Uncertainty clouds municipal bond market

For tax-exempt hospitals, one primary source of capital is an increasing source of uncertainty.

Municipal bond markets—where hospitals have issued $27.8 billion in bonds, on average, each year for the past two decades—have emerged as one possible target for policymakers in deficit-reduction talks.

Meanwhile, last year's law to increase regulation of financial markets includes new oversight that may extend all the way to hospital governing boards.

Hospitals should know more soon about the direction of proposed policy changes, but they should be ready for more upheaval in coming months, based on comments at last week's municipal finance conference in New York.

The Securities and Exchange Commission has started to draft recommendations to improve transparency by municipal borrowers, SEC Commissioner Elisse Walter told the audience of the Securities Industry and Financial Markets Association municipal bond summit.

She also stressed she did not believe the upcoming report, based on a review of the markets that began last fall, was a sufficient examination of the municipal market.

David Madigan, chief investment officer for Breckinridge Capital Advisors, told the New York audience, he doubts a proposal from President Barack Obama to limit the tax benefit of municipal bonds for high-income households would prevail.

The proposal drew criticism from municipal borrowers who contend fewer investors would find bonds an attractive option, which could raise interest rates.

Madigan, who called Obama's proposal dead on arrival, said the municipal bond market could nonetheless see tax policy changes in the coming year. “The ideas are out there,” he said.

John McNally, president of the National Association of Bond Lawyers, said municipal borrowers could see direct regulation for the first time under another proposal by Rep. Mike Quigley, a Democrat from Illinois.

The draft legislation would be the most significant expansion of SEC oversight of municipal markets since 1975, when the agency gained authority to regulate dealers and brokers, McNally said. The following years, legislation to include municipal borrowers under SEC oversight failed.

McNally said regulators would gain authority to determine the timing and content of financial and operational disclosures to municipal bond investors.

Disclosure by borrowers is limited and cannot be expanded under current law, SEC Commissioners have argued.

Quigley's office directed questions on the proposal to Rep. Patrick McHenry. A spokesman for the North Carolina Republican said legislation is in early stages and it's too soon to say when a bill may be introduced.

There is one controversial policy proposal that regulators say could be settled by year end. By December, hospital directors and trustees may find out if some board members will face new regulation as municipal advisers, as currently proposed.

You can follow Melanie Evans on Twitter: @MHmevans.