BNY Mellon Investment Manager Says Potential Federal Revenue Not Enough to Offset Benefits to Local Governments
BOSTON, June 2, 2011 — The tax exemption benefits of municipal bonds are likely to remain intact despite attacks on these securities by those who see them as a source of revenue that can help reduce the federal deficit, according to a report by Standish Mellon Asset Management Company LLC, the fixed income specialist for BNY Mellon Asset Management.
These tax benefits enable issuers of municipal bonds to pay lower interest rates than other types of fixed income because investors in these bonds benefit from the tax treatment and are willing to accept the lower rates.
Lack of public support to make a change, the relatively small amount of incremental federal revenues that could be collected, and the burdens which would fall on infrastructure development and the delivery of public services are expected to blunt attacks on the current structure of municipal bonds.
Those looking to change the tax regulations surrounding municipal bonds have charged the current rules that enable state and local governments to borrow at favorable rates are inefficient and disproportionately benefit the wealthy, the report said. Some proposals would eliminate the special treatment for municipal bonds or extend it to other types of bonds.
However, Steven Harvey, senior portfolio manager for Standish and co-author of the report, said, "Actually, muni bonds are an effective way for state and local governments to raise funding, and the investors who buy municipal bonds tend to cover all income levels. For example, in 2008, the last tax year for which the IRS provides information, more than half of the 5.5 million tax returns reporting receipt of tax-exempt interest were filed by taxpayers with adjusted gross income below $100,000."
Nathan Harris, Standish research analyst and the other co-author of the report, noted that eliminating the special tax treatment for municipal bonds or extending this treatment to other types of fixed income would force state and local bond issuers to pay higher interest rates in order to produce returns that are competitive with other fixed income assets.
Christine Todd, managing director of tax sensitive fixed income for Standish, added, "We expect that a range of municipal bond constituents ranging from governors and mayors to leaders of transportation agencies, hospital systems, and colleges and universities will raise a formidable grass roots opposition to any effort to significantly change or eliminate such a valuable financing tool."
Standish Mellon Asset Management Company LLC, with more than $80 billion of assets under management, provides investment management services across a broad spectrum of fixed income asset classes. These include corporate credit (investment-grade and high-yield), emerging markets debt (dollar-denominated and local currency), core / core plus and opportunistic (U.S. and global) strategies. Standish also offers full service capabilities in Insurance and Global Workout Solutions. The firm also includes assets managed by Standish personnel acting as dual officers of The Dreyfus Corporation and The Bank of New York Mellon.
BNY Mellon Asset Management is the umbrella organisation for BNY Mellon's affiliated investment management firms and global distribution companies.
BNY Mellon is a global financial services company focused on helping clients manage and service their financial assets, operating in 36 countries and serving more than 100 markets. BNY Mellon is a leading provider of financial services for institutions, corporations and high-net-worth individuals, offering superior investment management and investment services through a worldwide client-focused team. It has $25.5 trillion in assets under custody and administration and $1.2 trillion in assets under management, services $11.9 trillion in outstanding debt and processes global payments averaging $1.7 trillion per day. BNY Mellon is the corporate brand of The Bank of New York Mellon Corporation (NYSE: BK). Additional information is available at www.bnymellon.com.
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