THERE'S little wonder that municipal-bond sales continue to set records in the United States: More than $1.1 trillion worth of municipal bonds are outstanding. With enactment of tax reform in the late 1980s, muni-bonds have become one of the few remaining tax shelters for middle-class Americans. Municipal bonds usually pay higher interest rates than US government bonds. Interest earnings are usually exempt from federal taxes, and some state and local taxes.
Unfortunately, the muni-bond market lacks the clear regulatory oversight faced by other significant investment instruments, such as equities and US Treasury securities. During the past year alone, at least three states - Massachusetts, New York, and New Jersey - have seen scandals about political contributions to public officials in charge of municipal-bond underwriting programs. Moreover, bondholders in the secondary market, where muni-bonds are traded long after they have first been issued and rated by a bond-rating firm, often lack detailed, timely information about the financial well-being of the issuing municipality.
With $250 billion worth of bonds expected to be sold or refinanced this year, it is imperative that the muni-bond market put its house in order. A US House subcommittee took testimony on the market in early September; another hearing is expected this year, possibly this month. If the industry, through such groups as the Municipal Securities Rulemaking Board, its main self-regulatory organization, will not move quickly to ensure tighter controls, then Congress must act.
Financial contributions from underwriters to politicians issuing new bonds should be banned. Bond issuers should provide updated and timely financial disclosure. Also needed is a central clearinghouse to identify price markups by bond dealers.
The muni-bond market has proven its value to investors and to state and local governments raising money for many worthwhile projects. Given its importance, the market must take all possible steps to provide maximum financial disclosure, while barring all potential conflicts of interest.