HomeMy WebLinkAboutIR 7239 INFORMAL REPORT TO CITY COUNCIL MEMBERS No.
December 8, 1987
�QF4oar,�� To the Mayor and Members of the City Council
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Subject: U.S. House Reconciliation Bill HR 3545
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On October 29, 1987 the U.S. House of Representatives passed HR 3545 as
its version of the Budget Reconciliation Bill. The reconciliation bill
is a package of measures designed to bring the FY 88 budget into
conformance with Congress' FY 88 budget resolution. The House bill
must be reconciled with the Senate reconciliation action. The final
package must, after a White House-Congress summit, be approved by the
full Congress. in theory the summit package will supersede either
reconciliation bill. in reality some provisions of the reconciliation
bills may be worked into the final budget package.
After its passage, Section 10118 of HR 3545 was identified as seriously
detrimental to bond issuers by increasing interest rates and placing
further limits on local tax-exempt financing. Specifically, it could:
-reduce the value of all outstanding bonds,
-increase issuance costs,
-impose a tax on income the investor has not yet and may never
realize, and,
-create additional administrative costs for investors and dealers.
There are two specific provisions of the Section which were opposed.
A. The bill reduces the "de minimus" rule on municipal bonds owned by
non-financial corporations. Under current law, non-financial
corporations can deduct interest incurred to hold municipal bonds, as
long as those bonds do not exceed 2% of the corporation's assets.
Under the proposed law, this "safe harbor" would be reduced to the
lower of 2% of assets or $1,000,000. Because large corporations might
hold more than the $1,000,000, this provision would make municipals a
less attractive investment alternative. Issuers of short term debt or
lease -purchase transactions would be particularly impacted since this
is the most common type of security held.
B. The bill also requires bondholders of discounted U.S. Government,
corporate and municipal bonds to annually accrue and pay capital gains
tax versus the present method of paying in the year of sale or
maturity. This would apply to all discounted bonds purchased after
October 13, 1987. Not only does this have obvious negative effects on
the sale of bonds, but, will, eventually, result in higher issuance
costs.
Based on the position by the City Council previously taken on the
detrimental provisions of the Tax Reform Act and because of the
potential of these provisions and their time criticality, the staff
prepared a letter for the Mayor's signature November 19, 1987
supporting removal of these provisions. This letter was sent to House
Leader Jim Wright and Senator Bentsen, as Chairman of the Finance
Committee.
C
u las arman
City Manager
ISSUED BY THE CITY MANAGER FORT WORTH, TEXAS ---