Agenda - Council - 01/13/1981 - Laserfiche WebLink

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. . underwriters, dealers, dealer banks, and institutional investors. Results show the market may already be imposing penalties in the form of higher interest costs where accounting and financial reporting are substandard. To assess the size of the penalty, S&P looked to one of its units which regularly prices about $20 billion of tax-exempt bonds for investment trusts. Based on views obtained there, plus contact with underwriters and market makers who set interest costs on new issues, research shows penalties may average 0.125 to 0.25 percentage point. On a typical $100 miIlionissue of bonds with a 10-year average life, that equals a penalty of $1,250,000 to $2,500,000 over the issue's average life. The market for new general obligation bonds totals about $12 billion annually. Based on estimates that half ofthem don't comply with GAAP, taxpayers could be penalized from $75 million to $150 million over a 10-year average life of the bonds. This penalty would be repeated annually as more new bonds are issued in future years. Of those polled by Goldstein/Krall on generally accepted accounting principles (GAAP) and the municipal bond market: -Fifty-four percent (54%) said they think the marketplace now imposes interest rate penalties on issuers who don't conform to accounting and reporting standards. Seventy-six percent (76%} of them think the penalties will increase in the future -Seventy-eight percent (78%) said they think issuers who ignore GAAP will have a harder time selling general obligation bords in the future -Sixty-five percent (65%) said they think the market feels less comfortable now with general obligation bonds than five years ago -Ninety-five percent (95%} said in their opinion municipal accounting standards are important. Eighty-nine ,percent (89%) said they feel accounting practices as a bond rating consideration is "desirable." The research also'found critics among those interviewed. Among sample comments: -Municipal issuers may not decide' to change accounting procedures for the sole purpose of getting an S&P rating -The accounting profession is trying to impose corporate standards on governments -It is not S&P's responsibility to make rules but to analyze what is given to them -So long as municipalities can get bids on bonds, they won't do more than they have to. Dollar Volume ID Billions Municipal Bond New Issue Volume by Type of Security 50 45 40 35 30 25 20 IS 10 S All '66 '67 '68 '69 '70 '71 '72 '73 '74 '75 '76 '17 '78 '79 General obligallon bonds have declined In recent years as a percent of lotallax-exempl Issues. Source: Public Securities Association.