Obama jobs act seen as potentially hiking borrowing costs

Borrowing costs for tax-exempt hospitals could climb under President Barack Obama's plan to increase employment.

The American Jobs Act of 2011 (PDF), proposed by the White House, would likely prompt some investors to demand higher interest rates from borrowers in the municipal bond market, said finance association and consulting officials.

Municipal bonds are a significant source of capital for not-for-profit hospitals and health systems.

Higher interest costs could reduce spending on capital projects, said Matt Fabian, managing director of Municipal Market Advisors, a Concord, Mass.-based consulting firm for municipal issuers, dealers and investors. Municipal borrowers would pay more to investors and have less to spend on infrastructure, he said.

The Jobs Act would require an income tax rate no lower than 28% after tax breaks—including municipal-bond tax exemptions—for households that earn $250,000 or more annually, Fabian said. That 28% limit would prompt households to demand higher interest from borrowers, he said. Fabian estimated increased borrowing costs could total $10 billion for a year when $300 billion enters the municipal market.

“This proposal would significantly reduce demand for tax-exempt bonds for a large portion of the tax-exempt investor base,” Michael Decker, managing director and co-head of the municipal bond division for the Securities Industry and Financial Markets Association, a financial industry trade group, said in an e-mailed statement.

Chuck Samuels, an attorney for the National Association of Health and Education Facilities Finance Authorities, which bring bonds to market for municipal borrowers, said more proposals could follow as Congress struggles to address the deficit and spur the economy. “It is the only thing we're going to see on bonds or is it the first thing we're going to see on bonds?” he asked.