At $3.7 trillion, the U.S. municipal bond market is so massive it is incomprehensible to many citizens. And as the source of financing for two thirds of schools, roads, hospitals, and other infrastructure, it is critical to the quality of life of states, cities and towns of all sizes.
A financial market cannot function well without one key ingredient – transparency -- said Lynnette Kelly, executive director of the Municipal Securities Rulemaking Board, at a recent presentation at the Lincoln Institute.
“Transparency promotes future access, lower borrowing costs and improves credibility with stakeholders,” said Kelly, noting that a transparent municipal debt market benefits state and local governments as much as it does investors.
Historically, information about municipal bonds has not always flowed freely, a problem that came to a head in the 1970s when New York City sold billions of dollars of bonds based on overinflated revenue projections, and reached the brink of bankruptcy after the local bond market collapsed. The Municipal Securities Rulemaking Board was created by Congress in 1975 in response to that upheaval.
The MSRB regulates bond dealers, underwriters, and advisors that participate in the municipal debt market, and the agency also maintains a public database of disclosures, prices and other information about municipal bonds. Over the past four decades the MSRB has helped increase transparency and narrow the information gap between large institutional investors, financial firms, individuals, and bond issuers.
But challenges remain. Six years ago, with the passage of the Dodd-Frank financial reform legislation, the MSRB received new authority to regulate municipal advisors, who act as counsel to cities and towns accessing the bond markets. The MSRB established a professional qualifications exam and basic rules these advisors, who had previously gone unregulated.
Last month, the MSRB announced new regulations to address so-called “pay-to-play” arrangements, whereby advisors make political contributions to local government officials or bond measure campaigns to help secure them as clients. The new rules prevent advisors from doing business with a municipality for two years after making certain contributions.
“This is such an integral rule to prevent conflicts of interest and insure that professionals are hired based on merit," Kelly said.
The presentation, including a conversation with Lincoln Institute Fellow Lourdes Germán, can be viewed in its entirety here. The event was the latest installment in a series devoted to municipal fiscal health.