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ROUNDTABLE ON MUNICIPAL FINANCE & THE MUNICIPAL BOND MARKET


T h U R S D AY , N O V E M B E R 7 , 2 0 1 3 | U I C F O R U M

CONGRESSMAN RANDY HULTGREN (IL-14)

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TABLE OF CONTENTS
E x e c u t i v e S um m a r y ................................................................................................................... 1
Importance of the Tax-Exemption ............................................................................................................... 1 Retail Investor Costs and Best Execution ..................................................................................................... 2 Issuer Disclosure ........................................................................................................................................... 2 Municipal Bankruptcies ................................................................................................................................ 4 Regulatory Burdens and Tax Reform ........................................................................................................... 4

T r a n s c r i p t ............................................................................................................................................5 M a t e r i a l s Di s t r i b u t e d a t R o u n d t a b l e ...................................................................... 54
Participant Biographies ............................................................................................................................... 54 Discussion Guidance................................................................................................................................... 57

M a t e r i a l s S u bm it t e d b y Pa r t i c i p a n t s ...................................................................... 58
NAHEFFA, Report on Municipal Bond Market ......................................................................................... 58 Merritt Research, Report on Audit Times ................................................................................................... 71 Bernardi Securities Repealing Tax-Exemption........................................................................................... 79

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CONGRESSMAN RANDY HULTGREN (IL-14)

EXECUTIVE SUMMARY
The issuance of municipal bonds has allowed our nations state and local governments to finance more than $1.65 trillion in infrastructure improvements and construction over the last decade. These taxexempt products are a common investment for many institutions and individuals, and the vitality of this market is necessary for our local economies and national economic recovery. In an effort to learn more about municipal securities and encourage discussion between different segments of the municipal marketplace, I hosted a stakeholder discussion on November 7, 2013 at the University of Illinois at Chicago. By convening an expert roundtable of issuers, investors, credit analysts, and other market participants, I gained a greater understanding of some of the most pressing issues facing this market today: issuer disclosure, new regulatory burdens and tax reform, municipal bankruptcies, price formation and best execution, and the preservation of the tax-exemption. Our conversation centered on three broad questions, but moved freely between points within their constraints: Who are the municipal bond issuers and how are their products brought to market? What are the advantages and challenges to retail investors in the municipal market? How have recent events affected the municipal market and what changes can we see coming? I present this summary, transcript, and appendices with confidence that you will find these resources informative and a valuable reference on issues related to municipal finance. In the interest of job creation, our countrys massive infrastructure needs, and our constituent municipalities, I urge the Committee to consider and address some of the important ideas presented here. Thank you,

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Im p o r t a n c e o f t h e Ta x - E x em p t i o n:
The importance of the municipal tax-exemption cannot be overstated. Particularly for small municipal issuers, the relative attractiveness of their bonds to the capital markets begins with their tax treatment and this cheaper financing keeps costs lower, allowing local governments to maximize their spending power. Any elimination of the tax-exemption would directly affect borrowing costs, resulting in decreased governmental services or increased taxes. The Government Finance Officers Association (GFOA) estimates that an additional $500 billion in state and local government spending would have been obligated to debt-servicing over the last decade without the tax-exemption. For Montgomery County, Maryland, a single jurisdiction, eliminating the exemption could redirect $40 million per year in spending. Instead, because the exemption has been preserved, this money can put teachers in classrooms and police officers on patrol. More than 50% of tax-exempt interest goes to people making under $250,000 and the hospitals, schools, and libraries built by municipal bonds are used by all tax brackets.

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Alternatively, limiting the tax deduction as has been proposed by President Obama could be almost as devastating to local governments. Once the tax status of municipal bonds is dynamic, investor confidence will crumble and these products, despite some tax preference, will trade like taxable bonds. The fragmentation and opacity of municipal debt is overlooked because these products are fully tax advantaged. A partial tax advantage a dynamic rate that can change with political winds will not be enough to overcome investor hesitance. We have seen a cautionary tale through the Build America Bonds program. At the outset, these taxable bonds were fully subsidized through tax credits and other preferences. However, because of sequestration, associated federal rebates paid to issuers were cut and, consequently, these bonds have lost their appeal to issuers and investors. Market confidence in any half-measures related to bond tax treatment has been shaken and only the full exemption, in place for a hundred years, is broadly supported by market participants. Finally, the municipal tax-exemption helps preserve local control over infrastructure projects and community growth. Many roundtable participants both issuers and investors highlighted the accountability inherent in local financing. A community benefits from the bond, as well as pays it off. This element of fiscal federalism is all too important today, as the federal government looks to get its own budget in order, and local governments need to weather the tepid economic recovery. Panel Recommendation: Preserve the full tax-exemption for municipal bonds. Protect other bond tax advantages from across-the-board cuts, which undermine investor confidence and limit future tax structure options.

Retail Investor Costs and Best Execution:


The Security and Exchange Commission (SEC) estimates that retail investors see slightly higher costs and wider spreads than institutional investors, estimated at 1-2%. The municipal bond market has some inherent inefficiencies particularly the sheer number of issuers and, as a result, segments of the market lack liquidity and require specialized analysis. Recently, great strides have been made by centralizing credit information through the Municipal Securities Rulemaking Boards (MSRB) Electronic Municipal Market Access system (EMMA) and by improving post-trade price transparency through the Trade Reporting and Compliance Engine (TRACE). These information repositories have brought liquidity to the municipal market and reduced retail investor spreads. Primary offerings have also expanded retail opportunities, giving them first crack at some new bond issuances. However, institutional investors still have advantages and these cannot be negated through regulation. Advantages of scale and regular market participation will always tip institutional investors because their expertise and will not be replicated in retail investor activity. A major concern expressed at the roundtable centered on MRSBs efforts toward proposing a best execution rule for the municipal bond market. While well-intentioned, this duplicative standard could drive away investors and hurt liquidity. Institutional investors in the municipal market, generally brokerdealers, are already governed by Financial Industry Regulatory Authoritys (FINRA) execution standards.

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The suggestion of the roundtable was to harmonize any MSRB rule with existing standards and make best execution principles-based, as opposed to rules-based, as much as possible. Panel Recommendation: Harmonize any rule regarding best execution with existing standards. Efforts to shrink retail investor spreads should not overly burden other market participants through excessive reporting requirements and prescriptive trade execution. Primary offerings to retail customers should be encouraged.

I s s u e r Di s c l o s u r e :
There are strong, differing opinions regarding issuers disclosure requirements between the investor community and the issuer community. This point was repeatedly discussed at the roundtable but without much conclusion. All parties were sympathetic to the cost burdens disclosure can put on small municipal issuers and that the component nature of government did not facilitate quick reporting. Another common point, highlighted by the example of health-care, not-for-profit tax-exempt bonds, was the emphasis on disclosure and the positive impact that has had on interest costs and liquidity in that subcategory of the municipal market over the last ten years. At least in this area, greater disclosure costs have been met with reduced borrowing costs. Another proposed idea was to encourage municipalities to submit unaudited returns in addition their annually audit returns. Any mistake or malfeasance would be caught at the audited intervals but more information could be shared by issuers in between, without much additional cost. Finally, distressed municipal disclosure was a repeated theme and an area where more common ground could be found. The disclosure obligations of municipalities in default or those with low credit ratings could be raised to provide investors with more information and, perhaps, generate more demand for struggling issuers. Panel Recommendation: Protect small issuers from heavy compliance costs by preserving the Tower Amendment. Raise disclosure requirements for municipalities that are severely over leveraged or in default.

Municipal Bankruptcies:
While there have been many market events and municipal bankruptcies over the last few years Stockton and Puerto Rico, for example concern continually returned to Detroit and pending bankruptcy proceedings there. All stakeholders were concerned with the emergency managers plan to treat varying municipal bonds types similarly and Michigans casual approach to general obligation bonds being treated as unsecured debt. The observation from market participants is that federal bankruptcy code may trump the States constitution, that political timidity may allow a terrible precedent, and, ultimately, that this will mean higher borrowing costs for all of Michigans municipalities.

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Panel Recommendation: Monitor municipal bankruptcies; preserve the secured status of general obligation bonds. Be aware of the impact municipal bankruptcies and credit downgrades can have on neighboring and related municipalities.

R e g u l a t o r y B u r d e n s a n d Ta x R e f o rm :
The SECs Municipal Advisor Rule was a major point of agreement. Issuers and investors raised concerns that the rule may [impair issuers] ability to operate and potentially raise costs. Participating underwriters and brokers highlighted potential compliance costs and difficulties, but it was interesting to hear their clients, the issuers, raise concerns as the rule would affect all market participants. Bank Qualified bonds and industrial revenue bonds are two sub-categories of the municipal market that have specific tax treatment. Roundtable participants suggested updating the corresponding sections of the tax code, bringing their treatment out of the 1980s, and some endorsed legislative action. The Volcker Rules carve out for municipal underwriting was another potential regulatory impediment to the market. Illinois Finance Authority was one of the represented institutions at the roundtable and would not qualify for the Volcker exemption as initially proposed. Panel Recommendation: Delay the municipal advisor rule; consider extensive revisions to allow small issuers to access industry expertise. Revise sections of the Volcker rule to exempt debt issued by municipally affiliated agencies or authorities. Update the small issuer exemption for bank qualified bonds. Consider exempting municipal debt from bank leverage or supplemental capital standards.

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CONGRESSMAN RANDY HULTGREN (IL-14)

TRANSCRIPT
Roundtable on Municipal Bond Finance & the Finance Market N o v em b e r 7 , 2 0 1 3 | UI C F o r um
CONGRESSMAN HULTGREN: Were going to go ahead and get started. First of all, I just want to say thank you so much. Thank you for taking time. I know you all are incredibly busy. A lot of different things going on. But really believe this is very important on a lot of different levels, and so I just want to say how much I appreciate your time, your willingness to be a part of this, and hope for all of us that this is a productive time together, and also a start of further opportunity for us to be working together as things come forward that potentially will affect finance, specifically municipal finance, going forward. So thank you very much. Couple things before we get started. We do want to keep this casual. If you need something to drink, if you need some food we are going to take a break a little bit later on. But feel free to get up and move around if you need to. Theres washrooms just down the way here, if you need that as well. The other thing is, we are hoping to put together kind of a transcript of today. The only way for us to really be able to do that is if we use the microphones. So, I know its a little bit cumbersome with something like this, but if you dont mind grabbing the microphone and just making sure its on the green light will come on, and then you know your microphones on that will help us that way. Do want to thank all of you for coming in. I know some had short commutes, others had longer commutes. I was pushing our staff to either first of all I want to thank UIC and the great work theyve done for hosting us. You all are wonderful, and I appreciate that so much. I was kind of pushing that we might meet at Luckys sandwich shop which is about two blocks down, or Als Italian Beef, a couple blocks over. Those are a couple of my favorite spots. But this is a great second best. And I do want to make this, again, a good time for us to be getting some information out. Really I do see this as an opportunity for me to be able to learn from each of you, and for us to learn from each other, about what we can do to strengthen municipal finance for our local communities and investors. Want to think of this time really as a jump-off point to share ideas and hopefully build some new relationships. And I know many of you have been involved in the legislative process, but this is really how things start. Its getting people together. Its roundtable discussion. Its stakeholders, shareholders getting together, and sharing ideas, bouncing those ideas off of each other, and then being able to move forward. So thats why I see this as so important. Survival and reinforcement of municipal finance is important to Chicago. Its important to my district, the 14th congressional district. Its certainly important to Illinois. For me, protecting municipal bonds is a Main Street issue, as much or more so than a Wall Street issue. You are all probably aware that Americas infrastructure gets consistently low marks across the board, as our bridges, roads, and public buildings deteriorate and decay. In Illinois, our cities and towns rely on municipal bonds to expand and refit facilities like schools and hospitals. This is certainly true in my

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district, the 14th congressional district. In Sugar Grove, municipal bonds helped fund a water main extension near Harter Road Middle School. The Red Gate Bridge in St. Charles was largely funded by municipal bonds, reducing congestion and improving emergency vehicle access to the surrounding areas. Back in late April, much of my district was damaged with severe storms and flooding. Often, municipal bonds are used to address these damages, providing much needed disaster relief. They are a lifeline to local governments and are a key to reviving our countrys worn infrastructure, maintaining our public health and safety, and keeping our schools up to date. They do keep taxes lower and help local governments who dont have the taxing power that the federal government has, and allow local governments to afford to do larger projects. At its heart, a municipal bond preserves federalism, by allowing local communities to raise their own funds, tax-free, and carry out their own improvements without the help or intrusion of the federal government, but also bringing in transparency and accountability to that local community. Communities can invest locally and gain locally. Some of you I know, but those of you who I am meeting for the first time today, I just want to give you a quick background for me. Grew up in Illinois. Grew up in Wheaton, Illinois. I grew up in small business. My family has a funeral home in Wheaton. Grew up upstairs from the family funeral home, so a lot of interesting stories of being a morticians kid. But also a passion for small business and opportunity, innovators, entrepreneurs. Certainly saw that with my parents. Had a passion for helping people plan for their futures. Went to law school here in Chicago, worked with estate and financial planning. Estate planning, probate work in law, and grew an interest in investments. And so got my Series 6 and 63 and Series and had a great opportunity to work in investments out in the suburbs, and then most recently here in Chicago, with a wonderful company, Performance Trust. Were going to be talking with Brian Battle a little bit later on. But Brian was a colleague of mine. Kind of one of my bosses there. So, great to have him here today as well. But, really a wonderful opportunity to work there. Very eye-opening. A new understanding of bonds, and specifically municipal bonds, in some of the work that was going there as well. I was elected to the US House of Representatives in 2010, to represent the 14th congressional district. My district basically is from Gurnee to Joliet. It looks like a capital E along metro Chicago. Lake, McHenry, Kane, Kendall, DuPage, DeKalb, and Will counties. So a big area, a lot of commuters, a lot of great small towns, a lot of towns that have greatly benefited from the opportunity to use municipal bond financing. Science and science funding is a big priority of my district as well. Having one of our national laboratories, one of seventeen national laboratories Fermilab in my district. And then Argonne just outside of my district. So I serve also on the Science, Space, and Technology committee to ensure we promote science and STEM education in our labs and in our schools. Because of my background and passion, I also serve on the Financial Services Committee, where I have made defending municipal finance a priority. In July, had the opportunity to work very closely with a colleague of mine, Maryland Democrat Dutch Ruppersberger, to send a letter to House leadership urging them to reject any cap or elimination of the deduction on tax-exempt municipal bonds. A hundred and thirty-seven of my colleagues joined us in rejecting that section of the Presidents 2014 budget proposal. What I was really pleased about out of

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that 137, almost split down the middle between Republicans and Democrats. So it was a very bipartisan issue as we talked to people. With more than 6,600 tax-exempt bonds financed over a hundred and seventy-nine billion worth of infrastructure projects in 2012, we saw the importance of defending this key financial tool. In September I raised a concern over the proposed SEC change, as you probably heard about, that could affect the DNA of money market funds and the bond market. I want to ensure that we dont limit cities cash management options and make short-term financing more expensive. Todays roundtable is another way to keep pushing this important issue, making sure we maintain the availability and accessibility of municipal bonds for our communities, and look ahead to the future of the municipal finance market. Im really looking forward to hearing from this great cross-section of bond issuers and investors. Lawmakers need to hear from participants in the municipal finance world so we can figure out how best to serve all stakeholders. I do want to let you know, as I mentioned, I plan to share a transcript of this event with my colleagues on the Financial Services Committee, to educate them more about this important, sometimes overlooked issue. With that, I will say, on the record, assuming as you speak that you are speaking for yourself youre not speaking necessarily for the institution that you represent. If you want that to be different, please make that clear as you are making a statement. We also will be putting together kind of the transcript or summary from this, that will get to all of you. You will see it first before we present it to the rest of the committee. So if you have any changes, or if you want to have any additions to that, that would go to the committee and to our leadership out in Washington, you will have that opportunity as well. To provide some general structure for our discussion, I have subdivided our time into three basic parts, focused on bond issuers, retail investors, and the current and future status of the bond markets as a whole. We will broadly tackle who are municipal bond issuers and how are their products brought to market, what are the advantages and challenges to retail investors in the municipal market, and how have recent events affected the municipal market, and what changes can we see coming forward? At the outset of each topic, we will have a few of the participants briefly introduce themselves, and then we can get into some of the more specific questions that were provided in your agenda. I want to emphasize again that the questions are merely to provide some structure, but we can take this wherever it leads. I want it to be a fluid and broad conversation about the issues and challenges that are facing all of you. I certainly dont want to squelch any discussion by sticking to a hard schedule and agenda, although well try to give about an hour to each topic, and move it along at that pace. At the end of our discussion, Ill be here to chat with any of you, if youre able to stick around. Or if theres a time where we could meet individually after this, would love that opportunity as well. I do want to thank my staff for putting this event together. A couple of people I want to introduce. First, my Chief of Staff, Katherine McGuire, has come in from Washington to be a part of this event today. Also, Scott Luginbill, my Legislative Assistant, helping with financial services. Many of you, I know, have talked with him as well. Also, Reed Sullivan is here, Valerie Wright, and also Sean McCarthy. So Sean runs our District operations as well. So really glad that Sean is in. Runs all of our Illinois operations. So, thank you. I know you are all busy, so I want to thank you for taking time to be here. I do want to dive into this.

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Before we dive in, each of you are going to have kind of a section where youll talk a little bit in more detail of some of the work that you are doing. Bring some thoughts together. But if we can just go around quickly, and introduce ourselves, and where we work, or the entity that we are representing today, that would be terrific. Ill start with Chris, and then well be coming back to you in just a minute. So if you can just introduce yourself. Well go around the table, and then Ill come back. CHRIS MEISTER: We need the mic, right? CONGRESSMAN HULTGREN: Yeah, lets and make sure your microphones are on, or turn them on. CHRIS MEISTER: Okay. Thank you, Congressman. Im very happy to be here. My name is Chris Meister. Im Executive Director of the Illinois Finance Authority. We are created by the Illinois General Assembly. We are the issuer, statewide, of federally tax-exempt debt. We are primarily a conduit issuer, which means that we issue on behalf of non-profits, and certain categories of for-profit and individual businesses. And again, Brett, great to see you. We are an issuer of Cadence, a 501c3 hospital system. Hospitals, non-profit hospitals and non-profit higher ed are a major part of what we do. We are self-funded. We support our operations without a dime of state-appropriated taxpayer dollars. We also we have a small and nimble staff, and a broad statute. We are governed by a fifteen-member board. We meet once a month like clockwork. And since we were created in 2004, we have closed 589 deals, the vast majority of them conduit conduit bonds, but also a number of other guarantees and participation loans. And it totals roughly $28 billion. Thank you. SHAWN OLEARY: My name is Shawn OLeary. Im co-head of Research at Nuveen Investments. We manage about $120 billion worth of assets. About $90 billion of those are municipal bonds. And I cover primarily state and local governments, as well as the education sector and tobacco bonds. BRETT TANDE: Great, well, my name is Brett Tande. Thank you, Congressman, for having me here. And Chris, its great to see you as well. I am the Vice President and Treasurer for Cadence Health. We are a suburban healthcare system based in the Wheaton, Winfield, and Geneva areas, looking to serve that west suburban market. And really try to enhance the level of care that is delivered in those markets. For so long there are so many great hospitals that are in downtown Chicago, but for a lot of our community members, it takes them some time to get downtown, and we have endeavored over the last ten years to really bring a higher level of care out to the western suburbs. And one of our hospitals, CDH, has been blessed to be named one of the nations top one hundred hospitals for six

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of the last seven years. And were we have been putting a lot of money into a our physician practice, which numbers almost 300 now, in this market. We have been doing a full redevelopment of a hospital called Delnor, which is in the Geneva area, serving the Fox Valley. And we have been a huge beneficiary, or user, of the municipal market over the years. Delnor really, back in the 1980s, was built based on proceeds from municipal bonds. CDH has gone over a broad transformation over the last ten years, portions of which have been with municipal bonds as well. TIM FIRESTINE: First, thank you for inviting me. Im Tim Firestine. Im the Chief Administrative Officer for Montgomery County, Maryland. Montgomery County is located northwest of the District of Columbia. We have a population of about a million people. The county is home to eighteen federal agencies, including NIH, FDA, NIST, NOAA, Department of Energy, and others. Montgomery County is a full service county, which means we provide a whole range of services, from education we have 150,000 students in our school system. We have a community college in the county. We actually have a liquor operation which a lot of counties dont but liquor is controlled in the county, and we have actually sold some bonds off of our liquor profits, to pay for some of the transportation infrastructure in the county. We issue about $300 million each year in bonds. Our total capital program is about $4.6 billion. Our operating budget is about $4.4 billion. Actually larger than I think four or five states. And Montgomery County has been rated AAA since for forty consecutive years, since 1973. I also serve as the current President of the Government Finance Officers Association, which represents over 18,000 public finance professionals across the country. And Id also like to recognize Jeff Esser, who is the Executive Director, and he has joined us today, at least for the first part of the program. TIM MCGREGOR: Thank you Congressman. I appreciate the opportunity to be here today. My name is Tim McGregor. I work with the Northern Trust Company. I direct municipal fixed income for the company. We currently manage $30 billion in long-duration municipal assets. I sit adjacent to the group which manages our short-duration assets, which is roughly another $30 billion in tax-exempts. So I look forward to the opportunity of hearing everyones viewpoints, and sharing a few of my own today. We bought some Montgomery County, Marylands today, so it worked out well. [Multiple participants laughing] RICH CICCARONE: I also appreciate the opportunity to be here, and thank you for this opportunity to talk about municipal bonds too. My role has been in municipal bonds for thirty-five years, or over thirty-five years. I have two roles. One is that I am the Chief Research Officer and Managing Director at McDonnell Investment Management in Oak Brook. McDonnell invests on behalf of not only high net worth individuals but institutions across the

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country, including some interesting insurance programs. For instance, a good use of how municipal bonds may be used, in which those insurance companies are buying $400 million of healthcare facility bonds for underserved areas, as an example of the good that they do. The other role that I have is that I am also President of the and Chief Executive Officer of Merritt Research Services, which is an independent research company that provides data to institutions of all types involving over 8,000 municipal bond credits. So it has become an important part of the research function for institutions to receive our information. And so, those are my primary areas, but I am also a CoPublisher of a website devoted to municipal bonds, called MuniNet Guide, and which my Co-Publisher is a person many people know Jim Spiotto, who is also an expert in municipal bankruptcies, which is unfortunately a very popular issue at the moment. STRATFORD SHIELDS: Thanks, Congressman. I appreciate the opportunity to be here. My name is Stratford Shields. I am a Managing Director at Morgan Stanley. I have been an investment banker for the last twenty years. The last seventeen at Morgan Stanley. I ran the department nationally for about five years until 2012. I have served as a banker for a wide variety of financings, including water and sewer, higher ed, healthcare, transportation. I personally led the effort for the state of Mississippi, post Katrina, for all the post-Katrina financings. I am the Chairman of the Securities Industries Financial Markets Municipal Division. And you know, that is our the lobby group the industry trade association for the broker-dealer community. And so I will be speaking primarily from my perspective as the Chairman of SIFMA today, for the Muni Division. JUSTIN FORMAS: Good afternoon. Appreciate the opportunity to be here today. My name is Justin Formas. I run the Credit Research Department for Bernardi Securities. We are a regional broker-dealer. We manage about a billion dollars in assets. Our primary underwritings are here in Illinois. We represent small, local communities, school districts, cities and counties, just across the Illinois area. BRIAN BATTLE: Two more times. Thank you, Randy, for having us here, Congressman. Appreciate it. Im Brian Battle. Im Director of Trading at Performance Trust Capital Partners here in Chicago. We have an asset management firm and a broker-dealer firm. Ive been in the business for about twenty-eight years. In trading, underwriting a lot of underwriting of municipal credit. So the process of where the public sector meets the private sector is of critical importance. So the you cant understate the importance of todays conversation. Im interested to hear what where the conversation goes. Performance Trust is based in Chicago. Were about, just almost twenty years old. And we about a lot of our time is spent on municipal credit. Our constituency are across the board. Institutionally though we are insurance companies, hedge funds, money managers, and depository institutions. Not so much retail, but mostly depository institutions. And we

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are users of municipal bonds, and we are very cognizant of their purpose, and were glad to be part of the conversation. MARY JO QUINN: Thank you Congressman, Im Mary Jo Quinn, and I work with Allstate Insurance Company. I lead the team of lawyers that works on the investments. We have $100 billion under management right now. And I have to say that for Ive been a municipal bond lawyer for twenty-five years, but I actually do a lot of the restructurings and the distressed things, and oversee our securities litigation. So I may come to this with a little bit more of a different view, because I see the bonds that dont go so well. Not that Allstate ever buys those, but [Multiple participants laughing] MARY JO QUINN: hypothetically, if we had one, I would be overseeing that.

CONGRESSMAN HULTGREN: Thats great. Thanks, Mary Jo. Well, yeah, and thank you all for being here. Lets jump right into it. The first topic I want to talk about is really, who issues bonds, and who uses bonds. Well, there are the Main Street cities and towns in my district, like Geneva, McHenry, Sycamore, Yorkville. Folks who want to improve their infrastructure, who want to turn a two-lane road into a four-land road. Who want to expand their hospital to meet growing demands. When taxpayers are feeling the pinch from federal, state, and local tax increases, these towns can use public, safe financing to make improvements. But when local governments have to pay more to finance improvements, that can lead to a tax increase, or cuts to service. My letter to House leadership emphasized the importance of keeping this type of financing tax-exempt, so these municipalities can maintain a market of interested customers, and not rely solely on tax dollars. Perhaps at the outset, we should begin our discussion around the current status of these cities and state bond issuers. But first, were going to open it up to our first three presenters. Chris Meister, with the Illinois Finance Authority, Brett Tande of Cadence Health, an exciting new group of hospitals in and around my district, as he mentioned, and also Tim Firestine, President of the GFOA, Government Finance Officers Association. And also coming in from Maryland appreciate you making the long trip today. So, first Im going to turn it over to Chris. I have talked about Brian and my friendship and relationship. Chris and I go way back. Dont always admit this to everybody, but its on Chriss resume; its not on mine. But the first time I got to meet Chris, I was taking a summer school class at Northwestern University, and had an internship in the City of Chicago, with Pat Quinn. And Chris and I worked together in that office, and had a very it was a great summer. I learned a lot. Very eye-opening. [Multiple participants laughing]

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CONGRESSMAN HULTGREN: But the Governor, every once in a while, reminds me of my former internship. But Chris and I have remained good friends. Worked together down in Springfield. And really enjoy still hearing from you, and hearing the great work that youre doing. So appreciate that. I will turn it over to Chris right now. Sorry, stealing you mic. CHRIS MEISTER: Thanks, Congressman. And again, I just want to say, of course now youve placed that in the Congressional Record. [Multiple participants laughing] CHRIS MEISTER: So, I was going to refrain. But actually, the Congressman and I worked at something called the Cook County Board of Tax Appeals, which actually no longer exists. It became another office. But that was the first time that I met Randy, and then years later, Randy was elected to the Illinois Senate. And I started working with the Illinois Department of Commerce and Economic Opportunity, so we had the opportunity to work together then. And Im very pleased and honored to be here today, working on this important issue. Thanks, Congressman. So, a little bit I told you a little bit about our agency. And again, all of you are probably familiar. Of course, Brett and I work together on a fairly regular basis. Its really great for me to see the other players in municipal finance, particularly conduit municipal finance. And because often we are sort of on one end of it. But I do really want to speak to what a well thought out accountable transparent creature of federalism, as the Congressman has mentioned, how when tax-exempt financing which goes back, I believe, to the first federal income tax code, was created, and then ultimately as it has developed in recent decades Congress made the decision to delegate to the states, to their constitutions, to their legislators, to their governors, to their courts, what the access to tax-exemption, a well defined, well articulated, and of course, as we see around the table here, well-understood economic benefit, and how various states would provide the access. I am proud that the Illinois Finance Authority is a member of two national organizations. The Council of Development Finance Agencies, and one of my colleagues one of our Vice Presidents, Rich Frampton, is a long-time hes a Vice President of the IFA. More importantly for your purposes, hes a long-time board member and nationally recognized subject matter expert in private sector conduit finance. And we have a report that Ill give to you to put into the record as well. But in Illinois, we have one mechanism, and one set of policies, and one set of policy priorities for accessing tax-exemption. Utah, Texas, South Carolina theyll probably make other decisions. And because Rich and I are involved with CDFA, and then also another Vice President of the IFA, Pam Lenane, is the current President of the National Association of Health and Educational Facilities Finance Authorities, which is on the non-profit educational and non-profit healthcare side. So just for example, we have a fifteen-member board. Theyre volunteers. Theyre governed by

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state ethics regulations. We are subject to open meetings. We put our board materials on the Internet. They are fairly extensive. They are accessible. We are subject to the General Assembly. We are subject to annual audit from the State Auditor General, which reports to the Illinois General Assembly under our state constitutional structure. And importantly, theres a policy choice that the General Assembly made, which was that our bond proceeds, when the borrower receives them, construction work needs to pay Illinois state prevailing wage. Again, this was a decision that the Illinois legislature made. Maybe its revisited in the future. Other states may make different choices. But this is an important element that these decisions are really made closest to the people, closest to the need, as the Congressman said. Much like and Ill let Mr. Firestine talk about the general obligation, because I think hes better equipped than I am. But this decision, the decision that Congress made to make this economic benefit available, is important. It reducing it, eliminating it, as some of the discussion has been in Washington, would represent a massive cost shift to local governments, state governments, and I think most importantly, non-profits that all of us in this country rely upon to perform certain vital health, education, and research functions. So Ill pass it on to you, Brett. BRETT TANDE: Well, I think as I had mentioned before, Cadence Health has about $600 million in taxexempt debt that is outstanding. And that has grown, I would say, modestly, over the decades that both CDH and Delnor have historically existed, and has gone to support the development of a lot of the critical facilities that comprise our healthcare system. So primarily the acute care hospital facilities. And one example would be Delnor, which years ago was the resulting entity from the merger of two hospitals in the Geneva and St. Charles area. Two hospitals that were capacity constrained, and those entities decided to come together and build a healthcare facility I think that was more appropriate for that area and the needs of the Fox Valley. Developed the Delnor campus, which is now on Randall Road. And even today, as we see it, that campus continues to grow. The needs of the communities around there is significant. We have seen tremendous demand for services from our own physician group, Cadence Physician Group. And so the continuation of the development of that campus you know, one of the important funding sources is municipal bonds. As a non-profit, we dont have the luxury, like perhaps private for-profit companies do, of having shareholders. So one critical component of capital being equity capital is not available to us. And so as we look to grow, one critical component of that is being able to access debt capital, and to be able to do so on efficient terms. And so that is critical. And weve seen that same need at CDH, which is in nearby Wheaton, or Winfield. But the development of that Cancer Center was with municipal bonds. And the economic benefit that is there very much accrues right back to the communities that we serve. Without an ability to pay that tax-exempt rate, our ability to ensure that we are developing highly sophisticated facilities that provide the appropriate level of care close to home for the communities that we serve is critical. And our ability to do that without that economic benefit might be more constrained. And so the ongoing vitality of the municipal market is very much important to us. I know it is very much important to other healthcare organizations, not only

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throughout greater Chicago but across the nation as well. And so we look forward to ensuring that that market remain open, it remain transparent, it remain fair for investors, institutional and retail alike, and that it is appropriately regulated as well. TIM FIRESTINE: Well, I would like to focus my initial remarks on the importance for counties, cities, states, and others to access and utilize the financial markets in order to support infrastructure development for their citizens, with a specific focus on the tax-exempt municipal bonds and money market mutual funds. Municipal bond issuers are state and local governments of all sizes, along with special districts such as utilities and public education and health centers that sell bonds to finance essential infrastructure. While there are several types of bonds issued by these entities, it is worth noting that state and local governments provide three quarters of the total investment in infrastructure in the United States. And tax-exempt bonds are the primary financing tool used by over 50,000 state and local governments and authorities to satisfy these infrastructure needs. State and local governments issue nearly 10,000 bonds a year, totaling $300 billion on average. This has allowed state and local governments to finance more than $1.65 trillion in infrastructure investments over the last decade, through the capital markets. And importantly, most of these bonds go forward at the direction of the electorate and state and local governing bodies. Which means that it is state and local voters and elected decision-makers selecting their short- and long-term priority projects, and choosing how these priorities will be financed. Local decision-making on local priorities. A joint report that GFOA helped develop earlier this year revealed that the top six infrastructure categories being financed by tax-exempt muni bonds are primary and secondary schools, general and acute care hospitals, water and sewer facilities, roads, highways, and streets, public power projects, and mass transit. Through the tax exemption, the federal government continues to provide critical support for the federal, state, and local partnership that develops and maintains essential infrastructure, which it cannot practically replicate by any other means. Federal policymakers continue to discuss capping or repealing the exemption, which would significantly increase the cost of borrowing to support critical infrastructure development. And we can talk more about that in a minute, in terms of what those costs are. But we need to work together to ensure that this important financing source is preserved. A second important issue to our members, that Id like to discuss briefly, is money market mutual funds, both as an investment vehicle for state and local governments, as well as issuers of municipal securities that are purchased by these funds. The Federal Reserve reports that as of the end of the first quarter of 2013, state and local governments hold over $120 billion of their short- and mid-term investments in money market funds. Beyond providing valuable cash management services for state and local governments, money market funds themselves are key purchasers of municipal securities. In fact, US money market funds are the largest investor in short-term municipal bonds, holding almost three fourths of state and local short-term debt. A proposal released in June by the SEC would jeopardize those benefits by requiring a fundamental change to the key feature of these funds, from using a stable net asset value to a floating net asset value, and possibly also by imposing

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liquidity fees and redemption gates on money market mutual funds investors during times of fiscal crisis. I know we will have a chance to share our concerns about this in greater detail in the discussion, but suffice it to say briefly that there is consensus that the SECs proposal would increase borrowing costs to governments by driving away investors from money market mutual funds, increasing government cash management costs, and potentially driving governments away from money market mutual funds and toward other investment vehicles that have historically paid lower yields, or less secure products that provide less liquidity. So well talk about more of those in a little bit. CONGRESSMAN HULTGREN: Great, well thank you all. I want to move now more just to discussion for a few minutes on this. And anybody feel free to chime in if you have some thoughts. But really to start off, following up on what each of you have talked about in different ways. I mentioned the letter that we drafted and passed around, of how important Members of Congress, a good number of us in the House, saw to keep this tax exemption. And I think Chris talked about that this has been in really from the beginning. About a hundred years, this exemption has been around. We have talked about the communities that benefit. So I wonder if we could just talk a little bit more of what would the cost be if this were to be taken away, who is hurt by it. Is it just large institutions that are hurt? Is it financial institutions that are hurt? Or does it really get down to local levels? Whats your thought on that? BRIAN BATTLE: May I? CONGRESSMAN HULTGREN: Yes. Brian. BRIAN BATTLE: Great. Ill simplify I think whats, or amplify on behalf of issuers. You know, local control is better. Right? And most of these bonds are self people vote to self-tax themselves, so I dont know whats better than that. I mean, so, the federal government should stay out of that business. If you get rid of the exemption, youre transferring the expense to the local unit of government. Thats plain and simple. Thats all there is to it. But what I want to point out, and I want to Im glad this is going to be on the record is some legislative assistant somewhere, during this discussion, during this debate, is going to discover that only rich people own muni bonds. Did you know that? That rich people own muni bonds. And what weve got to do is get rid of the exemption, and then all those rich guys wont get this tax-free municipal income. And thats a very it would be a very popular and true statement, because only people that pay federal taxes will own tax-free muni bonds. So in the attempt to injure these undeserving people, what we will do is that flows downhill though. If you raise the expense, if you make it more expensive for the local unit of government to build the school, to make the sewer system better, to establish some sort of infrastructure, youre going to diminish the level of

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service at the local level. Because government is a service enterprise. They deliver services to the constituency. So in this discovery, where were going to get the rich guys, what were going to do is hurt the local community and average Joe, because his level of service will decline. CONGRESSMAN HULTGREN: Thanks, Brian. Tim, you were mentioning maybe just percentages, or you know, dollar amounts of how TIM FIRESTINE: We did a look back just to try to get a sense of what the fiscal impact would be, yeah. And so looking at the last ten years and I talked about the total amount of bonds that were issued over that period of time $1.65 trillion. But the estimate is that if you eliminate the exemption, as if it had never been in place during that time, it would cost state and local governments half a trillion dollars. $500 billion. If it were capped at twenty-eight percent, its just under $200 billion. And thats over a ten-year time frame. I also translated to what would it mean for Montgomery County. For Montgomery County, if there was a twenty-eight percent cap, it would cost Montgomery County about $14 million more a year in our debt service cost, which means, if Ive got to pay fourteen more for that, something has to give. You know, its a tradeoff. So theres less, either less infrastructure, or less we can do in the operating budget. And so if you translate that into whats the impact in the operating budget, thats 187 teachers or 100 police officers. If you totally eliminate the exemption, its going to cost me about $40 million more a year. Thats about 536 teachers or 266 police officers. So, its just a tradeoff. Those are costs that we would have to pick up. Id also like to pick up on the point about, if you just simply decide to raise taxes to offset it, then youve shifted it from not a totally regressive tax, but a somewhat progressive tax, the income tax to local property taxes. Because thats the source of tax revenue at the local level, and we all know how regressive they are. So this thought that somehow its a tax break for the rich you know, to sort of key off of your point 52% of the tax-exempt interest is paid to individuals with incomes less than $250,000. People buy municipal bonds because theyre a safe investment. And its not just for rich people. Also, 57% of tax-exempt interest income is reported by earners over the age of 65. So its our grandparents and others who buy the bonds, and hold them, and collect their interest. So its not just some wealthy group out there. To that note too, Ive heard mentioned over and over that its an inefficient tax break. Theres an interesting piece that was put together by Citigroup that I think debunks that whole theory that based on the assumptions that were used and who actually holds the bonds, that its much more efficient than is being assumed on the Hill. I guess one other point Id like to make, and that is the fact that, you know, were trying to grow jobs in this country, or create jobs. I saw a statistic about I think McKinsey & Company did it that increasing annual infrastructure investment by one percentage point of GDP thats a hundred and fifty to about a hundred and eighty billion dollars could create up to a hundred 1.8 million jobs, according to McKinsey. And I think about that in our community in terms of, you know, infrastructure creation. In

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Montgomery County, we have three master plans that were just recently completed. Those three master plans, again, tie pretty closely to the types of federal facilities we have. But one of them creates a fairly extensive biohealth initiative within that master plan. The other one ties pretty closely to support around the FDA facilities. But our estimate is, when those master plans are built out and Im not saying it would take thirty years to do that youre probably talking seven to fifteen year timeframe its about a hundred thousand jobs that are created by those master plans. But the only way to complete those master plans is they are dependent on transportation infrastructure. So we need some mechanism to do that. And to the extent that you make it more expensive, you know, to finance that infrastructure, then the less we can do to create jobs in Montgomery County. CONGRESSMAN HULTGREN: Thanks. So a couple of things, to clarify. Clearly its not just ultra-rich who hold bonds, but its people who are looking for predictable return. Looking maybe knowing the community. That would be the other thing Id be interested in, is where are these being purchased? Most oftentimes, are they purchased by people who understand and know the location or whats going on in that area? Is there some connection there, I guess, with this type of investment, of people who actually know the community and are willing to invest in it? TIM FIRESTINE: Right. Well, I think some of your bankers might be better able to say who is buying them, but I think its 72% of the bonds are actually held by retail. So it is households that are buying them. And just sort of anecdotally, I have an aunt who is ninety years old, and one day we were sitting down, and she told me how she had just bought some municipal bonds. This is the same person who would never pay more than twelve dollars for her phone bill. But she loved municipal bonds because of what she heard about them, and all of a sudden shes talking about a jurisdiction. You know, like she was well aware of the bonds that she had bought. So, whether or not thats true across the board, and maybe some of the bankers could respond to that. STRATFORD SHIELDS: Congressman? If I could make a couple of observations on tax exemption from probably a market perspective to expand on what Tim started talking about earlier, and the investors, you know, Im sure will have a view of this as well. Yes, so there has been a hundred years of precedent for tax-exemption. Tax-exemption is clearly on the list of things that the Obama administration has been looking at. Its number six or seven on the list of tax expenditures, in terms of thats where the money is. Limiting the deductibility of tax exemption to 28% as the administration has proposed, when the marginal rate is 40%, is going to make a bond essentially 70% tax-exempt. Okay? And if that is actually done, even though the GAO and others assume that it would be an efficient market, it wouldnt. Once you change it, and once its shown that it can be changed, tax-exempt bonds will just trade like taxable bonds. Because if you can change

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it, you know, make it seventy percent, why cant you make it fifty, why cant you make it twenty-five, or zero? And so the whole kind of precedent is gone. Munis even now, and for a variety of reasons, some of which has been the talk of tax reform over the last few years, trade at very elevated ratios to treasuries. And so the more this is discussed in Congress, and proposed by the administration, the more its out there that people get concerned that, Hey, could this go away?, creates a higher cost for issuers, the more it is discussed. Theres a second issue on this tax exemption front that I think is important to get in the record. And thats the issue of fairness. Okay? So, you know, you have a market thats call it 350 billion annually of municipals. There are about 3.7 trillion outstanding. And the administration is proposing of course the 28% deduction limitation on all outstanding muni bonds. Not bonds going forward, okay? But you know, you bought a bond that was issued six years ago, and all of a sudden now the rules are changing on you. And the reason that theyre doing that is because you get $50 billion if you make it kind of retrospective, but you would only get five on a go-forward basis annually, so as you people look at ten year plans you know, its, if you do it now and make it retroactive, its 500 billion or something like that that you can put towards budgetary savings. And thats clearly you know, I think members of the Hill, I know members of your caucus have been on record saying that that would be a major issue in terms of the retrospective change. For it to be on a go-forward basis, that would maybe be another thing, but that would obviously increase capital costs. One of the things that the administration has proposed is these America Fast Forward bonds, which are really a successor to the Build America bonds, that would have interest rate subsidies. You know, issuers issue taxable bonds, and get a subsidy of under the Build America bond, it was 35%. Treasury swore on a stack of Bibles that the subsidy could never be cut, that they would be treated just like income taxes, et cetera. Along comes sequestration. You know? The interest rate is cut 8.1 Inaudible] percent. You know, I cant speak for the issuers, but I would be surprised if issuers were really interested in another taxable program with a federal subsidy. I dont know, Tim, if you have a view on this. TIM FIRESTINE: Were not interested. [Multiple participants laughing] STRATFORD SHIELDS: Yeah, okay. [Laughs]. So thats you know, thats just another thing to consider, as people talk about tax exemption. That the proposed replacement, which was really based on a CBO report from a couple years ago saying that the right subsidy should be twentysix and a half percent. The math on that was never clear to me, as to how that came up to be the what the right subsidy should be. With that, I think I would ask some of the investors, what do you think would happen to the market? Because I dont think, Tim, that if the numbers that you put forward on the 28% versus the you know, the 28%, 70% example, versus, you know, full elimination I think those are more theoretical. I

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think in practicality I think it would be very different. I think it would be basically the full number even at a twenty-eight percent deduction limit.

TIM MCGREGOR: I would just add some live market color to Stratfords comments, which the threat of the exemption, or limiting the exemption, isnt future damage. Its damage that is being done today. And over the past couple of years. Today you can buy a long municipal bond at five percent, and the 30-year treasury is at three seventy-five. Thats backwards. Okay? Theres no reason they should be paying a much higher net interest cost on a pretax basis than a US treasury. Now, not only is it hurting new issuers, but because of that reverse ratio, its precluding a lot of state and local governments from benefiting from the Feds low rate policy in terms of being able to refinance or restructure outstanding debt. They cant get a refinancing done when this ratio is backwards. You cant refinance a 5% muni with a 4% treasury. It doesnt yield enough. Usually its the other way around. From a real time, its not just a future penalty to issuers. Its happening now, for new money issuance, and also its prohibiting a lot of active refinance options. So it really flies right in the face of what the Fed is trying to do, in terms of a low-rate policy. TIM FIRESTINE: If I could also just, and again, since we have the right people here, the question would be, when everybodys buying taxables, then the competition is different. So, if youre a large issuer like New York City or others, you could probably compete in that environment. But if youre a small town somewhere in Iowa, its going to be hard to sell your bonds in a taxable market. RICH CICCARONE: I couldnt agree more with you, Tim. I mean, the point is, when you look at the municipal bond market, you have fifty thousand choices, to buy municipal bonds. And if we want to talk about liquidity for the investors who will be buying in there, its a real handicap if you are thrown into the same pot with taxable bond issues. Youre going to find its very unwieldy for institutional investors to buy in. And that will force higher interest rates, in and of itself, beyond the differences that we already see. There is a significant difference today in terms of the benefit that you get from a tax exemption. It will get much worse when interest rates go back up to higher levels. When interest rates are compressed, as they are these days, lower than they were over the last fifty years, you will find that the differences between a taxable bond and a municipal bond wont be as great as they will be when interest rates go higher. As we talk about this, and we talk about change, it always baffles me about, you know, were in the environment of the change and they are asking for the reform. We have been through the toughest time since the Depression. It has affected not only the private sector but the public sector. And the public sector, what has happened here is that they have already raised taxes. They have raised charges in order to provide better numbers to balance their budgets. Now what

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they did during that period of time is that they not only increased their revenues, but two things were very likely to happen and they did. And that is, you dont make payments to things that you dont have to pay today. And what are those two things that got hurt the most? Two of those things that got hurt the most is one, well get out of the way, is pension funding for some communities wasnt funded at the full actuarial value. Which means because we didnt have to pay the retirees today we let it go to the future. The second thing is that infrastructure was deferred, which typically happens in downturns. If we look at the accounting numbers that we have that are provided through the Governmental Accounting Standards Board rules, and you are using our database, the Merritt Research database, in all the key sectors, you will find that we have been creeping upward on average age of our property, plant, and equipment. Now if the financial numbers are not enough for you, from the finance side, you take a look at the other source that you have thats frequently quoted, and that is the American Society of Civil Engineers. Now their latest report card gave a D+ rating. But more importantly what they said is that if you were to do what is needed right now, you would take three point six trillion by 2020. Now put that number into context. If in the total municipal bond market for the last ten years, according to bond buyer statistics, we have issued 3.9 trillion in total, in the last ten years. Were being asked on a six-year window to go to 3.6 [trillion]. But the number is more interesting when you look at it, that the fact is of that total bond issuance number, not all of it was for new money projects. A significant amount was for refunding. So if you take the refunding numbers out, and you just look at the new money issue, you would be talking about $2.3 billion of new money issuance over the last ten years. Again, Im going to keep reminding you, thats 3.6 [trillion] is needed. And the average number over the last ten years is around 225 billion of new money every year. To get to what we need to do over six years, to get to this 3.6 number, we need to increase municipal bond monies just for new issuance to $600 billion a year. And so when we talk about interest rates could be higher, the differential between taxable and tax-exempt could be higher, and were talking about a number as massive as this, we have just gone through this crisis weve been to, in which governments have already had to fund just to keep up. We want to add that to the cost of government? Well, thats an economic case for keeping this. But I mean, a political case, an accountability case, is also there for municipal bonds. Municipal bonds are a terrific use, from a public finance, academic standpoint, where you keep local control of these particular projects. And the fact is is that, as you mentioned, I think a good point when the Build America Bond program was put into place, it scared me. It scared me in a number of ways. One of them was that it actually removes us more from fiscal federalism. And it moves the accountability away from state and local taxpayers that receive the benefits of the projects. It has the potential to become an entitlement program. The implied subsidy concept is not the same as an explicit subsidy, and once you put it into a form of an explicit subsidy, which would have been done through the BAB type program, youve now made yourself the responsible party Uncle Sam is going to have to take care of the family, in a way that he hadnt planned, because youre adding one more major cost to the federal government. By keeping it at the local level, whether its for government or for the high priority projects in healthcare and universities and other areas in which we

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feel are important by keeping it at the local level, we will be able to have the accountability that we need to, I think, to better maintain the cost the costs of government that are going to go up in this area of capital infrastructure.

CONGRESSMAN HULTGREN: Let me jump in here. Really appreciate that, Rich, and appreciate this discussion. And this is really why we wanted to have this today, and continue this discussion. To make sure people really understand what this is, and not only is there a significant additional cost if this goes away something that has become such a big part the cost is even there as we are talking about the possibility of this going away. And how that impacts. And ultimately, its not just an additional cost, financial cost on communities. I would say many of these projects wouldnt even be done without this tool to be used. I have had the privilege of serving, over the last twenty years started, got elected on the DuPage County Board, then served down in Springfield for twelve years. Now Ive been out in Washington for three. So local, state, and federal. I talk about this with audiences all the time, my constituents. That Im absolutely convinced that the best government is local government, because theres greater accountability there. You can actually see whats being done, and if someones spending money on something that is a ridiculous project, theyre not going to be in office for very long. People are watching it and seeing it. Where you dont have that same accountability if you get on the national level. And we see the problems that happen there. Also talking about the failure to fund pensions, and some of the problems there. I wonder if we could just shift briefly, and then I want to move on to the next subject but just talk a little bit about and I know this is a difficult subject, but, issuer disclosure, and making sure that there is a true understanding of what actually is being offered out there. I know theres been some talk in the news of SEC lawsuit against Illinois a few months ago, that I think is ongoing. But and on the front page of the Tribune today, talking about Broken Bonds, Spending Like Nobody Is Watching. And again, making sure that we find that right balance. I mean, there is this is such a unique instrument, that has been so effective for so many years. But also there are some challenges, as Mary Jo was talking about as well, that we want to make sure as best as possible that there is disclosure where it needs to happen. So I wonder if we could get some of your thoughts on that, of how do we do this well? And Mary Jo, I dont know if you have some thoughts on this, or MARY JO QUINN: Of course, talking from an institutional point of view, people think, well, we have all the credit analysts there are in the world, so we know everything, and we should never buy the wrong bond. But many of those bond deals that were in, there are retail holders there, too. So people say, Well, Allstate should have known better, but this poor guy over here you know, your ninety-year old aunt she maybe shouldnt have known. Well, in the end, they should disclose the same thing to everybody, and you should expect that there are people who really care about what their investment is, and they need to see what the investment is and not just have a broker say, This is going to be really

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good for you. I think the disclosure has to be way more like the corporate world. And in the corporate world there are 10-Ks and 10-Qs, and those things come out all the time. And you can understand, if you own stock, I know what IBM just did, because they sent out all their information to the SEC. Now, when you own a small bond issuance, you dont have as much information out there in the public, and frequently, the small issuers I think they may not think that what just happened, even though they have a continuing disclosure agreement they may think, Well, this doesnt rise to the level of what I need to tell the investor. And I think that the continuing disclosure is really important. The initial disclosure is big, but continuing disclosure of the financial health of the bond deal is very important. I think that should get beefed up. And the number one thing is that financials that you get are always extremely old. Which would not be the case if you were looking at your corporate investments. You have better timeframes of when you have to get information. So I think from the retail point of view, and the institutional point of view, I think were all the same therewe want more information, and we want it upfront, and then we want it in a continuing fashion. I think that would make the marketplace much better. Now, a lot of people say that people hold their bonds forever so they dont really care about the information. But I believe that they do, and there are more people who actually read the information when they get it. That makes the bond more liquid. Theyre easier to trade if you have the current information out there. It helps the issuer if their bond can trade. CONGRESSMAN HULTGREN: How do we deal with the fact we were talking about how different this is from corporate bonds that these are small towns, that you know, are doing a local project, that dont have the sophistication as a corporation, and the accounting departments that can put this paperwork together. How do we deal with that? Of recognizing the unique situation of municipal bonds, but still trying to provide information that will be helpful of again, seeing its very different than the corporate world. Brian, oryeah, if we could BRIAN BATTLE: What were asking then, is to add a layer of expense to issuers. Hey, we want more disclosure, and we want it sooner, and we need it better. Which I think is correct. But we have to be sensitized that if you spend an extra $50,000 on audit, thats not a thats half a policeman. I suggest that municipalities be allowed to file unaudited returns, and then annually audited returns. It makes the burden that much less. It could be internally generated. And then if there is a mistake, if they are mischievous no offense to anyone present we will catch that in the audited financial. So that would be my solution, is that, lets see unaudited financials, and then audited thereafter. TIM FIRESTINE: If I I know we dont want to get a debate on this, but CONGRESSMAN HULTGREN: No, just a discussion. [Laughter]

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TIM FIRESTINE: First of all, lets keep in mind I mean, you compare corporate to what governments do. We operate in a public environment. All of our, everything we do is subject to public disclosure. So more so than the corporate world. I mean, if you visit the Montgomery County website, theres a ton of information you can get. Our boards, our commissions, our councils they all work in public session. They have briefings from time to time on updates on financial information. A lot of that information is shared with EMMA, which by the way I think has been a tremendous help in providing a way to find out information about these smaller bond issues. But others in terms of providing annual information statements, links to our websites, where you can get updated information. So, I do think that disclosure has improved quite a bit over the past years. And that information is becoming much more accessible. One note, you know, providing information timely and I know we have discussed this with the SEC many times. It is very difficult to close our books and prepare our annual financial statements within a short period of time. We work within a component unit environment. For example, in Montgomery County, we have to wait until the school system closes their books. We have to wait until the college closes their books. And then we have to consolidate those into our report. And even though we press hard to get it done as quickly as possible, it can still take up to six months, you know, for the report to get completed after the close of the fiscal year, so. JUSTIN FORMAS: I would certainly agree that disclosure has come a very long way, at least even in the last several years. I sit at the intersection of investment bankers and brokers. I mean, that is right where their credit research department is. My job is to make sure that we are disclosing all of the pertinent information and doing a service, first to well, not only just first, but, to our issuer clients, as well as our investor clients. So I think when we talk about disclosure, its important to understand also maybe, particularly the way that small local governments get their revenues in maybe they just receive their revenues twice a year, right? So, in order to have like a 10-K or a 10-Q, I mean, youre talking about those guys I think that their ability to estimate and to certainly recognize those property tax revenues they only get the two large lump sum payments in on an annual basis. I think that the accuracy or the viability of a 10-K like or a 10-Q like may be in question right? I think at least for the small local government issuers. I think that the way we run our research department, and the way that we handle disclosure I cant speak for anybody else, but we have a very difficult job, right? I mean, I think that also so do the municipal issuers. I think that they are much more concerned with running their day to day government than they are with providing annual disclosure. Thats not to say that they dont, or they arent required to present that to the investing public, that own their bonds, et cetera. Their ultimate responsibility is to taxpayers, and so I think that that is where they concentrate the most. I think getting their attention, or deciding whether they want to have services specific to what they are doing, or if they want to allocate time to the private capital markets, is kind of a different story. I think that the way we run the research is we have a due diligence questionnaire, right? So my due diligence

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questionnaire is first and foremost, have you read the preliminary official statement? Is everything disclosed? Everything disclosed in the preliminary official statement, does it accurately reflect the health and operations of the village, school, town, county, whatever? The FY12 audit is going to be included in the preliminary official statement. Have you reviewed the accuracy and fairness of the financial statement? How do you go about building your annual budget? Do you use historical projections? Do you maybe pull in third party private resources? How do you go about building the expenditure side? Do you use zero-based budgeting? How accurate are your projections? Is there some sort of measurable way that you can describe to me that you sort of feel comfortable achieving a balanced budget if that is in fact what you say you are going to do? What about your pensions? How are you funding your pensions? Are you fully funding the ARC? Are you funding it with the tax levy, or are you having to fund the tax levy and kick in additional revenue dollars? Debt, right? I mean, not only do you have any public market debt? So GO bonds, whether in Illinois death certificates, alternate revenue source bonds, et cetera. Do you have any open lines of credit? Do you use any derivative contracts? Do you have any other maybe esoteric type of financing? And so, when thats how we run thats what I do on a daily basis. That is my job, as credit research. I run the credit committee. It is my job to make sure that everything is disclosed, and everything that is material to the issuer clients is presented to our investor clients, and that our salesmen are well educated on the ins and outs from a credit perspective, of that particular issuer. So I think from a disclosure standpoint, certainly we could get -- frequency from our small issuer clients is certainly difficult, but I think there has been a couple of I think our continuing disclosure, we are always at 180 days, right? At the close of their end of their fiscal year. I think that that certainly leads to stale financial statements, but I am certainly cognizant of all of the other things that those guys are doing on a daily basis, and certainly the accounting standards, and the ability to gather all the information with the limited resources they already have. I think in this particular time, were asking municipalities, from the private sector, to do more, with I think theyve shed so many jobs as it is, that it is difficult for them to allocate sufficient staff and resources in order to achieve this maybe like dream goal, well have it out in sixty days at the end of the close of the fiscal year. I dont Im not sure that that is something that is maybe ever going to be come about. CONGRESSMAN HULTGREN: Let me do this. I know theres a lot more we could discuss on this. I do want to keep moving through, if thats all right. If there are other thoughts that you have on this, or for me, the biggest thing is, I want to be intentional and careful, as we are finding this proper balance. And I dont know if you ever perfectly achieve it, but to struggle with it. And so, would ask, if you have suggestions of how we do this well, recognizing the uniqueness of the municipal bond market, different than other areas, but still making sure that we are providing an openness and information thats necessary for investors to make good decisions if you can give that to us, or if we could make that part of the record, any suggestions you might have, that might be great. Im going to move on to kind of keeping it still sort of the same discussion, but make sure we keep moving through. I

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know you all are busy and have other things you need to get to as well. So continuing on this, but in a little different direction, more focused on retail investors. Want to turn our attention to the buy side, to the folks who actually buy these bonds. In Washington, it seems that a lot of attention has been directed towards retail investors and their advantages and challenges to the municipal market. SECs report and their April roundtable in DC put the focus on retail investors, specifically the higher cost and wider spreads generally seen in their market activity. SEC study estimates that the average spread for retail investors is two percent of the bonds price, compared to one percent for large institutional investors. No doubt we want to make sure retail investors are protected. But at the same time, we have to be careful to not burden the market with unnecessary compliance and reporting costs, as we are talking about, especially when we observe the uniqueness of the municipal securities market. Certainly its fragmented. Theres more than 46,000 municipal issuers, including states, counties, cities, towns, state and local government agencies. Its also relatively illiquid -- on any given day, 99% of outstanding municipal securities may not trade. An estimate of 70% will not trade even once in a year. Its also opaque. Municipal credit analysis is technical and timeconsuming, as we have been talking about. Plenty to talk about here. But first, I want to have our next panelists give a few a couple minutes of thought. The panel will be Tim McGregor from Northern Trust, Shawn OLeary with Nuveen, and Mary Jo Quinn at Allstate, and then my former boss, Brian Battle, at Performance Trust. [Participant laughter] CONGRESSMAN HULTGREN: So well start with Tim McGregor of Northern Trust. If you can give us a few thoughts, specifically to the retail investor. TIM MCGREGOR: Sure, absolutely. And we do manage for retail investors, high net worth investors, institutional types, insurance, corporate cash balance sheets, all type of settlement trusts. So theres all kinds of participants in the muni market. We believe its a very inefficient market, for that reason. Weve talked about the sheer volume of issuers. 46,000 issuers in the index alone. Theres probably another 20,000 that arent big enough to be in the index. Its still a market that has no investable index. So if you need any more proof that the market remains inefficient, you cannot go buy a municipal bond index. They dont exist on anything but a computer somewhere. So, pretty solid statement there. I will say huge strides forward in reducing the cost to retail investors, versus ten years ago, versus twenty years ago. I have been at Northern twenty-five, and municipals twenty-four of those twenty-five. So I have seen three, four, point retail spreads compressed to one to two. A lot of that due to the reporting requirements, the trade reporting. Do I think reporting with a five minute limit versus fifteen is going to help lower that retail markup? Probably not. But no doubt the transparency thats available today has helped the retail investor greatly. And also the products that are out there today for the retail investor. Obviously the more traditional mutual funds, but now some ETFs, some closed-end

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funds. The research thats involved in the municipal market, the underwriting costs I do not think theres an inappropriate price to retail investors to participate in the municipal market. The advantages of the municipal market for the retail investor clearly, high quality tax-free income streams. One of the few certainties out of Washington this year has been higher taxes. So, municipal bonds are even more valuable for investors for that reason. Its a question of demographics. 46 to 64 those are the baby boomers. 47 to 49 years old to 67 right now, they are right in their fixed income years. At the same time, they are concerned about pensions not being what they thought they once were. So municipal bonds are a very sought after asset class for all individuals in that age group, regardless of tax bracket. So again, the market is inefficient. The work that goes into managing these assets, selecting these assets, the accountability for these assets that are brought to retail investors, is high. So I think the participant cost is very fair. MALE: Shawn? SHAWN OLEARY: Well, you know, I would certainly agree that theres a pricing advantage for institutional investors. How much of that is you know, I tend to attribute most of that to the fact that institutional investors just have the function of scale, that retail doesnt. So when I think about the advantage that institutional has, its more informational than pricing. And what I mean by that is, if you go back five or six years ago, we had a market that was largely commoditized through municipal bond insurance. And everything sort of traded based on interest rate, and duration, and flows and appetite basically. But now, we have had issuers basically go away, following the financial crisis. I think the market penetration is five, six percent for new issue, in terms of municipal bond issuance. So much more of a credit-driven market. So its easy for Nuveen, Allstate, McDonnell, Northern [1:12:33 that all employs?] credit research analysts, to fundamentally analyze each bond, as we consider it for purchase. And then make an investment decision. A credit-driven investment decision. You know, I talk to a lot of retail investors that buy our products. I talk to a lot of financial advisors that traditionally have spent their entire career running ladders for their customers, and they bought a long bond, sold a short bond now theyre bringing assets to my firm, and Im sure the other firms around here, because they feel that theres a credit risk there that they didnt have before, and they dont have faith in the rating agencies. And I think thats probably one of the biggest disadvantages that the retail investors have. And I say this as a former rating agency analyst. But, theyre very backward looking. Theyre not a forward-looking assessment of credit risk. And by the time they actually act on information, its usually post-event. Even in our market. And were a low risk market, generally speaking. But, there is no good surrogate for the independent type of credit research that the professional managers around the table here have, thats available to the retail buyer. So as I think about the disadvantages they face, I think thats the biggest disadvantage they face in our market.

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CONGRESSMAN HULTGREN: Thank you, Shawn. Mary Jo. And I guess I will so everybody can hear, pull the microphone really close if you could. Just to make sure we pick it up. So, thank you.

MARY JO QUINN: Well, Allstate doesnt sell to any retail holders. Wwe cant buy a large issuance in the primary market, because it all goes to the retail holders. So we dont really have this kind of issue. We dont have funds like other people do. Were only buying for our own portfolio, so I dont really have anything on this topic. CONGRESSMAN HULTGREN: Okay. Well I lets yeah, well come back then, on the next one, if thats okay, with you. I mean Brian. BRIAN BATTLE: Briefly, remember, its a $3.7 trillion market, and it trades over the counter. So its made inefficiently. I mean, thats just the way it is. This is how it trades. Because its all fractured pieces and parts. So its inherently inefficient. And we have done two things to try and jam Congress or, the regulatory agencies, have tried to jam it into the corporate model. We need transparency and we need full disclosure. So TRACE has been an asset. Has been a tremendous improvement. As much as the Street probably doesnt like that, they have forced pricing to be more obvious. So certainly everybody can go look and see what bonds cost. Transparency, not as much. Corporations, easy to file. Municipalities cant. So to force a disclosure burden on municipalities is difficult. Dont try and do that. Its probably not going to work. So the main question you have is, is retail getting fair treatment? They pay a point more than institutional investors do, roughly. To Shawns point, youre exactly right. Its a matter of scale. If I want to buy $10 million worth of bonds, its better than buying fifty. So you have to normalize for that. So but a point difference for that seems fair. But we also have to remember too that if a retail investor is going to buy a house, they hire a realtor and a lawyer. And if a retail person is going to go build a trust, they hire a banker or an estate lawyer. So if you are going to penetrate a credit market like the municipal market, if youre going to do it on your own, youre going to do that at your own peril. Youre probably going to have to hire someone to do that. Youll access it through professional services of some of the people at the table here. So, that youre going to pay a point more than somebody else is not making a comparison to, well, If I hire a mutual fund company, they charge me x number of fees also. So you have to make an apples and apples comparison to somebody just wandering into the market and trying to buy bonds on their own. Theyre paying two points, rather than hiring a manager, and that point might be embedded in the fees elsewhere. TIM MCGREGOR:

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Thats exactly right. Nobodys managing municipal assets for free. So if were managing them on behalf of a large institution, theres an annual fee involved, as opposed to a commission cost for our retail investors. And the alternative trading systems that are out there have the platforms have leveled the playing field some. You know, remember five years ago, a lot of broker-dealers carried one, two billion dollars in municipal inventory. Today, thats a couple hundred million with their risk reduction mode. So, again, its not as one-sided as it used to be from that standpoint. The alternative platforms plus the reduced risk appetite of the broker-dealer community has leveled that playing field. STRATFORD SHIELDS: Congressman, I would like to say so first off, I work at a firm, we have 15,000 retail brokers. Probably the second largest retail brokerage network out there, in Morgan Stanley Wealth Management. And second off, SIFMA has actually put in so, SIFMA has put in a proposal to the MSRB the SEC and the MSRB are very focused on creating a best execution rule for the municipal market. So the MSRB has put out a concept paper, or call, you know, basically for ideas. We submitted a paper back in June, as to what we thought best execution would look like in the municipal market. People have said there are hundreds of thousands of CUSIPs in the municipal market. I mean, these arent equities. These arent liquid corporate bonds that come in bulk. You talk about ATSs, Tim. I mean, 80% of the bonds on an ATS on any given day dont trade. Okay? Dont get any bids. I mean, you know, were not going to have NASDAQ for muni bonds, okay? And I hope that as best execution is developed in the municipal marketplace, it is developed with the thought in mind that these are unique securities that are often in small pieces. That they look at the size and the type of the transaction. The information thats available on the particular security. It varies widely. A California GO bond is a very liquid known bond. The price is very well known. Theres really no price discovery. A small local school district in Illinois that rarely trades what is the correct price for that? Its not scientific. And so I think that as everybody looks at best execution I think the term the politicians at the SEC and the MSRB love cause they want to say, Oh, well were making sure that retail gets best execution. But I think it has to be in the context of what does best execution mean within what is achievable in the municipal marketplace? RICH CICCARONE: I dont want to be redundant, because so many good points have already been made, but let me just reinforce a couple of points here. One is that the EMMA, which is the MSRBs trading platform, which provides some history of actual trades, has been real helpful. Not only in retail, but institutional. All institutional parties look at that, as soon as it a bond is being shown to them, to see what the most recent trade has been. Retail can be and thats a matter of information and education. And I heard somebody say. But this particular issue, you know, is one, its kind of important, of note, that I just attended an institutional investor conference this week, which was about corporate bonds on the panel. And they were complaining about some of the same issues, you get into the

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smaller corporate bonds. So its not just isolated to munis. When you get into smaller issues, it affects both markets. One of their panelists gave a good suggestion, which I thought, wow, this is a challenge, but we ought to be more creative in trying to think about it. Part of the problem is theres what we call too many CUSIPs. CUSIPs is the label, the identifier, thats provided to a bond, for a different maturity, a different coupon, et cetera. And when you have 50,000 issuers, and in municipal bond market, we have serial bonds, we call that. And each of them has its own CUSIP for those serial bonds. The numbers are enormous. And so for when you look at these trades on EMMA, theres very likely that many of them wont be trading on a daily basis. So even if you have that access to it. So Im just going to challenge investment bankers and issuers to think about that. Perhaps theres time to consider something along a bond to make some bonds into a term bond, which would be more widely traded and more widely quoted. And they could be used for investors who are going to avoid the institutional managers, and want to do it themselves. That they might be have an they may have an alternative for them. So Ill just offer that out. CONGRESSMAN HULTGREN: Let me ask a question of how you would this group would recommend to me because I think there is concern over the spread, by the SEC. Theres some talk about best execution. Some other things that theyre pushing forward. If you could just talk of how we can explain this, of really the difference again between retail and institution. I think weve talked some about that. Weve talked about the uniqueness of the market. But any suggestions you would have for me, that I could bring back to my colleagues, bring back to our committee, of how to explain why this makes sense, I guess the difference there. How we always are trying to make that as close as possible, make that spread as small as possible, but how certain activity by Washington DC entities could really do more harm than good. I have talked about it a lot with many of the things that have passed over the last couple years, where they have been passed under the guise of consumer protection, but in ways have taken away consumer options and driven up the costs for consumers. And my question would be, how would that apply in this? Anything that you would see? Any suggestions you would have, of how do we explain the differences here? How do we do this well? And what should we be most wary of? Any thoughts? BRETT TANDE: Yeah. I might make one comment on this. And it is that, I think this is less a from my observation, because well invest some of our excess cash into the corporate bond market, and what well usually be doing in that case is buying bonds, talking with, call ten to fifteen brokers and looking for that. And to the point that was made earlier, theres no NASDAQ market in the corporate bond sector. And so in some senses, while you might have this institutional-retail issue in the muni market, I agree with your point that in the corporate market, when youve got Verizon $49 billion bond issues that name might not be a good example, but there are plenty of corporate names out there where that same issue exists. And it is a true statement. I think this is less of a my observation personally would be this is less of a policy issue as much as it is a structural

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issue. And Im not sure theres anything from a policy perspective that could be done to truly drive that down. Because of the CUSIPs, I think its just naturally going to be that there is going to be somewhat of a dichotomy. And I think you can look at the corporate bond market, even in investment grade, and you see that there too. So one challenge would be is, Im not sure how much of a policy perspective can really allay some of this issue that exists. And its not specific to munis alone. JUSTIN FORMAS: Well I was just going to say CONGRESSMAN HULTGREN: Hold the microphone closer. JUSTIN FORMAS: Sure, sure. So, how much is too much, right? I mean, how much of the spread is too much? I think you heard me go on about how much work, just, myself, that I put into it thats a lot of energy, time, money, et cetera. So and I think that were already, as a broker-dealer, we are inherently middlemen. Right? So, there has to be some spread there. My question back would just be, well, how much is too much? And then also to maybe some of the other muni-like products out there, right? Like a muni ETF I think I hear a lot of people say, Well, that is a much more efficient product. Well, where do muni ETFs get their bonds from, right? A broker-dealer who is already probably a middleman. So I think that there are additional costs built in, and just because you dont necessarily see the cost, or, like, its in the one percent management fee, youre also talking about a security that is totally different than a municipal bond as a whole. I think then if you even take it a step further, if you think one percent or two percent or even three percent spread is too much, think about the strategies that typical muni buyers have. Right? Your typical retail muni buyers, right? Retail muni buyers are buy and hold. If you can amortize that cost over lets say you buy a ten-year bond. Now all of a sudden youre talking about a little different cost than you are specific to, you know, just an ETF or now youre just now its not three perits three percent today, but you dont have to pay that for the rest of the ten-year maturity that it is. So. STRATFORD SHIELDS: I just wanted to add that, as a firm that is regulated by the SEC, that is both a rule-making and an enforcement agency, the MSRB, which is a rule-making agency, and FINRA, okay, which is a rule-making an enforcement agency, okay? You know, there are many different regulators in this market that are very active. We at Morgan Stanley think that we already have a best execution duty. That it actually comes from FINRA whats called 5310. And that we have urged the MSRB and the SEC as they work with us to harmonize to an existing rule, as opposed to creating a whole new rule that will create a new level of infrastructure on the compliance side that we would have to deal with. So I would just put that out there. You know, at SIFMA, we actually, we have a draft of a

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best execution proposal on the municipal market we call it municipal market execution that Id be happy to give to your staff for your review. CONGRESSMAN HULTGREN: Great, thank you. If you can get that to us, we will certainly make it a part of this record as well. I wonder what value pre-trade price transparency has. If you could talk about that a little bit, if anybody has any thoughts. BRIAN BATTLE: You mean the function of TRACE? Pre-trade CONGRESSMAN HULTGREN: Right. BRIAN BATTLE: So, exactly right. To the best execution rule, we are already held to a massive amount of regulatory standards for fair dealing. So my one comment on the best execution rule is, if theres any accountants here, it should be a principles not a a principles-based method instead of a rules-based method right? Is it fair, you know, once weve caught you doing something, lets see if you were fair, instead of trying to proactively reanticipate all the things that you could be caught cheating. So. So I think your question goes to TRACE. And I think TRACE is exactly what has forced this isnt a theory, it actually exists that TRACE has forced pricing down, and it already exhibits these the function of showing people what bonds are worth pre-sale. So being able to make a comparison between TRACE trades is something thats different, but I think the system already exists. CONGRESSMAN HULTGREN: Would you say the system works, or needs changes? BRIAN BATTLE: I think it works. Its free. You can get it from the government, which is EMMA, and you can look it up online twenty-hour hours a day. So I dont it doesnt get any better than that. [Multiple participants laughing] BRIAN BATTLE: I dont think. MARY JO QUINN: Thats certainly what we thought too, is that it works. And I think from the institutional investor, you have people who know to go look for things. And the question becomes, how do you educate the retail investor, to say, Theres information out there? And

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some retail investors go and look at it, and some dont. And I think the information may be there. And you can see it. But if you are asleep at the wheel, then theres nothing that I think any of these regulations will do to make it better. So Im not sure that its totally broken. I think sometimes people feel sorry for the person who didnt know. But they didnt look. So I dont think its broken.

TIM MCGREGOR: And I would say it has been a huge improvement. And initially I think some brokerdealers, traders, buy-side firms were not in favor of the new transparency. But what it has done has also improved confidence. Not just for retail investors, but its very important to remember now more than ever the global dollars that are being allocated to the municipal bond market. You know, partly because those ratios are backwards like we talked about at the start. And you have people buying municipal bonds who dont need a tax exemption. They wouldnt be buying them if they had no idea where these bonds traded, or what they were worth, or how much the market was going to be. So the transparency has helped bring in some global fixed income dollars here, to help with infrastructure needs as well. Which has been maybe not the plan of TRACE initially, but it has helped institutional investors from a confidence level as well. CONGRESSMAN HULTGREN: Any other thoughts on that? I wonder if we could talk just a little bit about retail investors finding best price. How do they find the best price? How would you recommend retail investors we talked a little bit about it, of some of the tools that are there. But if any of you have any thoughts on that, of how we can continue to get this information out there, but what are the best ways for retail investors to find best pricing? RICH CICCARONE: Its actually always a challenge for institutional as well as retail. But your folks are interested in retail here. So if I was to recommend to my best friend what to do, one of the things I would do was first of all, I would advise them, once you get your bond issued, to ask for the CUSIP if you dont know what that is. And take a look at the MSRBs EMMA website to see where its traded. The MSRBs website not only has trade information, historical, but it does a wonderful thing of providing official statement information, to give you all the salient details on the credit, the purpose of the bonds, the security, and historical information. It also provides you with secondary market information, and material events information is provided there too. So if something recently was considered by the issuer to be of material importance, they could go onto the EMMA and pull that information down too they can pull that information down as well. So, that information is all very important. Id say the as we talked about, and not to be redundant again, is that the sometimes a bond hasnt traded recently. And therefore that is a gap. So once you identify, even though there is some criticism of the ratings, which I heard earlier, which I think a lot of people have criticized as well, so it wouldnt be the first time you have heard it. But the fact is, is the rating agencies do provide at

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least some guidepost for them to then take a look at other bonds that might be comparable. Now thats a gap perhaps that could be fixed by private matters. By private functionality as well as public sector. I think as I looked at the EMMA website, and I will stand corrected if Im wrong on that, but I couldnt find it, it wasnt easy it would be nice to have a yield curve up there, that they can get either from private sources or from their own or from their own trades. In that way, that if one wants to have yield curves out there that they can compare, thats an A-rated 20-year bond issue, they can see what at least the pricing services of some sort are providing on that bond. Now thats tough because you get into a lot of market forces as well, and private sector vendors who are providing that information. But if we can get closer to that, it helps to fill in that gap, that you have if you dont have a recent trade. So Im going to leave it that its not a I dont have the perfect solution there, but its a challenge for us, and wed like to try to see if we can solve it. They can always subscribe to those private services that provide yield curves, and if they are a big enough investor that would be probably a good option for them. But if they these days, with interest rates so low, the coupon, the interest that youre getting right now on that bond issue, is relatively low, which helps the borrower, but it may not necessarily provide a lot of extra income there that pays for you to go out and buy a lot of services. MARY JO QUINN: The other thing that I would do if I were telling my best friend how to be sure that their bond was good I would actually tell them to find out what it is that the issuer is required to tell them in the default scenario. Does the issuer have to tell them only when the bond is actually in default, or if theyve hit a debt service requirement? Or do you wait is there some trigger before that? And otherwise the bond holder is sitting there all happy for a long time, not knowing that theyre sliding down a hill, and maybe there was no trigger for them to disclose something until it truly defaults, and youve got your continuing disclosure agreement that doesnt say, You have to tell me when youre sliding downhill. You have to perhaps just wait until six months later when youve hit the bottom of the hill. So I think I would tell my best friend to be sure that they know what they are being told, because maybe they shouldnt be happy today. And that I think they could find it. But I dont think the typical retail investor does that. TIM MCGREGOR: They do benefit today also from the new retail order periods on a new bond deal. So there could be a day or two where retail investors can subscribe for a new bond deal, as opposed to where it used to be institutionals would buy the entire deal, and then filter it through the broker-dealer network retail system, and prices get marked up there. The fact that they have instituted the retail order periods, definitely a big plus for retail investors. JUSTIN FORMAS: Part of our credit approval process I think that the retail investors maybe were talking about are the smaller mom and pops. The ones that are buying maybe twenty-five bonds or something like that. So as part of the credit committee approval, before we even

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underwrite a deal, part of our checklist is to go through and generate comparable scales, right? I mean, thats a requirement under the G-17 and G-23 requirements, that we as broker-dealers are required to follow. And I think that it is our again, I cant speak for the rest of the broker-dealers out there I think weve taken it several steps further than even the rule is requiring us to do. But we go through, and we get at least two, three, four comparable scales of the basically the same credit quality. The same maturity. You know, sort of all those features. And make sure that our prices are comparable to the other scales in the marketplace, I think, while maybe a specific retail investor couldnt find the comparable scales that I am using. Those comparable scales do exist in the marketplace. If you did go on EMMA, theyre typically new sales we dont use anything thats too stale. Its usually within the same week, or the week before. So youre talking about thats the way that we set our own pricing. So I think were in terms of getting a fair price, I think that that goes certainly a very far way. BRIAN BATTLE: Also might be a problem looking for a solution too. If the if the known institutional execution price is one point if thats the level that institutional players pay for you could go to any one of the fine institutions here, and get in a muni fund for some fee at a point or less. I dont know what the average muni fund fee cost is, but its certainly its you cant get in a no-load muni fund for a point or less. So if you dont have any expertise and the burden to entry is very high, hire someone to do it for you professionally. Its a very competitive business. Its a fractured market. Its a very competitive business. CONGRESSMAN HULTGREN: Thats helpful. Let me get back to just so I understand a little bit more on TRACE. My understand is is that post-trade? That TRACE reports off of. I thought Ive heard that the SEC roundtable now is talking about some pre-trade activity. Different options theyre looking at pre-trade, such as bid reporting. I wonder if any of you know anything about that, what your thoughts are, if there is if that would be helpful, if that would be harmful, if that becomes too complex in this, so any of you have any thoughts on something like other pre-trade reporting that what were hearing from SEC roundtable folks. TIM MCGREGOR: Im not too familiar with it, but I would imagine that would challenge liquidity even more than it is today, and I dont think it would be helpful to the retail investor, in terms of best execution. Theres probably not going to be a pre-trade on that bond, most of the time. So Im not sure they would be reporting something off of a matrix, which I dont think is going to be ultimately helpful. BRIAN BATTLE: Real price is always better than a virtual price.

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CONGRESSMAN HULTGREN: Yeah. Yeah? STRATFORD SHIELDS: So, Congressman, I think what the SEC is looking at is, theyre saying, Okay, well you sent this guy a statement, and it said that the price of his bonds was, like, 102. And then he sold them, and he got 101. Okay? And the problem is partially that there are these pricing services that we all use, okay, Morgan Stanley uses for all of our retail clients. And they are theoretical prices. And theyre based off of theoretical curves, et cetera. And when the actual trade occurs, that you know, it could, because of the unique nature of the security if its not, you know, a State of Illinois, State of California, something thats big and liquid, it will potentially trade differently. And so they are trying to create pre-trade price transparency. In an extent of like, to the extent that youre like, youre kind of like, kind of looks like, you know, youre supposed to get something closer to what your statement value is, and theyre concerned when people dont. And thats just the problem, is that, you know, we have to report statement values that we do off of these kind of theoretical curves, as opposed to an actual actual trading and you know, theres a lot of data that goes into it. Im not an expert on all the particular data that goes into this. And so, I dont want it to sound like its I mean, there is a lot of effort that goes into it. But its often less than perfect. In the municipal market, pre-trade price transparency again is something thats much discussed, that from SIFMAs perspective, its going to be something that is going to be imperfectly achieved at best, because again, there just isnt unless its a big liquid security, the kind of demonstrated pricing out there, the the size of the transaction, we have talked about that many times, will determine what the value is. The type of the transaction. You know, is it dirt bond in Florida? That trades rarely? That will be worth a very different price, even if its singleA. A single-A VAT versus a single-A sewer bond will trade very differently. CONGRESSMAN HULTGREN: Thanks. Switching a little bit. Just to get your thoughts on alternative trading systems. How that has impactor, alternate trading systems, excuse me, has impacted the municipal market, and your thoughts of specifically how that potentially would impact, or has impacted, retail investors. Anybody have any thoughts on that? TIM MCGREGOR: Well, again theyve been a big plus in terms of transparency, execution. I dont know in terms of volume, but in terms of number of trades, they account for almost forty percent of the trades on a day to day basis now, in the municipal market. Some of the institutional size trades probably swamp the size component, but sheer volume of actual transactions is forty percent today, which is a big number. CONGRESSMAN HULTGREN: We have been sitting for a long time, so let me ask one last thing, and then if we can take a little break and then well come back and kind of wrap back of looking forward, and

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any suggestions you might have there, but Stratford, wondered if we could talk just a little bit more, just about the best execution, and Brian, you were talking about it as well. Of, how do we present this back? I mean, my sense is that there is some momentum here that were going to have to be ready for when we get back out to Washington. To push rules. Thats Washington and bureaucrats love rules. Principles are harder for them, or you know, so help us help me do that. Or, you know, if we can put something just on the record of, what are what is the right way to do this? You talked briefly about that. And what type of principle should we be looking at? And what is the danger of having kind of a rules-based structure, if that does go forward? So if we could talk just for a couple minutes about that, and then well take a break for a few minutes to be able to stretch our legs. BRIAN BATTLE: Stratford, you go first? Yeah. STRATFORD SHIELDS: Briefly, Congressman, as you look at Ill talk about the SIFMA proposal. As we look at quality of execution, which is what people are interested in. So, the concern is that you have a retail customer and he wants to sell a bond and you say, The price is 101, and thats the end of it. Okay? And, you know, the obligation that we have is much greater than just putting a number on it. How do we put a number on it? Are there opportunities for that bond to trade? If its a well-known name, are we supposed to put it on an ATS? To let it trade that way? Or if its an obscure name, are we supposed to put a price on it, because the customer often hes concerned about the speed of his execution. Okay, you want to sell a bond. All right, well Ill put it on an ATS for you. Maybe it will trade, maybe it wont. How long do you want to leave it out there? Theyre looking to actually transact something. And so there has to be some recognition for the differential in the bonds that youre trying to sell for the retail customer. Weve talked about size, different size will generate different pricing. Are there transaction costs? It costs as much to paper a fifty bond transaction as a five million bond transaction, just from kind of compliance paperwork perspective. At the end of the day, I think that there are many ways that pricing is put on. Big dealers like us, we trade stuff all the time. We think that we can give our clients a fair price based on our knowledge of the market. There are other ways that you could do it. You could look in the ATS. You could use a brokers broker. There are a lot of brokers brokers out there that kind of function as a kind of over the counter clearinghouse for bonds. But at the end of the day, youre trying to how do you balance speed, size, transaction cost, et cetera? Again, as I have said earlier, we think that we actually have an obligation already for best execution based on the way that FINRA treats us. And its something that I think will be topical as the next year goes forward, Congressman. I think youll see a lot of discussion about best execution in the muni market. BRIAN BATTLE:

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Yeah, briefly, you know, Congressman, if youre going to insist on rules, Id say mimic the rules that already exist on fair dealing. Dont make another set to complicate the issue. We already have fair dealing rules. Were already very regulated as brokerdealers. Failing the fair dealing if someone feels like they didnt get a fair deal or werent dealt with appropriately, theres also the arbitration process that already exists if they think they got a raw deal. So it seems like the infrastructure is there. Dont reinvent the wheel. Either, if you have to put rules down, just copy the ones that already exist. Because they seem to be working. CONGRESSMAN HULTGREN: Good. Well, thank you all again. Appreciate what you are doing so far. This has been very helpful to me. Im really Im looking forward I hope youre all able to stick through for a little bit longer, because I really do think its so important for us to be getting ready, of the future. And how are we prepared for that? What are some thoughts that you might, suggestions you might have, for legislation that might make some sense, or again, getting information out to my colleagues. So lets take a five-minute break, and then well convene back here in just a few minutes. Thank you. __________________________

CONGRESSMAN HULTGREN: [Getting back and well spend a few more] minutes together, I do want to spend some time looking back, but also looking ahead. Recognizing some of the things that have happened, and that we expect to happen going forward. Its hard to talk about anything related to municipal finance markets and its future without first going back to 2008. The financial crisis and the Dodd-Frank federal response. Those reforms that came out of that crisis touched a wide array of areas we can discuss, including municipal advisors, credit rating changes, the Volcker Rule, and others. Also in the last five years, we have seen some major market events, like the Detroit bankruptcy, the events in Puerto Rico, and as I mentioned earlier, headlines here in Chicago challenges. But back in August, Gail MarksJarvis of the Chicago Tribune wrote that Chicago has become a national poster child for financial distress in the aftermath of the Detroit bankruptcy as bond analysts have been warning investors about cities and states that could be financially risky in the future. And you may all have seen the investigation the paper unveiled last week that revealed some disturbing spending habits by the City of Chicago, including an overreliance on bonds that has led to a massive debt with little oversight. In fact, the investigation revealed that Chicago has more general obligation debt per capita than any of the ten largest cities except New York. Even more than Detroit. Dim news, but then this is why youre all here. Communities are more connected than others, and we know that municipal bankruptcies and downgrades can increase costs for other government entities as well. But we know fundamentally that municipal financing is not the flaw. Bad public policy is. Its important to have transparency and accountability in how cities and towns spend their financing they secure from bonds. Further, we cannot ignore how

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bad policy at the national level affects governments at the local level. Because of our interconnectedness, a national debt racing past $17 trillion can only harm local governments efforts to borrow. So we need to address what legislation or regulatory action could help smaller government borrowers. We need to make sure that any tax reform passed by Congress maintains the full tax-exemption for bonds. When cities and towns hit hard times, municipal finance can still help them weather the storm. So what we have seen and what do we expect to see in the municipal market space? Really again, a big reason why I think this is so important that were doing this right now is, my greatest fear is what happens if there is discussion of some significant tax reform, and theyre meeting at eleven o clock at night and say, Hey, weve got to find an extra $300 billion somewhere. Lets go for that. [Participant laughter] CONGRESSMAN HULTGREN: And thats why this is so important for us to be discussing this. To make sure that people understand all of the impact Chris and I were talking over the break of really the ecosystem of municipal finance. And I am more aware of that than ever. That you cant just kind of pull out one part without impacting another part. You cant put a rule on one part without having it potentially have ripple effects all over. So, wanted to talk in this next section of how can the federal government, specifically Congress, help, or get out of the way? First, want to ask kind of our final grouping of four folks just to give a few minutes talk of really kind of where things are at, and where you see things going in the future. So I would ask Stratford Shields of Morgan Stanley if youd talk for a few minutes. Justin Formas of Bernardi Securities. Rich Ciccarone of McDonnell Investments. And then also if we can get back Mary Jo, if youd maybe have some thoughts on some of the crisis that weve been talking about, and specifically how that has hit people like Allstate or others. So with that, Im going to turn it to Stratford to give a few comments. STRATFORD SHIELDS: Thanks, Congressman. So market status we have alluded this a little bit. Post 2008, municipals have moved from what we used to call what we call a rates market, where it was essentially everything in our market was either AA or better naturally or insured fifty percent of the issuance pre-2008 was insured. To now a credit market. The two muni bond insurers that are left have AA category ratings. From S&P. Its less than 10% of the volume. Underlying credit finance, or underlying credit analysis for municipal investors has become the key. But then we get to credit of like, what does credit mean now? Okay. Lets look at the Detroit example. You talked about your partner, Jim Spiotto, Rich. What does a general obligation bond mean, in the context of Detroit? Detroit is now in federal bankruptcy. Detroit has unlimited tax general obligation bonds that are voter-approved that, according to the Michigan state constitution, are supposed to be paid first. Okay? And youre supposed to get paid a hundred cents on the dollar. They have limited tax GO bonds. And they have appropriation bonds. All of which

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come out of the general fund. All of the revenues of this come out of the general fund. In bankruptcy, the emergency manager appointed by the treasurer and the governor of Michigan proposed to treat all of these classes the same. The unlimited-tax GO, the limited-tax GO, and the appropriation bond holder are going to get ten cents on the dollar. And basically the thought is that federal bankruptcy trumps any state constitutional issue. Youve got Stockton, San Bernadino, out there as well. I think they are going to be very interesting precedents. I think it will establish a change in the marketplace. I think if you ask any investor here, they are perfectly comfortable holding a Detroit water and sewer bond, which is going to basically be unimpacted. And, you know, what does a GO bond mean? And I think youre going to see that in many other places as well, particularly entities under stress. The second thing that is a major issue in our market is on the regulatory front. There are two aspects that I want to focus on on the regulatory front, that are currently pending. One is the municipal advisor rule, that was originally proposed in 2011. The SEC just put out a final version of this rule in September of 2013. This comes out of Dodd-Frank. The municipal advisor rule is 777 pages long. It has yet to be published in the Federal Register, though it is expected soon. But its going to need its own issue of the Federal Register to publish it. I am one of few people that has read most of the 777 pages. And as the Chairman of our broker-dealer industry association, I am very concerned about some of the impacts of this municipal advisor rule. It could limit dialogue between issuers and underwriters without a financial advisor. It creates a fiduciary standard for underwriters who bring tailored ideas to clients who are not engaged as their underwriter. The SEC has proposed what they consider to be the way to deal with this is that you need to have early engagement for an underwriter, and the reality is, is that thats often not practical. Governments have procurement processes and rules. I cant say to you, Oh, Brett, hire me. I have this great idea for you. If you engage me, Ill tell you what it is. Okay? And I dont want to see what I consider to be the dumbing down of the municipal industry particularly on the underwriting side. Id just like to read to you I have dozens of these. But Ill just quote the one that I received most recently this week from a law firm, Squire Sanders, which is probably the fifth largest law firm in the municipal market, of some of the impact of the SEC municipal advisor rule, which is now published which soon to be published, would be sixty days effective thereafter. Unsolicited pitches by underwriters to municipal issuers may be limited or eliminated, which may impede the ability of municipal issuers to receive, review, and respond to refunding and/or restructuring opportunities. Theres a whole discussion of what is an advice standard and what is advice and you know, theres no bright line definition. So information of a factual nature without subjective assumptions, opinions, or views. Thats okay. Information that is not particularized to a specific municipal entity or type of municipal entity. Thats okay. Information thats widely disseminated for use by the public clients or market participants, other municipal entities, or obligated person. General information in the nature of educational materials. So, you know, basically, we can have a discussion but it cant be very substantive. It has to be very generic in nature. They have some exemptions. The SEC is now essentially telling municipal issuers how to do business in some extent. You know, they have exemptions to responses for RFPs or requests for qualifications. They put in the concept

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of a mini-RFP, to generate an idea for discussion. So Chris, if you want to have a dialogue about your SRF program, you need to send us a mini RFP, okay? [Participant Laughter] CHRIS MEISTER: Yes! STRATFORD SHIELDS: Because being in the pool, if you are an underwriter who is you have been hired by the State of Illinois IFA, example, you hire underwriters in a pool. Thats not good enough. The broker-dealer has to be engaged for a specific transaction. It says simply being in the underwriting pool is not sufficient. Okay? And this is something that is its a significant issue in our market for those issuers that dont have financial advisors, if you want to have a free exchange of ideas. In the spring of this year, I asked the SEC to re-propose this rule, as part of a delegation from SIFMA, given that it had been two and a half years since it was first proposed, and it was going to be substantially changed. And I was told, Absolutely not. We are going to implement these Dodd-Frank regulations. It has been too long. We have taken hundreds of comments. And my response was, Well, what does it matter if you take a month or two longer to get additional comments, given that its a couple years later anyway? Lets make sure that its done right. I was told, no, that, were going to do this. Were going to do this expeditiously if you count three years expeditiously. And in the interim, before this was the final rule was proposed, Congressman then Congressman Dold, who was a Congressman from Northern Illinois, introduced a bill which actually passed in the fall of 2012, to clarify that the municipal advisor provisions of the Dodd-Frank rule were there to just that. Regulate municipal advisors, who were previously unregulated entities. And somehow, in some Kafka-esque type of scenario, the municipal advisor rule has now been used to re-regulate the already regulated of the broker-dealer community. And so this bill actually by Congressman Dold passed unanimously in the House. Unanimously. Barney Frank voted for it. Dodd-Frank. And I said to then Commissioner Elisse Walter, who was the point person from the SEC on municipal issues, that that was indicative of the legislative intent of Dodd-Frank. Now I did not have a tape recorder with me, but I wish I had. But there were twelve other people in the room at the time, and I was told that a bill that passes only one house of Congress is not indicative of anything. Okay? And so as you all consider the impact of some of the things that you are proposing, you might want to keep that in mind, when you have discussions with the SEC. Currently we are awaiting guidance from the SEC on kind of like frequently asked questions, Q&A, to get more clarification on this 777 page rule. We at SIFMA have given kind of ten pages of questions to see what the responses are, so we can get greater clarity. But this is going to be effective January 1. This is going to be a potentially major change in the brokerdealer community. And if you talk to some of the smaller broker-dealers Im not even sure how theyre going to deal with this issue. Most of their clients dont have financial advisors. Fortunately, at Morgan Stanley, ninety percent of our clients have financial

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advisors. Its not necessarily an issue. But the ten percent that dont, who think that theyre sophisticated enough to make their own decisions without a financial advisor, you know, Im not sure that theyre going to be able to do business as they had if they want the free flowing of ideas. The second thing that you should look at, that I would urge you to look at, Congressman, from a regulatory perspective, are the new Fed guidelines relative to Basel III and bank portfolios, what bank portfolios can hold. I think people like Tim McGregor could probably speak better to this than I, relative to that munis will get no credit for liquidity purposes. And this is going to impact the municipal bond market, because if munis are not going to be considered in the kind of available for sale category by bank holding, and banks are big holders of bonds, from large banks to small banks, that it will kind of diminish the available universe of potential buyers for municipal bonds, which will of course increase price as you have fewer buyers in the market. So those are the two regulatory issues that I would urge Congress to think about, if they want to weigh in again. The municipal advisor bill was picked up by Congressman Steve Stivers from Ohio, and Gwen Moore from Wisconsin. One Republican, one Democrat. It has been reintroduced. But Im not sure that that is going to well I can guarantee you that its not going to pass both houses of Congress and be signed by the President in the next sixty days. So this municipal advisor rule, that will be effective in 60 days, is something that is well worth paying attention to. JUSTIN FORMAS: So, to his point about the municipal advisor rule, we are a very small broker-dealer, at least by comparison to Morgan Stanley. So in termI know, even from when I arrived at Bernardi Securities like four years ago, the regulatory environment is completely different. We have implemented several layers of policies to ensure that we are in compliance with some of the proposed and soon to be instituted rules and regulations. And so theres a few points that I would like to make, maybe about the municipal advisor rule. As a whole I think that several of our clients, just given historical relationships, and maybe they dont have a real financial advisor if you know that would be an extra layer cost, some municipalities prefer to issue, come to market for as little as possible, and to maybe not impair the taxpayers as much. They typically, maybe they have a deal or a transaction coming up, they will pick up the phone and call our bankers. That, under the municipal advisor rule, that has to stop almost immediately. Which thats perfectly fine. But its a relationship that I think my firm has had with that individual city, town, village, et cetera. We already have implemented the signed engagement letters. We go through that process. We ask them to certainly agree to have discussions about the market conditions, and what they can expect in their underwritings, and then thats when we get into the due diligence. And so, to that end, there is also an inherent cost if I have to keep up, at least on the credit side, right? I left a rating agency four years ago to maybe avoid some of the regulatory things, and certainly found myself doing more regulatory work here. And there is a cost to that, right? I mean, there is an inherent cost. And the reason that we can be a low-cost provider to the small and local governments is that we are in a position that is our niche market, right? I dont know if the larger bulge bracket banks would be interested in underwriting small and local transactions, if small broker, regional

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broker dealers like Bernardi Securities arent really around. That is the two cents on the market advisor rule. So I think from a credit quality standpoint, certainly I cant tell you how many times I heard, Well is it a GO? It is going to fall from our retail investors? And the answers are certainly out there, and they are prevalent. I think that there are some excellent analysts out there doing some excellent work on some of the distressed credits. And they are able to go far more in depth, and I think I would do any disservice to them at this point. So I think credit conditions, as a whole I asked my trading desk today, Are you more do you think that we are more or less skeptical in terms of municipal risk in the last, lets say six months? Right? I think we were talking about a transaction thats maybe, hypothetically, we decided to avoid, in February. I think given certain market circumstances like Detroit, et cetera, I said, Do you think that weve become more skeptical of some of the municipal credits? And certainly our credit research process was always fairly comprehensive. I think now we are drilling down to the furthest detail, and his ultimate answer he sort of looked at me and he agreed that the end result isnt it is certainly that we are more skeptical of municipal risk, and credit risk as a whole. Im not sure that thats how I as a market participant feel about it, but that is certainly how our retail investor clients feel about it, and certainly they are the ones that are driving some of the credit quality questions, and certainly some of the dialogue that exists in the marketplace right now. CONGRESSMAN HULTGREN: Thanks. Rich? RICH CICCARONE: Well, I think the aftermath of the 2008 credit crisis is still being felt, and still playing out. Its likely to result in changes and reforms in the rules, but it has also had an impact on the market itself, and how investors see us. We have drawn scrutiny, and some of that is very healthy. Both by the media and with investors. I mean, munis are not risk-free. They never have been. However, their historical record has been remarkably strong. And it should be that way. We want it to be that way so that we can get the lowest borrowing rates we possibly can in the marketplace in order to give, as we have been talking about here, every local government and not-for-profit or public purpose that we see beneficial, to get the lowest rates. With that said, Id like a lot of comments that have been made and Stratford, you mentioned here, the attacks that are on the General Obligation bond today possibly set by Detroit and in that particular circumstance where you have a legal standoff between the labor unions and bondholders has a really dangerous feel to it, that could, you know, unravel that safety and security and that feeling that you have, that Im sure to be paid over the next thirty years. So that has to be done very carefully. What Im concerned about is that because weve had a lack of Chapter 9, which has been good bankruptcies the precedents that are being set today are being led by lawyers that are coming from the corporate sector, in my opinion. And they are following rules and guidelines that rather apply to Chapter 11, rather than to Chapter 9. The issues about the general obligation security being an unsecured pledge in the city of Detroit really worries me, because its it has focused in the last several years

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these lawyers have focused on this whole concept of you must have a secured lien in your state, even though voters approved a designated bond issue with an unlimited tax rate to pay it off. That sounds to me like a special revenue bond. And the comments that are being made by those that are arguing this point that say that some GO bonds are unsecured could really have an unraveling effect in the standing of municipal bonds. So we are concerned about that. Now, whether Congress can weigh in on Chapter 9 and new interpretations or amendments, Im not sure. Im not in the position to know that that makes sense, or but to the fact that you can do things to provide clarity on that particular issue, I think that would be helpful. Because I think that what we want to do is to have a strong fiscal federalism in which state and local governments are empowered to be the leader, actually, when it comes to fiscal matters. Congressman, you brought up twice, two or three times, that Chicago Tribune series, which is a good series. And one of the facts that theyre trying to comment on in that particular article is the fact that bond proceeds were used to pay for projects and services that were consumed at very short run, but the bonds were long-term. I think that thats not necessarily something that we have to put new rules into place, but it is a call for more responsibility for those in government to use the basics of public finance to match the life cycle of a particular improvement, or consumption of a service, with that of the debt issue. It goes right to the heart of that. Now thats not true just with the state and local government. Thats very true with the federal government. And we have had the problem in this country, which is actually becoming catchy to our state and local governments, in which we fund operations out of debt. So that the moral, I think the moral standing that we have at the federal government has to be introspective, and just saying, Can we continue to do that, on mandates that we have? Thats not a fiscal conservative statement. Thats a practical statement. You know, if were going to build for our future. So that the example that we get at the federal government level could be very helpful here. Now in the aftermath of New York City, and when I came to the business as an analyst, young analyst soon after that, we found that the government was ready to respond in many ways to discuss reform and regulation of the muni market at that point. And there was resistance, and it came in the form of the Tower Amendment, which inhibits the federal governments ability to regulate state and local bonds. Now I understand and I respect fiscal federalism, and Im a strong supporter of that. But there are times in which, if bonds are sold outside in an interstate basis, outside state lines that does call the question that the government must have to do, is set standards that provide for transparency and proper integrity of those markets. Now theres always a danger that the pendulum swings too far, when that happens. And that Im not in favor of. There are some parts of the corporate registration that I find, that are very weak, and that they obfuscate the points that we want to make, because theres too much legalese in there. Tends to not help retail investors by any means. In many ways, not only is municipal bond disclosure over those years in which we have been in this non-regulated market improved, but in some ways its superior in some cases, with individual issuers, relative to corporate bonds. The many issues Ive seen in the area of disclosure have actually gotten better over my career. I can remember in the early 80s when you had to own the bonds in order to find out and ask information

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about those bonds, in order to get information. No one should have to buy the bonds to find out they didnt want to own them. [Multiple participants laughing] RICH CICCARONE: But that was the case for many years. We dont have that case today. Governments themselves, state and local governments, including the GFOA, have I think fostered very good standards of disclosure in that area. We still do have and so have the private entities. In those days, hospitals used to be one of the worst when it came to providing documents. Today they are not only among the best in terms of the content, and so are universities, but both of those private sector, or not-for-profit organizations not only lead in terms of comprehensiveness of their disclosure but in their timing. In a Merritt audit timing report that we do the last three years, they are near the top of the list in terms of how fast the documents come out. Now, in deference to, the fact is governmental accounting is very complicated. And it does slow down the process. I will say there were some good ideas, and I did like the idea you had here about having maybe an unaudited statement come out first to provide some timing help, but in the Merritt audit timing report, it did find that, whether you were small or large, there were late audits and there were fast audits, on both sides of that. And it really didnt matter on size, necessarily, in our study. We do find that New York City, which is one of the most complicated credits in the country, and so is New York State, consistently provide their documents within 120 days. And it should set the standard for the rest of the industry. Even though the standard for large corporations is 60 days. So we need to do things to improve it. Its still better if we can do that on our own, as it has been done. But its always the outliers that cause us to worry. So as I say this here, I say that in terms of what you can do, I think the government needs to set a moral example. Thats number one. Number two, I think that we dont want to overregulate. I think we want to be smart regulation, to the extent that we can call attention or bring the outliers around, so that the egregious situations are no longer there I think that might be appropriate. And I frankly believe that maybe issuers, it would all be in their best interest, because bad issuers hurt the marketplace. They hurt everybody else. They hurt the good ones. And we want to bring those in, to the extent that they can bring them in a self-regulatory way. But if they cant, we need to consider doing more in that area. There may be other things that we need to do, but I dont think necessarily government bailouts are it. I think that we found after the New York City crisis, revenue sharing was used for many years until the Reagan administration. And at that point in time, it was taken away. But it was taken away because it was no longer needed as much, although there was some fear about that. And I think that there may be help here, when the federal government does have, imposes mandates on governments in the area of Medicaid, environmental issues, et cetera, in which, if they have provided those mandates, theres a requirement that they have to help fund those mandates. But in other instances, I dont look for bailouts to be there, because I think bailouts can create a dependency which does not honor accountability. And therefore I would say that for the most part I would not suggest that thats the route we

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go. There might be some one idea I had thats a minor issue that does need to be explored, and if you can work it out on a fairness basis, is one of the changes the IRS had, in order to reduce the number of tax-exempt bonds that were out there, was that they limited the number of refundings. Now I understand that, and in a compromised situation, maybe we do need to limit the number of refundings, so that theyre not theres no churning in that area, or no potential for churning. But as we talk about, there are crisesalthough most cities in the country, most governments in the country have improved since 2008 according to the data we have on a large number of sectors, we are finding that those marginal players which were already hurting before the credit crisis are still in bad shape. Or they may have liabilities that they are not their useful life has already been spent, and theyre going to have to pay for that. And in those cases, were going to have some problems and perhaps following in the what happens in Detroit will make a difference here. And we may need the case for what refundings were originally intended for, and that was, after the Depression, they were intended to restructure bond issues, in order to make it so that that general obligation plan could be honored. And that was part of what a general obligation meant historically. And that is that even if you could not afford to make payment, because of hardships to your community and a lack of cash, that we could provide some relief to you to restructure that bond issue, so that eventually we could be repaid, and more importantly is that we would maintain the lowest cost for borrowing for the future, because municipal bonds reflected an honorable market with a more responsibility to pay in full sooner or later. So Im going to end on that note. CONGRESSMAN HULTGREN: Thanks, Rich. Mary Jo, do you have any thoughts? MARY JO QUINN: First of all, we are thrilled that you believe that tax-exempt bonds should stay right where they are, and we would support that, all the way along. The municipal advisor piece doesnt apply to us, so Ill skip over that. But I think the one thing that we would want more of, and I know perhaps the issuers dont want to hear this, but I really believe that the market would be a better place if it had more disclosure in the default situation. So that people can see how its either different from Detroit, or its like Detroit, or why is it that my bond isnt Detroit? And I think that the disclosure would actually help the marketplace see that not everything is going to be a municipal bankruptcy. I think people are scared of municipal bankruptcies now. Has it affected the marketplace? Yes. Do we own fewer municipal bonds now? Yes. Is it because of municipal bankruptcies? I cant say that. But people worry about it, and the more information you can give people, the more educated they are, and theyll be able to understand why they are not Stockton or Detroit, and theyll feel more comfortable with their bonds. So again, of course, because Im a lawyer, disclosure is what I think will help a lot of it. CONGRESSMAN HULTGREN:

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Thank you. Love to hear other peoples thoughts. A couple different things here, as we finish up over the next thirty, well, twenty minutes or so. But one would be, just, what is the impact? Mary Jo was talking about that it certainly has impacted or potentially has impacted some of the choices that Allstate and maybe some other companies have made. Whats your sense from others of you, of what the impact of Detroit has been, or some of the questions even that we have referenced today? SHAWN OLEARY: Well, Ill answer that in a couple of ways. I think one is kind of jumping off of one of Richs points, where he was saying theres not a lot of Chapter 9 history here, so Detroit is going to set some important precedents. I think because youve seen the Governor of Michigan effectively bless the plan for the treatment of GOs, youve already seen that affect the state of Michigan broadly. You had, initially after the bankruptcy, some deals that couldnt get done, or at least at levels that issuers would accept. But even as that market has started to move again, pricing a little wider than youd see in other states. But if the treatment that is proposed by the emergency manager is in fact blessed by the federal court, and thats what you see on exit from bankruptcy, you look nationally, about half the states either allow their governments to file for Chapter 9 bankruptcy without oversight, or with some form of oversight and permission. I would assume that and I view this is an investor, as a credit analyst for an investor, that you immediately look to those states and say, I either need enhanced security i.e. a defined secured lien in the bankruptcy code or I need a higher yield. But youre not going to get away without one or the other. So I think thats one that needs to be thought about, as we think about Detroit moving forward. More practically speaking, as I speak to financial advisors, retail customers, they are more afraid now, of the GO pledge, which I dont think is fair necessarily, but the fear is there. And retail flows do drive a lot of the pricing and demand in our market certainly. And you see a preference for water, sewer, electric, secured liens, sales tax bonds, things like that. And I dont see that changing if in fact this type of precedent is set in Detroit. So that would be my initial response to your question. CHRIS MEISTER: Rich, Id like to thank you, because I think that that was that combined with Tims comment is governments engaging in municipal finance are fundamentally different than shareholder entities. And they are driven by different things, and different layers of accountability and transparency. My own personal view, and again this is my own view, not the view of the IFA, although because our Board Chairman, Bill Brandt, in his day job, is an expert on bankruptcy and workout, we have had a great deal of Ive had a, by osmosis, Ive had a great deal of exposure to this question. In Illinois, were not a stranger to this. Twenty years ago, the city of East St. Louis had problems. They went to the General Assembly. They passed an ordinance. Bonds were issued by our predecessor. There was state moral obligation enhancement. There was a secure revenue stream, a riverboat. And I think at this point, those bonds are sort of towards the end of being paid off. And I think thats a fiscal and public policy victory. My own view, and

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frankly I grew up in Flint, Michigan, not one of the Athens of the American Midwest was that the governor of the state of Michigan has done a real disservice, because in avoiding this discussion or characterizing the responsibilities of a sovereign to its component parts, and by walking away from it, and by allowing somebody to impose private sector norms on the public context, he has and again, if its blessed by the bankruptcy court, you are going to be imposing a tax on local governments across the state of Michigan, one that they had no that they had no consent to do. And they would have been much better served to and again, I agree. There is a standoff between the unions and the pensioneers and the bond holders. But you would be much better off by tackling and attempting to address that difficult problem rather than by saying, hmm, general obligation, maybe not so much. And I think that that course of action is really going to reverberate, in getting back to how this panel began I think that this that it is going to result, if not dealt with appropriately, in higher cost of capital for vital municipal infrastructure projects, essential public service infrastructure projects, and thats something we should all be deeply concerned about. JUSTIN FORMAS: And certainly, to echo a couple of the points, so the governor of Michigan has, I agree, done a disservice to the state, and then certainly to the city of Detroit. I think if you look at Rhode Island for example not historically a hotbed of financially stable credits their state legislature took the reins, and certainly made the general obligation exactly what it is, and what it always was, and so I think you can see that there is a clear dichotomy between the way that maybe even Rhode Island, the state, and its cities, towns, counties, is being priced in the marketplace versus how credits like Michigan and all of its cities, counties, are being priced. STRATFORD SHIELDS: On the Detroit point, I think the issue is I think everybody expected that there was going to be some type of restructuring in Detroit. And that had been kind of known for a while. That even the unlimited tax GOs, youre not going to get a hundred cents on the dollar. But that the emergency manager is trying to treat all those obligations the same, the unlimited tax, the limited tax, and the appropriation bonds, I think is the big issue. I think if there was some differentiation among the proposed recovery, you know, among those, then I think that would be much more consistent with the norms and expectations of the municipal marketplace. TIM MCGREGOR: And it was why they went to bankruptcy so fast. I mean, they pulled creditors in, said Youre all legally different, but were going to treat you the same. Well then everybody went back to start to file their lawsuits, and they went to bankruptcy to put those all on hold. So thats why it happened so quickly. But, I would just say, a lot of the things weve talked about today, that help retail investors, help state and local governments, better disclosure you put all those things in jeopardy with overregulation, especially of banks. From an underwriting standpoint or from a buyer standpoint. And

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our market is teetering on liquidity now. Its not good. And it wouldnt take much to really push it over, and then when it does go over the fence, then the next marginal buyer is not until yields come so high you get distressed hedge funds and global fixed investors come in. And we have seen that a couple times in the past five years, and its very close to happening again. So to tell a bank high quality municipal bonds are not high quality liquid assets in a Basel liquidity ratio, its almost crazy. But its close to happening, and banks have been the largest municipal buyer from a percentage standpoint in the past three years. The Fed wants banks to lend money. So they cant find people to lend it to or corporations, so theyre lending it to state and local governments. So just, they need to kind of I dont want to do a political speech, but they got to get on the same page here. Okay? Banks are doing what large part of the federal government wants them to do. So to now regulate that you could really jeopardize liquidity in the municipal market with an overregulated environment or you know, a cut on the tax treatment for individual investors. I mean, its just its really right there on the cusp. And it really is not what the country needs, especially at the state and local level. They have not created jobs for the past five years, for a reason. The uncertainty around the market has caused job creation to just come to a standstill. There has been no new state and local jobs in the past five years. CHRIS MEISTER: And I would agree to your point, because the banks have also done a great deal of buying in the non-profit world too. Hospitals, higher ed. And we have seen exactly in the last three years, as an issuer, as a conduit issuer, that a very large percentage of our bond issuances go directly to banks. They are not posted on EMMA. And again, the banks have made the credit decision. The banks are bearing the risk. BRAIN BATTLE: And to Tims point too, its not theoretical. We have had 23 weeks of straight outflows from the municipal funds. And thats retail investors. Thats almost a half a year. Theres two weeks in May where there were slight inflows, so were really were over half a year. Were in the thirties for how many weeks. So the people are selling. And Im going to go to one of your explicit points. How can tax reform affect the market? And throughout part of that selloff I believe is, the threat that youre going to lose some of your exemption. You know? And, oh, maybe just a part of it. You dont just get part of an exCongress doesnt do anything partway when theyre taking a benefit away. So there would be a selloff. So what can we do about it? Or, if we how can we change the tax code to benefit, or say, help the market? So if the whole market went tax-exempt, and I think it was mentioned earlier, New York and California and Illinois will have access to the market. At a taxable rate or at a tax-free rate. But small issuers wont. In 1986, The TEFRA Act, has a carve out for small issuer exemption. And Congress has done this in the past. They recognize, and they heard testimony, that sure, youre going to change the terms and conditions of the muni market, you have to make sure the small guys have access to the market. And this is small towns, cities, counties, park districts, projects. So, one thing I think that you should be aware of is that the small issuer exemption,

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which was established in 86 at $10 million a year defines small issuers that was by my exact calculus twenty-seven years ago, and it has never been changed. It was set at 10 million. So if Congress did anything about the tax code, one of the things they might ponder, and I would suggest that they do, is change the small issuer exemption number and make it larger. Give small cause a school doesnt cost $10 million anymore. In twenty-seven years, its more. So either index it to inflation, or make that number bigger, so whatever you do to the tax code, we dont injure Decorah or Grimes, Iowa, or Joliet or Wheaton, because Illinois is going to always going to have access. We need to make sure we protect the small issuers, and make sure they have access to financing their projects and delivering services at a reasonable race. CONGRESSMAN HULTGREN: You think that makes sense as a standalone bill, in and of itself? Not to necessarily wait for larger tax reform? Or is there a risk there too, of opening that up? BRIAN BATTLE: Yeah. Sure. If you could get that if you could raise the BQ limit what were talking about is the Bank-Qualified limit 265(b)(3) if you increase that limit, it makes that many more buyers for small issuers. So it makes the market that much more efficient. If were losing liquidity, youre going to lose it on the small issuer side before you lose it on the big issuer side. TIM FIRESTINE: Wasnt the bank qualified limit raised temporarily during the BRIAN BATTLE: It was changed during the ARRA, in the ARRA legislation in 9 and 10, to thirty million. STRATFORD SHIELDS: It has been re-proposed to bring it up many times, but it has just never passed. BRIAN BATTLE: So as the market loses liquidity, sure, it would be a great time to, as a stop gap measure before the whole big thing gets done, to propose an increase in that limit to make sure we have access for small issuers. CONGRESSMAN HULTGREN: Any thoughts on that of what the best is it best to index it? Is it best to set a new level? Whats your thought? TIM FIRESTINE: I think you start by setting a new level and you index it. I think thats what we argued back when we changed it the last time, to try to get that done permanently.

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CONGRESSMAN HULTGREN: Sure. Yep. Any other thoughts on that? CHRIS MEISTER: Yes. I would add the same problem applies to industrial revenue bonds, which again go back to the 1980s. I have brought and Ill submit to your staff a list of industrial revenue bonds that have been issued in your district and across the state. And again, it faces the same problem. It needs to be modernized. It needs to be indexed. And most importantly, the small issue and the industrial revenue component or sector of the municipal market needs to reflect 2013 and not the middle 1980s. TIM FIRESTINE: If I could just comment on your question about how you can help, I think doing what you are doing here is important to us, because its being inclusive. Its getting the players around the table, and having the conversation about what those impacts are. And perhaps having that conversation before things are sort of set in a proposal and then given to us to react to it, after it has come out publicly, and people are in their position. I mean, the municipal advisor issue is an important one to us, but 700 pages is a bit overkill, and you know, to try to protect those issuers who are out there who probably arent sophisticated seems to me there might be a way to do that, but also not sweeping everybody into the same place, and requiring everybody to have an advisor. But if that conversation can happen first, before something gets out there, I think that would be really helpful. STRATFORD SHIELDS: Go ahead, Brett. BRETT TANDE: On the municipal advisor rule as well. I can say, as an issuer, we have absolutely zero desire to sign engagement letters far in advance of hearing any idea. Its just not its not going to happen in that. Its not going to happen in any other line of business that Cadence is in, as an example. And I think its important that folks understand the critical role that an underwriter plays. They sit at the nexus between supply and demand. And as much as you you know, I think financial advisors can serve a very important role. But I think what is very telling is that when a bond issue comes to market, and a financial advisor is trying to understand, Is this the right level? they dont have traders. Theyre calling other underwriters saying, How do you think thats doing? So I think that is very telling in itself of how this market operates. And to have something like the municipal advisor rule go into effect, 700 pages, I didnt realize it was that long youre effectively restricting the flow of information. That is going to result in folks like me, at Cadence, evaluating opportunities to reduce the cost of our debt. You know, its just going to reduce that. The impact of that is that is when we go to budget, and set capital spending levels for future years, and were going out five years at that to the extent that were paying higher interest, that reduces our ability to spend elsewhere. Were trying to

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bring more primary care physicians to our area so that we can improve preventative medicine, as opposed to defensive medicine. Thats expensive for us, to the extent that we dont have were paying more money interest because theres a restricted flow of information is hurting communities. And so thats very important on that perspective. So from an issuer perspective, and I think you would hear this loud and clear, I would imagine, throughout the healthcare industry, thats a real that we look at that as impairing our ability to operate. And so thats one item. And then I just wanted to circle back to one item of disclosure. Because I think the healthcare industry Rich, what you were saying earlier is important is, ten years ago, healthcare was the pariah industry within munis. It was high yield. No one wanted to touch it. And my sense is today, when you look at our disclosure documents you know, ours is probably forty or fifty pages. Theres some in the Greater Chicago area that are as many as eighty. And a lot of that information doesnt change necessarily quarter to quarter or year to year. Its stating very basic items. But it actually doesnt take that much to put together. And I would argue that over the last ten years, youve seen healthcare come in a lot. And so while there is an explicit cost for us to keep disclosure current, I think there has been a very large indirect benefit that we have received as an industry, in the fact that the bonds I think theres much greater clarity into how healthcare organizations operate. So I think there is a happy medium with disclosure. But I think its more than just the explicit cost of it. I think to the extent that you can level the playing field in terms of information, there has been demonstration that that can lower interest costs as well. RICH CICCARONE: I just want to Brett, you make me think of something that I would like to at least give you as input. And that is, its so important that we consider, that we talk about municipal bonds, were not just talking about governmental issuers that deserve the tax exemption. And I think that the is particularly and its important now to consider, in light of uncertainties, not only are going on in the future for fisfor the fiscal future, particularly involving the new healthcare program. Theres a lot of uncertainty going along with that. And I think now to pull the wool under the not-for-profit organizations who provide what I would call infrastructure healthcare in their communities, would be a very unwise thing to do. Same thing could be said really for holding down the cost of college. And its already too expensive. Now, we need good policymakers in there that are in the universities too, that dont go overboard with how they use their money. And maybe theres ways to provide that accountability. But for many of them thats not the issue. For many of them, its just, we want to keep the cost of providing higher education down, just like we do for healthcare. The program weve done in the Sate, we do run underserved healthcare, it has been critical that the lower cost of financing that we can provide for them has been very important and they have mentioned that over and over again, to their ability to get their projects done. STRATFORD SHIELDS: I think, Congressman, one thing I would urge you to have your staff take a look at, if there ever is a tax reform bill, is to perhaps reallocate or rewrite how volume cap in

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Illinois is distributed. Volume cap is the ability to issue tax-exempt debt by student loan entities, industrial development, revenue bonds, housing agencies, et cetera. In 1986, when tax reform occurred Rich could probably give a better summary of this Dan Rostenkowski basically did a special carve-out for Illinois. And rather than in almost every other state, you know, basically goes to a state agency like IFA and is then distributed out. In Illinois it goes to some to the state and some to home rule cities. Okay? Which include Chicago and a whole bunch of other places. And you can buy Illinois is the only place you can buy volume cap in the secondary market. I mean, its you know, it doesnt make any sense as to how it works. And I think that almost everybody would agree in our marketplace that there could be a more rational way of allocating out volume cap in Illinois, that was carved out in the 1986 federal tax reform act, than currently exists and, you know, have one central entity that would allocate cap. CHRIS MEISTER: An excellent point. [Multiple respondents laughing] CONGRESSMAN HULTGREN: Any last thoughts? Weve got just a couple more minutes left. Any last thoughts? Well open it up. TIM MCGREGOR: Just one more thing which I think everybody assumes will be changed in some of the Volcker rule language coming out maybe very soon. And the MSRB wrote a letter about this too. Just broadening the definition of what a municipal bond is. Where initially they said it was just a direct obligation. So essentially GOs and others would not be exempt from trading proprietary rules and things like that. So, it was very surprising to see it in there, and I think theyve got a lot of feedback that it needs to be changed, but I would echo that. So hopefully when they do revise it, that broader definition is included. BRIAN BATTLE: As Rich said, and this is the its the moral imperative, you know, that it costs less for a municipality to borrow, but what youre doing is, youre making a tradeoff for services for interest expense. So I think thats its just as simple as that. And its a cost shift from the federal level to the state level. So. CONGRESSMAN HULTGREN: Well again, I just want to thank you all. This has been a big commitment by all of you to be here. I know this was kind of a long meeting. And you all are extremely busy. Your time is very valuable. So I just want to say thank you so much. Couple things in closing. We will be back in touch if thats all right. Our hope is to transcribe, or at least do a very thorough Executive Summary of what happened today, get that back to you hopefully in the next couple weeks, to get your thoughts. Make sure that we were accurate in what

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you had said, and what your thoughts were. And then put that together to present to the Financial Services Committee, and to our leadership in the House, and maybe to other interested folks. Our senators from Illinois, maybe to pass that along to them as well, if youre okay with that. We would also ask, if you have other material that you think would be helpful for us to put together in this, or a statement that youd want to make in a more official way, you certainly are welcome to do that. We would love to have that. The other thing Id ask as we move forward is, wed love to continue to have you as a sounding board, as issues come forward. If youre willing to do that, please let us know. One other another thought is, if were missing people that we should be including in this conversation, let us know that as well. We know again, its busy times, and theres so many things that could happen. I think this was a good size to have this type of conversation, but we also want to make sure if were missing certain people or certain segments that we ought to have, please let us know that as well. In conclusion, again, thank you so much. This isnt a one-time activity for us. We really I want to learn more. I want to be a champion for Chicago, for Illinois finance, but also for our national financial structure, specifically for municipal finance. I think it is so important. For the purpose, we want to support munis certainly not perfect, certainly always looking for ways that we can make improvements, but recognizing this is something thats so important, that has had such a big role in providing vital services in a cost-effective way, very accountable way, to our municipalities, to local government, to non-profits, and making sure that that can continue. And on the flip side, having something as an investment that can be a very good, predictable, something that people can understand, and know who theyre working with thats very accountable. So we want to be helpful, we want to be a strong voice, and a leader on this, where its appropriate. We certainly want to take all of your ideas and continue working on this. So thanks again for your time. Thanks for doing this, and hope you have a great rest of the evening.

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WELCOME
I am looking forward to a productive day of discussion covering municipal financing, a lifeline to local governments and a key to reviving our countrys worn infrastructure. Participants have been invited because of their experience and diverse backgrounds in the market. This event is informational to provide lawmakers a concise discussion of pressing topics with a cross-section of market participants. Our goal is to end the day with a better understanding of the marketplace and the important role municipal bonds play in the success of growing businesses and making our communities more competitive. As a member of the House Financial Services Committee, I plan to share a transcript of this event with my colleagues with an eye toward educating other members of the Committee. I hope the discussion is free flowing and rewarding for everyone. Thank you for participating in todays event.

Randy Hultgren, U.S. House of Representatives

P A R T I C I pA N T S
B r i a n B a t t l e , D i re c t o r, P e r f o r m a n c e Tr u s t C a p i t a l P a r t n e r s , L L C
Brian has spent over 25 years analyzing, underwriting and trading in the fixed-income market. He has proven to be a tremendous asset for Performance Trust as well as the industry, particularly in his roles of municipal bond expert and media liaison. Recently, he has taken on a new role within Performance Trusts growing Analytics Group. As its director, he will use his expertise to bring our disciplined analytical approach to the middle markets in the financial industry. Brian is a frequent on-air commentator for CNBC, Fox News, Bloomberg, WTTW Chicago Tonight, NPR, and MarketWatch radio. He has been quoted in the Wall Street Journal, Chicago Tribune, Reuters, and numerous online financial news sources. Brian joined Performance Trust in 2005 as a trader and underwriter. Prior to Performance Trust, he spent a decade at Griffin, Kubik, Stephens & Thompson, Inc. He began his career at American National Bank & Trust, a wholly-owned subsidiary of First Chicago (JP Morgan). Brian holds a Bachelor of Science degree in Business and Economics from Winona State University in Minnesota and an MBA from DePaul University. He is a past president of the Municipal Bond Club of Chicago and an instructor at the Municipal Bond School in Chicago.

R i c h a rd C i c c a ro n e , P re s i d e n t & C h i e f E x e c u t i v e O f f i c e r, M e r r i t t R e s e a rc h
Mr. Ciccarone is Managing Director and Chief Research Officer and has thirty-five years of investment industry experience. Mr. Ciccarone is responsible for managing the Companys fixed income investment research resources, including the management of research analysts and analytical tools to support client portfolios. In addition, Mr. Ciccarone is President, CEO and a majority owner of Merritt Research Services, LLC, a municipal database research company. Prior to September 2001, Mr. Ciccarone served as Senior Vice President and CoHead of Fixed Income at Van Kampen Investments Inc., where he was primarily responsible for municipal asset management. Prior to that position, he served at Van Kampen as Senior Vice President and Co-Head of Municipal Investments and Director of Research. From 1989 to 1996, Mr. Ciccarone was Executive Vice President at EVEREN Securities Inc (Chicago) and served in various capacities at its predecessor firms (Kemper Securities Inc and Blunt Ellis & Loewi. Inc) as an Executive Vice President and Director of Fixed Income Research. From 1983 to 1989, Mr. Ciccarone was a Vice President and Director of Unit Investment Trust Research for Van Kampen Merritt Inc. Prior to 1983, he was manager of municipal research at Harris Bank (Chicago). Mr. Ciccarone is a co-founder and past national chairman of the National Federation of Municipal Analysts and has received numerous awards and distinctions as the top buyside research director and top municipal generalist analyst from SMITHs Research & Gradings and The Bond Buyer as well as a first team All American Fixed Income Analyst from Institutional Investor magazine. Active in community affairs, Mr. Ciccarone has served as an elected trustee of the Hinsdale Village Board as well as a member of the Hinsdale Firefighters Pension Board. He is as an executive member of the Civic Federation of Chicago Board of Directors and the co-chair of the organizations State and Local Pension committee. He earned a B.A. degree at Miami University (Ohio) and a dual Masters degree in Public Administration and Urban Studies from the University of Akron.

Participant Biographies | 54

Ti m o t h y F i re s t i n e , P re s i d e n t , G o v e r n m e n t F i n a n c e O f f i c e r s A s s o c i a t i o n
Timothy L. Firestine has worked in public sector management for more than 34 years. In his current role, he serves as the Chief Administrative Officer (CAO) for Montgomery County, MD, a position he was appointed to in November 2006. Prior to his appointment as CAO, Mr. Firestine was the Countys Director of Finance for 15 years and before that, held various management positions over a 12 year period in the Countys Office of Management and Budget. Before coming to Montgomery County, he was the Budget Officer for the Allegheny County, PA Controllers Office.Mr. Firestine received his Bachelor of Arts in Political Science from Albright College in Reading, PA, and his Master of Public Administration from the University of Pittsburgh. He is currently the President of the Government Finance Officers Association and, in the past, served as vice chair of its Committee on Debt Management. He is also a member of the District of Columbia Water and Sewer Authority, where he serves as the Vice Chair. In the past, Mr. Firestine also served as president of the Maryland Government Finance Officers Association; President of the Board of Trustees for Suburban Hospital Health Care System, Inc., in Bethesda, MD; and President of the Board of Investment Trustees for the Employee Retirement System for Montgomery County. Mr. Firestine was an adjunct professor at the University of Marylands Graduate School of Public Policy where he taught Public Finance.

J u s t i n F o r m a s , D i re c t o r o f M u n i c i p a l B o n d C re d i t R e s e a rc h , B e r n a rd i S e c u r i t i e s
Justin Formas is the director of municipal bond credit research at Bernardi Securities. His primary responsibility is oversight of the firms municipal bond credit research process. He also serves on the firms credit committee and frequently authors market commentary. Justin is also responsible for maintaining the surveillance of existing issues, updating internal rating designations and periodically releasing market commentary. Prior to Bernardi Securities, Mr. Formas spent six years as an associate municipal credit analyst at Standard & Poors. Before leaving Standard & Poors, he successfully passed Level I of the S&P analytical certification exam, which indicates he is proficient in corporate, government and structured finance credit analysis and has a comprehensive understanding of the capital markets. Justin holds a BS in public financial management from Indiana University and an MBA in financial analysis from DePaul University. He also holds the Chartered Alternative Investment Analyst (CAIA) designation and the Series 52 Municipal Representative license. He is a member of the National Federation of Municipal Analysts and the Fixed Income Analyst Society.

Timothy McGregor, Director, Municipal Fixed Income Management, Northern Trust


Timothy T.A. McGregor, Senior Vice President of Northern Trust, manages the Northern Intermediate Tax-Exempt Fund and the Northern Tax-Exempt Fund and co-manages the Northern Florida Intermediate Tax-Exempt Fund. Mr. McGregor began his career at Northern Trust in 1989 and has held positions as an investment manager representative and taxexempt fixed income manager for high-net-worth individuals. He has managed the Northern Tax-Exempt Fund since the beginning of 1998, the Northern Intermediate Tax-Exempt Fund since the end of 2000 and has co-managed the Northern Florida Intermediate Tax-Exempt Fund since October 2004. Mr. McGregor received a B.S. in economics with a minor in East Asian studies from Indiana University. He is a CFA charterholder.

C h r i s M e i s t e r, E x e c u t i v e D i re c t o r, I l l i n o i s F i n a n c e A u t h o r i t y
Chris Meister has served as Executive Director of the Illinois Finance Authority since 2009, when he was first nominated by the Governor and hired by the IFA board. Between 2007 and 2009, Chris served as the IFAs General Counsel. Prior to that, he was Director of Legislative Affairs for the Illinois Department of Commerce & Economic Opportunity where he worked closely with the Illinois General Assembly on a variety of matters involving job creation and retention, including the passage and extension of the Illinois Film Tax Credit. Chris has also worked in private law practice including most recently at the firm of Holland & Knight. Last year, Chris was selected as part of the inaugural class of Edgar Fellows through the University of Illinois Institute of Government and Public Affairs. Chris served as a co-chair of the Finance Committee on Governor Quinns Elgin-OHare Western Access/By-Pass Commission and looks forward to a similar upcoming assignment on the Tollways Illinois 53/120 Finance Committee. He was a clerk for Illinois Supreme Court Justice Mary Ann McMorrow and is a graduate of the University of Illinois College of Law, DePaul Universitys College of Liberal Arts and Fenwick High School. Chris and his wife Connie live in Oak Park with their four children, Jake, Julia, David and Kathryn. On Sunday mornings, he plays co-ed soccer through his local park district generally with more enthusiasm than skill.

55 | Roundtable on Municipal Bond Finance & the Finance Market

S h a w n O L e a r y, Vi c e P re s i d e n t , S e n i o r R e s e a rc h A n a l y s t a n d M a n a g e r, N u v e e n
Shawn manages the Municipal Fixed Income groups research teams covering higher education credits, non-profit credits and state/ local governments as well as the generalists supporting separately managed accounts. He began working in the financial industry in 2002 and joined Nuveen Asset Management in 2009 to start up a research team supporting separately managed accounts. Shawn previously provided credit analysis for Moodys Investors Service where he covered a wide variety of municipal sectors, including general obligation, special tax, water/sewer, public power, airports, transportation, municipally owned hotels and other publicly supported projects. Shawn earned a B.S. from Bates College and a M.P.P. in public finance with honors from the University of Chicagos Irving B. Harris School of Public Policy Studies.

Mary Jo Quinn, Corporate Counsel, Allstate


Mary Jo has been in the Law Department of Allstate Insurance Company since September 1996. Ms. Quinn leads the Securities Legal Team and provides legal review of municipal bond transactions, distressed securities and structured financings. She is also active in legislative issues related to financial reform. Ms. Quinn also leads Allstates legal compliance with the Investment Adviser Act of 1940. From 1990 to 1996, Mary Jo worked for the law firm of Jones Day where she served as bond counsel to numerous governmental entities and had extensive experience in serving as counsel to underwriters and letter of credit banks; and provided legal services on tax-exempt derivative products. From 1988 to 1990, Mary Jo worked for Kutak Rock, serving as bond counsel and underwriters counsel. Mary Jo received her B.S. with highest honors from the University of Wisconsin (1977), and her J.D., from University of California-Hastings College of Law (1988), where she was a Tony Patino Fellow.

S t r a t f o rd S h i e l d s , M a n a g i n g D i re c t o r, M o rg a n S t a n l e y
Mr. Shields is one of the firms senior bankers and from 2007-2012 served as the Head of Morgan Stanleys Public Finance Department. He currently serves the Chair of the Securities industry Financial Markets Association (SIMFA) Municipal Division (the industry association for municipal underwriters) and is one of the leading voices in the industry. Since 2000, he has served as lead banker or advisor on more than $20 billion of financings for a variety of major issuers including general obligation, appropriation, transportation, student loan, water and sewer, economic development agencies and higher education institutions, among others. He has worked extensively with issuers such as the States of Illinois, Ohio, Mississippi, Kentucky and Pennsylvania, and Cities of Chicago, Cleveland and Cincinnati for their water, wastewater and general obligation credits. Mr. Shields has also worked with a variety of state agencies across the United States including state revolving fund agencies including the Ohio Water Development Authority, student loan agencies such as the Illinois Student Assistance Commission and Pennsylvania Higher Education Assistance Authority, economic development financing agencies including the Commonwealth Finance Authority (PA) and state building authorities including the Ohio Building Authority and the Kentucky State Property and Buildings Commission, among others. In addition, Mr. Shields led Morgan Stanleys finance team for the State of Mississippis post-Katrina financings including coordinating institutional investor calls for the State after the Hurricane and serving as senior banker to the State for financings for its General Obligation, Department of Transportation and Development Bank (Hurricane Katrina Relief Bonds and Electric Utility Restoration Bonds) credits. Prior to joining the securities industry, Mr. Shields served as President of the State Controlling Board and Deputy Director of the Ohio Office of Budget and Management (OBM). At OBM, Mr. Shields had oversight responsibilities for the States capital budget expenditures. He also served as Director of Administration for the Ohio Office of the Governor, where he was a member of the Executive Staff and Cabinet Management Council. Mr. Shields holds a B.A. in History from the Ohio State University, an M.A. in American Politics and International Relations from Columbia University, and an M.B.A. in Finance from Columbia Business School, where he was elected to the national honors society Beta Gamma Sigma.

B re t t Ta n d e , Vi c e P re s i d e n t a n d Tre a s u re r, C a d e n c e H e a l t h
Brett Tande is Vice President and Treasurer for the Cadence Health, serving CDH since April 2011. Before joining the health system, Mr. Tande served as executive director at Morgan Stanley where he focused on financing and strategic advisory assignments for not-for-profit hospitals and health systems. Mr. Tande began his career with KPMG and held positions at Raymond James. A graduate of Washington University in St. Louis, he earned his Bachelor of Science in Business Administration. He is also a member of Healthcare Financial Management Association (HFMA).

Participant Biographies | 56

Washington DC Office: 332 Cannon HOB Washington, DC 20515 tel.202-225-2976 Geneva Office: 1797 W. State Street, Suite A Geneva, IL 60134 tel.630-232-7104

C O N G R E S S M A N R A N D Y H U LT G R E N
P ro u d l y re p re s e n t i n g t h e f o u r t e e n t h d i s t r i c t o f I l l i n o i s

ROUNDTABLE ON MUNICIPAL FINANCE & THE MUNICIPAL BOND MARKET: DISCUSSION GUIDANCE
Welcome! I am looking forward to a productive day of discussion covering municipal financing, including pending and potential legislation. Participants have been invited because of their experience and diverse backgrounds in the market. This event is informational, to provide lawmakers a concise discussion of pressing topics with a cross-section of market participants. Our goal is to end the day with a better understanding of the marketplace and the important role municipal bonds play in the success of growing businesses and making our communities more competitive. As a member of the House Financial Services Committee, I plan to share a transcript of this event with my colleagues with an eye toward educating other members of the Committee. I hope the discussion is free flowing and rewarding for everyone. Thank you for your time, Randy Hultgren U.S. House of Representatives

DIScUSSION TOPIcS:
1. Issuers
General question: Who are the municipal bond issuers and how are their products brought to market? Other questions of interest: Why is the municipal tax-exemption important? Who benefits from the tax-exemption? How would changes to the taxexemption affect local communities and infrastructure projects? What regulatory challenges exist in underwriting municipal bonds? How does underwriting determine potential investors? How well does the primary offering process work? What investment instruments are used to hold municipal debt? How would regulatory changes affect demand? Would the SECs money market reforms affect the municipal market? How can credit quality be more accurately determined? Can issuer disclosure be improved without regulatory action? Is improved disclosure accessed by retail investors?

2. Retail Investors
General question: What are the advantages and challenges to retail investors in the municipal market? Other questions of interest: It is estimated that retail investors see 1-2% higher costs than institutional investors why? How does the fragmentation of the municipal market affect price? How does the liquidity (or illiquidity) of the municipal market affect price? Do these higher costs impact retail investor behavior? How do institutional investors find and execute at best price? How do retail investors find and execute at best price? and what is best price? What impact has post-trade (TRACE) transparency had on transaction cost and liquidity? What impact would greater pre-trade transparency have on transaction cost and liquidity? How have alternate trading systems (ATSs) changed the municipal market and have retail customers shared in the benefits of ATSs? What additional resources (tangible and intangible) are available to institutional investors? What does best execution in the municipal market look like?

3 . M a r k e t S t a t u s & F u t u re
General question: How have recent events affected the municipal market and what changes can we see coming? Other questions of interest: Since the 2008 crisis, how has the municipal market developed? and why? How have municipal bankruptcies and other crises affected the market? Does a credit event, like a downgrade, affect other issuers? Does the current regulatory structure of municipal securities (SEC, MSRB, et al.) serve all market participants fairly? What new rules and regulations will affect the market? Will new credit rating requirements make the municipal market better? How will the SECs municipal advisor rule impact the market? Could regulators improve the proposed Volcker Rule (Oct. 2011)? Would a reproposal give market participants more clarity and confidence? How could tax reform affect the market? What parts of the tax code should and should not be changed? What activity should the Financial Services Committee consider legislative proposals and regulatory oversight?

57 | Roundtable on Municipal Bond Finance & the Finance Market

REPEALING TAX-EXEMPTION
Impact on Small and Medium sized Communities
Ronald P. Bernardi President Justin Formas, CAIA Director of Municipal Bond Credit Research John E. Balzano Investment Banking Representative

February 2013

INCREASED LOCAL GOVERNMENT FINANCING COSTS ultimately lead to higher taxes and fees.
This report demonstrates the potentially detrimental effects on taxpayers and residents if municipalities are forced to issue taxable debt as a result of proposed changes to the federal income taxexemption of municipal bonds. This is a core issue for local governments, particularly in the face of current and future budget constraints. The impacts are no more evident than when viewed from the perspective of small and medium-sized issuers, who comprise the majority of financings that come to market each year. The two examples presented in this report quantify the increased financing costs that will result if the tax-exempt financing option is repealed or if a limit is applied on the value of tax-exemption. These case studies should serve as a warning for thousands of communities across the country. Each year thousands of communities issue tax-exempt bonds to finance infrastructure projects. They build schools, roads, courthouses, and village halls. They invest in essential water and sewer projects, and public safety initiatives. Without question, every man, woman, and child living in these communities benefit from these public purpose facilities. Equally indisputable, is that without a tax-exempt financing mechanism the cost of these projects could increase significantly. While the increase in costs will vary from community to community, the result will be: fewer critical projects built, diminished effectiveness of scaled back projects, and almost certainly higher local taxes and fees. We believe local taxpayers and residents across the country would find all of these scenarios upsetting and problematical.

REPEALING TAX-EXEMPTION Impact on Small and Medium sized Communities

This analysis features two Illinois municipalities that both issued a taxable and tax-exempt series on the same day. Lemont issued in 2012 and Rockford in 2009. Additionally, we chose these two examples because: The tax-exempt and taxable series are of similar size and similar structure. Both issuers, in recent years, have accessed the market every 12-18 months and are of solid credit quality. Both are above average in their levels of market sophistication and understanding. 3.

service amortization in each Column B scenario rather than a level debt service run. This is atypical of what we view as a properly structured financing and most likely understates the additional cost incurred by the issuer. We assume the basis point spread for any added maturities in Column B scenarios are at the same basis point differential as the actual spread on the final maturity of the Column A taxable series. This assumption most likely understates the true cost increase to the issuer. In our experience for smaller issuers such as these, the basis point differential for taxable issues tends to increase as the maturity date is extended.

Our data is based on actual numbers and facts and not grounded in a multitude of abstractions and assumptions. The data represents market reality, not academic theory which often serves as the basis of reports critical of the present day municipal bond market. Column A shows the issuers actual borrowing cost. It shows the combined annual debt service payments of the tax-exempt and taxable series, the total debt service of both issues and the respective Net Interest Cost (NIC) of the tax-exempt and taxable series. Column B shows a revised debt service payment schedule. Column B totals the cost differential between the issuer's actual cost of its tax-exempt/taxable series combination versus a similarly structured taxable issuance. This side by side comparison illustrates the increased debt service cost the issuer would incur if prohibited from issuing the tax-exempt bond series captured in the Column A totals and instead issued one, larger, fully taxable series for the entire amount borrowed. For the issues highlighted in Column A, the respective tax-exempt and taxable series were not identical in par value size and debt amortization schedules did not mirror one another. In order to present the Panel B comparisons, we made these assumptions to arrive at the Column B debt service schedules: 1. We use the longer maturity, Column A amortization schedule of the two series (tax-exempt series in both cases). We combine the par values of each maturity year in the Column A series into one taxable maturity in the Column B scenario. We realize this produces a front end loaded debt

Column C shows revised debt service schedules applying all of the same assumptions as made in the Column B scenarios with one significant modification; we assume a traditional, level debt service run for the issuer, a more likely debt borrowing structure than the Column B structure.

2.

C.

compared to its actual cost. This debt structure scenario is more likely than the structure used in Column B adding $1,737,000 of project costs for Lemont and its residents. At these costs levels, the project is likely untenable. Similarly, Rockford, Illinois would see its financing costs increase 4 percent in the Column B scenario and approximately $327,000 or 8 percent in the third scenario.

These examples show the important role tax-exempt financing plays in lowering building costs in these communities making essential public purpose building projects financially feasible. Additionally, there are many taxing bodies serving these communities. Lemont taxpayers and residents are typically assessed by more than one dozen different jurisdictions. The debt service costs of these jurisdictions would also increase similarly. Communities across the country would experience similar increases in their project costs if tax exemption is repealed or reduced. In fact, we would expect less frequent, lower credit issuers to see cost increases of even greater magnitude than what Aa2 rated Lemont and A1 rated Rockford scenarios show. Repealing tax-exemption or substantively altering it by capping it at 28% will increase financing costs for local building projects across the country. This impacts all of us in a significant way. Tax-exemption allows local officials, driven by local needs to make affordable infrastructure investments their communities need, want and are willing to finance. The current market tends to allocate capital efficiently when all its benefits are considered- jobs creation, reduced cost of capital for local building projects, risk distribution to investors, autonomous decision making. These are dynamics of a healthy and efficient market that should be fostered not curtailed. Today, local governments can raise capital at low interest rates not seen in over four decades independently of the federal government. Tax-exemption helps ensure this independence. Not all tax expenditures are bad policy. Tax-exempt municipal bonds issued to finance essential purpose building projects is one such instance. Why alter this successful dynamic?

As you can see, the result of losing tax-exempt status is telling and financially significant for these two local governments. In the Village of Lemont, Illinois scenarios, the total interest cost and total debt service costs increase dramatically. This is a direct outcome of having to issue taxable bonds for the entire village hall renovation project rather than relying on tax-exempt financing for approximately 43% of the project cost. Specifically: A. Lemonts total project cost will increase almost $800,000 or 7 percent in the Column B scenario. This equates to an annual debt service cost increase of approximately $44,000, not an insignificant increase given the Village's 2012 operating budget of $7 million. If this increase in debt service is not funded out of general operating revenues then local real estate taxes and fees may be raised to compensate for the shortfall or the project scope will be reduced. Either scenario is dubious for Lemont and its residents. B. The Column C scenario offers an even direr picture for the Village, Lemont's total project cost will increase over 15%

REPEALING TAX-EXEMPTION Impact on Small and Medium sized Communities

DISCLAIMER
The information contained in this report has been compiled by Bernardi Securities, Inc. from sources that are believed to be reliable, but Bernardi Securities, Inc. makes no warranty as to the accuracy, completeness or correctness of the research. The views expressed herein are the views of the authors only and are accurately expressed. All opinions and estimates contained in this report are subject to change. All opinions and estimates are made in good faith but without legal responsibility. This report is prepared for general circulation in the investment and political community. The examples seen in this report are used for illustrative purposes. To the full extent permitted by law Bernardi Securities, Inc. does not hold any liability for consequential decisions arising from use of this report. Nothing contained in this report may be copied without the prior consent of Bernardi Securities, Inc.

Washington DC Office: 332 Cannon HOB Waashington, DC 20515 tel.202.225.2976 fax.202.225.0697 Geneva Office: 1797 West State Street, Suite A Geneva, IL 60134 tel.630.232.7104 fax.630.232.7174 Connect online: hultgren.house.gov facebook.com/RepHultgren twitter: @RepHultgren youtube.com/RepHultgren

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