Taxpayers getting hosed in muni market: Study

Municipal bond issuers are paying $30 billion a year in unnecessary costs, according to a policy paper released today by the Hamilton Project, the economic think tank of the Brookings Institution. Authors Andrew Ang, a professor at Columbia Business School, and Richard Green, a professor at the Tepper School of Business at Carnegie Mellon University, say the illiquidity of the municipal market, together with unnecessary fees and transaction costs, causes taxpayers to pay more than they should. The paper proposes the creation of a clearinghouse, to be called CommonMuni, to advise smaller issuers and pool services in an effort to cut costs. The idea was inspired by the Commonfund, a nonprofit that manages $25 billion in assets and allows small endowments to pool resources, the authors said, CommonMuni could be formed with about $25 million in private grant money, the authors said. With some 1.5 million different municipal bonds issued by 50,000 different borrowers, the market is hindered by a lack of standards, the paper said. Pooling issues to create larger offerings and creating standardized "plain vanilla" bonds would lower interest rates, the professors said. The paper also criticized the use of derivatives and said that advanced refunding should be discouraged. The authors also urged the use of competitive auctions to sell bonds. Some of the activities proposed by the paper already exist in the marketplace. The pooling of small bond issues is already done by state bond banks, said Colette Irwin-Knott, a partner at H.J. Umbaugh and Associates Certified Public Accountants LLP and president of the National Association of Independent Public Finance Advisors. The NAIPFA advises municipal issuers on their debt financings. The package then has the "moral obligation of the state," she said. "One of the challenges in bundling [bond issues] is that in many cases … the creditworthiness is only as strong as the weakest link," Ms. Irwin-Knott said. In addition, the Municipal Securities Rulemaking Board's Electronic Municipal Market Access system acts as the central repository for municipal issuers' financial data, but the system has been plagued by late or missing filings from issuers.