MSRB Calls For Local Governments To Fully Disclose Bank Loans For Infrastructure

A Governing op-ed (2016-05-13) by Municipal Securities Rulemaking Board (MSRB) Executive Director Lynnette Kelly identified a risk that many local governments may not consider when taking on a bank loan to pay for infrastructure projects and stated that the MSRB will be advocating for greater disclosure requirements of loan terms and amounts. Otherwise, Kelly argued that local governments could face bond rating downgrades. Kelly cited the case of the small town of Lawrence, Wisconsin, that saw its bond rating downgraded to junk status when a rating agency learned about the terms of several of the town’s bank loans. From the op-ed:

Borrowing funds from a bank to build a bridge is not inherently problematic. The problems arise when the extent of the borrowing — and the precise terms of the loans — are a secret….Investors who hold a city’s outstanding bonds may have no idea that the city has taken on more debt or that the bank making the loan has made sure it will be first in line to collect if the city runs into financial troubles. …

A few states, counties and cities voluntarily make information about their bank loans publicly available on the Municipal Securities Rulemaking Board’s Electronic Municipal Market Access website (EMMA), the official public archive for financial documents and other information for municipal bondholders. But the vast majority of bank-financed public projects remain a mystery to municipal bond investors, taxpayers and securities regulators. …

This year, the MSRB is escalating its call for improved bank loan disclosure. We are now collecting public input on how the MSRB might exercise its regulatory authority over the financial professionals who work with state and local governments to require more transparency around these loans. Because state and local governments have legal protections against federal oversight, the MSRB cannot simply mandate bank-loan disclosure on their part. Any future action by the MSRB must also take into consideration the fact that bank-loan documents may contain proprietary information that would need to be redacted prior to public dissemination.

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