred or 
continued to purchase or hold such bonds. Consequently, banks made up a 
significant share of the demand for municipal debt. But the 1986 tax 
reform eliminated this deduction for banks by requiring a pro-rata 
interest expense disallowance, with a limited ``qualified small 
issuer'' exception that permits banks to deduct 80 percent of the cost 
of purchasing and carrying bonds of governmental entities that issue 
$10 million or less in municipal bonds in any calendar year. This 
exception was added because small issuers' infrequent and small 
borrowing amounts make it too costly for them to sell debt in the 
national capital markets, leaving private placements with local banks 
the most feasible and cost-effective alternative.
  To increase demand for municipal debt, the bill makes two 
modifications to these limitations. First, it would raise the bank 
qualified limit for small issuers from $10 million to $30 million, and 
then index the new limit for inflation. Municipalities that issue 
between $10 million and $30 million will thus be able to raise capital 
through private placements. Because private placements generally carry 
no underwriting fees and require no offering document, the up-front 
issuing costs to municipalities are far lower than issuing debt on the 
public markets. More critically, interest payments are far lower: 
Interest on such ``bank qualified'' debt averages 40 basis points, 0.40 
percent, less than interest on nonbank qualified debt.

[[Page S9031]]

  Failing to raise the bank-qualified level from the amount set in 1986 
has real consequences for American communities. For instance, many 
small hospitals and healthcare facilities, even in small population 
States, 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. In my 
home state, the New Mexico Hospital Equipment Loan Council tells me 
that if the $10 million limit had instead been $30 million, then many 
hospitals in our state'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.
  As another example, the City of Las Cruces would benefit from this 
bill. The city has had five debt issues in the last 5 years that 
exceeded $10 million. The financial advisor under contract to the City 
estimates that the difference in rates, with a higher limit on bank 
qualified debt, would be about 20 basis points--a savings that would be 
passed on to the taxpayers and rate payers in our community.
  Second, as concerns municipalities that issue more than $30 million 
in debt annually, the bill would allow financial institutions to hold 
up to 2 percent of their total assets in such debt, without disallowing 
a proportional amount of their interest expense deduction. This change 
is intended to restore bank demand and provide some stability by 
bringing this group of institutional investors back into the municipal 
market. Nonfinancial companies already benefit from this safe harbor, 
so in this regard, the bill creates parity. Many larger municipal 
infrastructure projects have costs in excess of $30 million, and bank 
investment can only help these critical projects succeed.
  Finally, it bears mentioning that this bill offers at least two 
collateral benefits. First, enabling local governments to undertake 
additional infrastructure investments will help to stimulate our 
challenged economy. Second, by enabling banks to acquire municipal 
bonds--the safest class of security--the bill will enhance the 
stability of banks at a time that they face considerable financial 
pressure.
  I am pleased that this bill has been endorsed by a number of 
organizations, including the National League of Cities; U.S. Conference 
of Mayors; National Association of Counties; Government Finance 
Officers Association; International City/County Management Association; 
National Association of State Auditors, Comptrollers and Treasurers; 
National Association of State Treasurers; Council of Infrastructure 
Financing Authorities; Education Finance Council; and National 
Association of Health and Educational Facilities Finance Authorities.
  I hope my colleagues will join with Senator Crapo and me in working 
to enhance liquidity in the municipal bond market. Our bill will go a 
long way toward ensuring that our cities, towns, counties, utility 
districts, and school districts can secure affordable financing to 
undertake the infrastructure projects that our communities sorely need.
  Mr. President, I ask unanimous consent that the text of the bill be 
printed in the Record.
  There being no objection, the text of the bill was ordered to be 
printed in the Record, as follows:

                                S. 3518

       Be it enacted by the Senate and House of Representatives of 
     the United States of America in Congress assembled,

     SECTION 1. SHORT TITLE.

       This Act may be cited as the ``Municipal Bond Market 
     Support Act of 2008''.

     SEC. 2. MODIFICATION OF SMALL ISSUER EXCEPTION TO TAX-EXEMPT 
                   INTEREST EXPENSE ALLOCATION RULES FOR FINANCIAL 
                   INSTITUTIONS.

       (a) Increase in Limitation.--Subparagraphs (C)(i), (D)(i), 
     and (D)(iii)(II) of section 265(b)(3) of the Internal Revenue 
     Code of 1986 are each amended by striking ``$10,000,000'' and 
     inserting ``$30,000,000''.
       (b) Repeal of Aggregation Rules Applicable to Small Issuer 
     Determination.--Paragraph (3) of section 265(b) of such Code 
     is amended by striking subparagraphs (E) and (F).
       (c) Election to Apply Limitation at Borrower Level.--
     Paragraph (3) of section 265(b) of such Code, as amended by 
     subsection (b), is amended by adding at the end the following 
     new subparagraph:
       ``(E) Election to apply limitation on amount of obligations 
     at borrower level.--
       ``(i) In general.--An issuer, the proceeds of the 
     obligations of which are to be used to make or finance 
     eligible loans, may elect to apply subparagraphs (C) and (D) 
     by treating each borrower as the issuer of a separate issue.
       ``(ii) Eligible loan.--For purposes of this subparagraph--

       ``(I) In general.--The term `eligible loan' means one or 
     more loans to a qualified borrower the proceeds of which are 
     used by the borrower and the outstanding balance of which in 
     the aggregate does not exceed $30,000,000.
       ``(II) Qualified borrower.--The term `qualified borrower' 
     means a borrower which is an organization described in 
     section 501(c)(3) and exempt from taxation under section 
     501(a) or a State or political subdivision thereof.

       ``(iii) Manner of election.--The election described in 
     clause (i) may be made by an issuer for any calendar year at 
     any time prior to its first issuance during such year of 
     obligations the proceeds of which will be used to make or 
     finance one or more eligible loans.''.
       (d) Inflation Adjustment.--Paragraph (3) of section 265(b) 
     of such Code, as amended by subsections (b) and (c), is 
     amended by adding at the end the following new subparagraph:
       ``(F) Inflation adjustment.--In the case of any calendar 
     year after 2009, the $30,000,000 amounts contained in 
     subparagraphs (C)(i), (D)(i), (D)(iii)(II), and (E)(ii)(I) 
     shall each be increased by an amount equal to--
       ``(i) such dollar amount, multiplied by
       ``(ii) the cost-of-living adjustment determined under 
     section 1(f)(3) for such calendar year, determined by 
     substituting `calendar year 2008' `for calendar year 1992' in 
     subparagraph (B) thereof.
     Any increase determined under the preceding sentence shall be 
     rounded to the nearest multiple of $100,000.''.
       (e) Effective Date.--The amendments made by this section 
     shall apply to obligations issued after December 31, 2008.

     SEC. 3. DE MINIMIS SAFE HARBOR EXCEPTION FOR TAX-EXEMPT 
                   INTEREST EXPENSE OF FINANCIAL INSTITUTIONS AND 
                   BROKERS.

       (a) Financial Institutions.--Subsection (b) of section 265 
     of the Internal Revenue Code of 1986 is amended by adding at 
     the end the following new paragraph:
       ``(7) De minimis exception.--Paragraph (1) shall not apply 
     to any financial institution if the portion of the taxpayer's 
     holdings of tax-exempt securities is less than 2 percent of 
     the taxpayer's assets.''.
       (b) Brokers.--Subsection (a) of section 265 of the Internal 
     Revenue Code of 1986 is amended by adding at the end the 
     following new paragraph:
       ``(7) De minimis exception.--Paragraph (2) shall not apply 
     to any broker (as defined in section 6045(c)(1)) if the 
     portion of the taxpayer's holdings of tax-exempt securities 
     is less than 2 percent of the taxpayer's assets.''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after the date of the 
     enactment of this Act.
                                 ______