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 Remarks by Under Secretary for Domestic Finance Mary Miller at the Annual Conference of the National Federation of Municipal Analysts


As prepared for delivery

LAS VEGAS, NEVADA – Good morning. I appreciate the invitation to join you at your annual conference here in Las Vegas.  For those of you who do not know, I worked in the fixed-income markets for more than twenty-five years before joining Treasury at the beginning of 2010.  In my prior job I was an active participant in the municipal securities market – in fact I see a number of familiar faces and firms here today.  During my career I came to understand the quality of the National Federation of Municipal Analysts. This organization is an important voice in the municipal securities market. I am looking forward today to discussing the priorities of the Treasury Department in areas affecting domestic finance, and in particular the areas that relate to the municipal securities markets.

There are a wide range of responsibilities that come under the Office of Domestic Finance at the Treasury Department. Broadly speaking we are focused on policies to support economic growth, with particular emphasis on financial institutions and markets.  This includes overseeing the federal government’s debt management, helping implement the Dodd-Frank Wall Street Reform and Consumer Protection Act and other financial regulatory reforms, and working to strengthen the housing market.  All of these things impact state and local governments and the work that you do.

It is impossible to talk about the issues we are focused on today without referencing where we have been. Four years ago a financial storm of global proportions was undermining our markets and our economy, with a force unlike anything we have weathered in our careers. In the United States a number of federal entities - including the Treasury, Federal Reserve and the FDIC – undertook extraordinary measures to stabilize the financial markets and restart economic growth.

In order to support state and local governments, some of these measures included steps like introducing Build America Bonds to broaden the market for taxable municipal debt by directly subsidizing interest costs to issuers. The Build America Bonds program supported the issuance of more than $181 billion in over 2,275 transactions for public capital infrastructure.  Assistance was also provided to state housing agencies through the Temporary Credit and Liquidity Program and the New Issue Bond Program. These were direct responses to the freezing up of markets at the end of 2008 and into 2009.  They proved highly effective in providing critical access to credit for important issuers in the municipal market.

The second response to the economic crisis was the American Resource and Recovery Act adopted in 2009, which provided direct assistance to state and local governments in the form of funding for infrastructure projects, education and health care costs. The economic support through the Recovery Act provided an important countercyclical buffer along with the automatic stabilizers that kicked in with a weakening economy. For example, in fiscal year 2011state and local governments faced a record budget gap of $191 billion, or 30 percent of state budgets – the largest nominal and percentage gaps on record.  The use of Recovery Act funds reduced the shortfall by a third, to $123 billion, preserving countless state and local government jobs at a critical juncture in our economy’s trajectory.

Nevertheless, the financial crisis and its aftermath took a heavy toll on our nation’s economy and our fiscal situation.  Millions of jobs were lost, countless families lost their homes, and trillions of dollars of Americans’ savings were wiped out.  We had no choice but to take aggressive steps to stabilize financial markets and help restart growth.  And at the same time, the fallout from the crisis caused tax receipts to go down while payments for programs like unemployment insurance were going up.

To finance the Federal government’s efforts to stabilize the economy, we had to issue more debt at the federal level. Unlike most state governments that must balance their budgets each year, the federal government can increase spending in an economic downturn and incur deficits.   Although government borrowing peaked two years ago and deficits are coming down relative to GDP, our debt is still growing while economic growth is picking up steam.  Interest rates remain at historically low levels and have helped keep the costs of responding to the crisis lower than they otherwise would have been.

But interest rates won’t stay this low forever, and the long-term fiscal trend in the U.S. is unsustainable.  As one of the officials responsible for our debt issuance, I know firsthand that we simply cannot afford another financial crisis.  American workers, families, homeowners, and entrepreneurs cannot afford another crisis either. And neither can state and local governments afford a repeat of what we experienced.

So where are we today after these very significant fiscal and policy interventions? This past week we provided an update on the financial stability programs, including not only the Troubled Asset Relief Program known as TARP, but also the mortgage backed securities purchase program, support for the GSEs, Fannie Mae and Freddie Mac, and programs implemented by the Federal Reserve and FDIC. At this point we expect those programs to generate an overall positive return, with some areas generating profits that exceed losses in other programs. This is not an outcome that anyone anticipated in the darkest hours of the financial crisis and represents a very good result for U.S. taxpayers.

However, the true costs of the financial crisis and follow-on recession are much larger than the cost of these financial stability measures. After weathering the deepest recession since the Great Depression we have still not fully recovered. While growth in the labor market appears to be gathering momentum, the national unemployment rate at 8.2% is still unacceptably high, and in some states even higher. Real GDP only recently returned to its pre-crisis levels.  Most recently, GDP measures improved over the course of 2011, finishing the year with a 4th quarter annual growth rate of 3%.

The housing market remains weak, although it is beginning to show some important signs of stabilization. Housing starts and home sales have trended higher since last summer, but are still near record low levels. Historically low mortgage rates and the decline in home prices have improved measures of housing affordability, but demand remains weak. A number of negative factors remain in place, including the large stock of homes in the foreclosure pipeline and significant levels of negative equity, with roughly one in five mortgage holders underwater on their mortgages. We have recently been focusing on a number of housing measures:

  • Broadening access to refinancing for homeowners who are current on their mortgage payments but may be underwater on their loan;
  • Developing a national program for the GSEs to dispose of foreclosed properties on their balance sheets to meet rental demand; and
  • Continuing to deploy hardship assistance, like the Hardest Hit Funds that reach states like Nevada.

As I mentioned earlier, our federal deficits peaked two years ago and are projected to continue falling.  The President’s 2013 budget proposal would reduce the deficit by more than $4 trillion over the next ten years. The budget proposals include a $1.5 trillion tax reform package that includes the expiration of tax-cuts that were adopted in 2001 and 2003 for high income households.  The budget proposals also include a cap at the 28 percent tax bracket on a range of deductions (including municipal bond interest) for these high income households. I expect we will have a very healthy and important national debate on the best mechanisms to achieve long-term fiscal balance.

For state and local governmental finance, this debate raises the question of how best to support needed public investments in an era of increasing budget challenges.  Tax-exempt municipal bonds finance the predominant portion of the nation’s public infrastructure.  The President’s fiscal year 2013 budget proposals would provide additional tools to support infrastructure investment, including a proposal to make the Build America Bonds program permanent (at a 30 percent subsidy rate for bonds issued through 2013 and at a 28 percent subsidy rate for bonds issued thereafter).  The budget also includes a proposal for a national infrastructure bank.

While additional deficit reduction measures are clearly necessary in the medium term, the economy still needs support in the near term. For 2012 this meant extension of the 2 percentage point payroll tax cut and extended unemployment benefits. Both measures have direct economic impact in terms of helping 160 million American workers and saving five million Americans from exhausting unemployment benefits this year.

State and local governments continue to face difficult fiscal decisions. Despite data showing that state finances have recently started to improve, including the fact that tax revenues grew over 8% in the twelve month period ending in June 2011, many states and local governments continue to face fiscal headwinds and are projecting shortfalls  for fiscal years 2012 and 2013. These deficits, would be in addition to the more than $500 billion in shortfalls that states have already had to close over the past four years. This fiscal retrenchment has compelled many state and local governments to cut back on essential services like education, health care and infrastructure improvements. These dramatic cuts have resulted in a lagged effect on state and local government payrolls.  State and local governments have had to reduce their payrolls by nearly 670,000 jobs since the peak reached during the recession.  More than 80 percent of those losses have been at the local government level, with half of those in the education sector.


The costs of the recent downturn to both the public and private sectors are clear. In order to reduce the risk of another crisis, the President asked Congress to pass the reforms our outdated financial regulatory system needed before memories of the crisis faded.  Congress’s response, the Dodd-Frank Act, put in place a number of important measures to strengthen and modernize our financial system.

Much of the basic framework of these reforms is already coming into effect.  The Federal Deposit Insurance Corporation has finalized a number of rules for winding down large firms that fail through an orderly bankruptcy-like process that will help limit the fallout from their failure.  The Consumer Financial Protection Bureau is up and running and undertaking initiatives to better protect consumers.  Regulators are deploying new authority and greater enforcement resources on a more coordinated basis to go after fraud and unfair practices.  The majority of the new initiatives for reducing risk and improving the transparency of the previously unregulated $600 trillion derivatives markets have been proposed and more rules are being finalized with each passing month.  2012 should bring much more clarity to firms adjusting for these changes.

As a result of the reforms we are putting in place, the financial system is getting stronger and safer.  Financial institutions are better capitalized, less leveraged, and more liquid, reducing systemic risks.  Some of these changes have already been required, some are anticipatory of Basel III, and some are just the result of caution after the financial crisis.  But the gains we have made will erode over time if we are not able to complete the work that is underway.

As we continue moving forward, rest assured that we are not just trying to get reforms done so that we can check a box.  We are focused on working to get the reforms right so that they reduce risk, improve transparency and help restore market discipline in our system while preserving the best features of our markets and the competitiveness of our financial institutions.  We aren’t just looking at individual rules in isolation.  The Dodd-Frank Act created the Financial Stability Oversight Council (FSOC) to bring together the combined perspectives of federal and state financial regulators and experts to monitor risks to the financial stability of the United States and to promote information sharing and coordination.  The Secretary of the Treasury chairs the FSOC. Partly through the efforts of the FSOC, we are working to look at the way rules interact with each other across the financial system. 

I believe these goals are well aligned with the interests of this group. Before I came to Treasury, I worked for 26 years as an investor and manager of clients’ assets. In that capacity, I did not look for the least regulated markets, with the lowest transparency, the weakest investor protections, and the greatest risks.  I looked for opportunities with expectations of reasonable returns, with appropriate disclosures, and strong legal and financial protections to protect the safety of the investments we made.  Whether acting directly as investors or advising your clients, I expect that many of you share this view.


Many of the overarching goals of the Dodd-Frank Act also apply to the reforms that are being implemented in the municipal market, including efforts to strengthen transparency, to provide investors with objective information and tools they need to make informed choices, and to reduce conflicts of interest.   I should also emphasize that, as in other areas of financial regulatory reform, Treasury does not have a direct role in writing the regulations to implement many of the provisions of the Dodd-Frank Act. But given the importance of these issues to the financial markets, the financial system, and the economy, we do work with the financial regulators and closely follow these issues both directly and through the FSOC.

Increasing the transparency of markets is an important goal of the Dodd-Frank Act, as reflected in the efforts to provide far more pre- and post-trade transparency to derivatives markets.  It is important to provide municipal investors with access to timely and accurate information in order to allow them to make the most informed investment decisions possible. The coordinated efforts of the Securities and Exchange Commission (SEC), Financial Industry Regulatory Authority (FINRA) and the Municipal Securities Rulemaking Board (MSRB) have made good progress in addressing this issue.    The SEC’s designation of the MSRB as the central repository for ongoing disclosures by municipal issuers, and the MSRB’s subsequent efforts to make its Electronic Municipal Market Access (EMMA) disclosures and post-trade reporting available to investors have been positive steps towards increased transparency.

Despite these gains, however, there are still potential areas for further improvement.   Some of the Dodd-Frank Act’s efforts to improve pre-trade price transparency in derivatives market, for example, would be harder to replicate in the municipal market. Low liquidity levels of many municipal bonds can make meaningful price discovery challenging, but increasing pre-trade transparency for investors should ultimately increase investor participation in the market and, by extension, reduce issuance costs for state and local governments. 

Disclosure related to pension plans is another likely area for improvement. GASB is currently undertaking a robust process to identify best practices for pension disclosures, and we strongly support a move towards a more standardized approach to pension reporting. Improved disclosure will ultimately help promote better funding and risk management practices by state and local governments for their retirement and health care obligations.

In addition to improving transparency, another key component of Wall Street Reform is to strengthen protections for investors and issuers.  This goal is also reflected in Dodd-Frank’s reforms to the municipal market.  The Dodd-Frank Act amends the Securities Exchange Act to prevent municipal advisors from providing advice to, or soliciting, municipal entities without registering with the SEC. For the first time, municipal advisors now also have a fiduciary duty to the municipal entities they deal with. These changes are aligned with reforms at the MSRB that are also designed to protect issuers. The MSRB has a new mandate to protect issuers and has altered the composition of its board to include representation from municipal issuers.

The Dodd-Frank Act also seeks to make sure that the reforms it implements are matched by improved ability to hold people and firms accountable when they break the rules. Reforms to the municipal market have similarly been buttressed by the SEC’s increased focus on enforcement in this area. In 2009 the SEC announced the establishment of a specialized unit dedicated to enforcement in municipal securities and public pensions. This unit is focused on offering and disclosure issues, tax and arbitrage-driven activity, unfunded or underfunded liabilities, and "pay-to-play" schemes in which money managers and advisors pay kickbacks and give other favors in return for the right to advise the funds. Together with the disclosure and registration requirements, this renewed focus on enforcement should not only strengthen protections for investors and issuers but also strengthen the functioning of the municipal securities market overall.


Beyond these and other reform initiatives that are specific to the municipal market, there are a number of broader reform efforts that will likely impact the municipal securities market, and I would like to spend a few minutes discussing them.
Both SEC Chairman Mary Schapiro and Federal Reserve Chairman Ben Bernanke have recently expressed concerns with the inherent susceptibility of money market funds to liquidity runs during times of stress. Indeed, money market funds contributed to instability during the financial crisis in 2008 and at the time, the previous Administration was forced to intervene to prevent a widespread run. Since then, the SEC has taken actions to reduce the risk of this industry by adopting new portfolio credit, maturity, and liquidity requirements through 2a-7 reforms in February 2010.

However, while money market funds are more resilient today than they were in the lead-up to the financial crisis, as noted in both the President’s Working Group Report in 2010 and the Financial Stability Oversight Council’s 2011 Annual Report, further steps are  needed to improve the stability of the industry and reduce money funds’ susceptibility to runs. The SEC and other members of the Financial Stability Oversight Council (FSOC) are actively discussing the most appropriate way to affect this, while preserving the usefulness of these funds for investors and issuers, including those in the municipal market.

Another reform initiative with implications for the municipal securities market is the Volcker Rule. As you likely know, the comment period for the notice of proposed rulemaking to implement the Volcker rule has closed for the five agencies charged with promulgating the rule.  Treasury is not writing the Volcker rule but the Secretary, as Chairperson of the Financial Stability Oversight Council, does have a specific statutory role to coordinate the rule’s implementation.  More than 18,000 comments have been submitted in response to the proposed rule, and dozens of these letters comment on the implications that this rule holds for the municipal securities market.

These comment letters have focused on a number of issues, but one in particular that the municipal market appears to have focused on is the definition of a municipal security.  Some commenters have noted that the statutory definition of municipal securities for purposes of permitted activities under the Volcker Rule includes the direct obligations of municipalities but not those securities issued by agencies or authorities of state or local governments. These commenters have raised concerns that municipal markets could be distorted by the differential treatment of direct obligations and agency obligations.

We welcome the feedback on this issue as well as all of the other issues that have been raised in the comment letters.  We view the comment letters and the dialogue with market participants and other stakeholders as an essential part of the process, and firmly believe that that the final rule will benefit from the additional information, perspectives, and insights we have received.

Getting the Volcker rule right is an important issue for the safety of our financial markets and for preserving their liquidity and efficiency.  It is important to separate risky proprietary trading activity from the federal safety net.  But as a former investor, including during the financial crisis, I also appreciate the role of market-making and know the importance of deep, liquid markets.  It is essential to have buyers who are willing to step up and buy a position, particularly during times of market stress. The statutory language of the Volcker Rule recognizes the importance of striking that balance, and so does the study issued by the Financial Stability Oversight Council last January.  We are equally committed to achieving the right balance in the final rule. 

In addition to the public comment process, I would like to emphasize another important way in which the private sector can contribute to strengthening the financial system.  You do not have to wait for the government to act to implement reforms that could reduce risks, improve returns, and strengthen financial institutions.  There are many areas where the private sector could make valuable contributions.  A great example of an opportunity for groups like this one would be to develop ideas for alternatives to the use of credit ratings in investment guidelines. As part of the Dodd-Frank Act, federal regulations can no longer refer to or require reliance on the use of credit ratings.  The challenge to the private sector is to come up with something to use in their place, not just where federal regulations formerly required them, but for the purposes of your own investment analysis, decisions, and criteria. Given the use of ratings in the municipal securities market, and the need to enhance the quality and transparency behind stand-alone ratings assessments, this group is uniquely positioned to help provide ideas in this area.


Let me close with some remarks about what lies ahead this year. We expect to make significant progress on the completion of important financial regulatory rulemakings, to provide further guidance on the future of housing finance reform, and to work towards bipartisan agreement on long-term fiscal policies.  But most importantly, the message that I would like to leave you with is that we will continue to deliver measures to restore integrity and trust in our financial system to ensure that it can, once again, serve as an engine for economic growth and job creation.  A pro-growth, pro-investment financial system allows us to help transform ideas into industries, to finance infrastructure that supports economic activity and create jobs that lead to economic prosperity.  This can only be accomplished with a stable financial system that encourages investment and does not expose investors to undue risk.

We recognize that there is still a lot left to accomplish, and we look forward to working with you over the coming months to implement financial market reforms in a careful, effective manner.  I am confident that in the coming year there will be much more clarity about the final rules of the road.  By continuing to put the right reforms in place, I believe that our financial system will be better positioned to respond well to whatever changes may come. 
Thank you very much.


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