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      "id": 444211,
      "date": "2015-08-14",
      "retrieved": "2016-04-06T18:36:12.417045",
      "title": "The Demand for Municipal Bonds: Issues for Congress",
      "summary": "Congressional Research Service\n7-5700\nwww.crs.gov\nR44146\nSummary\nMunicipal bonds are debt securities issued by states, cities, counties, and other government-created agencies to finance capital projects, such as highways, airports, sewers, bridges, schools, hospitals, and other public goods for residents. The municipal bond market is large and varied, consisting of more than an estimated 1.5 million bond types and more than an estimated 55,000 issuers borrowing to finance a variety of civic projects. The U.S. municipal bond market had a total of $3.7 trillion outstanding issuances by year end 2014, reflecting a 3.2% decline from its peak in 2010. \nMeanwhile, the outstanding municipal debt associated with financing of capital projects has risen over the last decade. The distressed financial situation of the Commonwealth of Puerto Rico, while not the primary focus of this report, serves as an example of financial distress attributed to an increase in longer-term liabilities. Rising indebtedness levels may have led some municipal bond issuers to curtail new issuances rather than further increase longer-term liabilities. \nVarious bills that would impact the municipal bond market have been introduced in the 114th Congress. \nThe Move America Act of 2015, S. 1186, would create expanded tax incentives for infrastructure projects. \nThe Municipal Bond Market Support Act of 2015, H.R. 2229, would increase the annual municipal debt limit that could be exempt from $10 million to $30 million on the amount of tax-exempt obligations a small issuer may issue for a bank to purchase. \nIn addition, legislation has been introduced to protect taxpayers at the federal level from municipal bond defaults. \nThe No Taxpayer Bailouts for Unsustainable State and Local Pensions Act, H.R. 1476, for example, would prohibit the Secretary of the Treasury and the Board of Governors of the Federal Reserve System from providing any financial assistance to state and local government pension plan funds.\nCongress generally has supported policies to encourage credit access for state and local public-sector entities. This report informs Congress about various developments related to the demand for municipal bonds. Beginning with investor holding trends, the household share of municipal bondholders has decreased whereas the share of various financial intermediaries holding municipals, particularly depository banking institutions, has increased. Changes in the composition of investors could be related to several types of financial risks (e.g., interest rate, liquidity, default). Likewise, various regulatory developments also influence the profitability of municipal bonds for different bondholder types, and thus their willingness to hold these securities. This report also presents concerns expressed by the Securities and Exchange Commission (SEC) regarding the need for improved disclosures to inform investors about the financial health of municipal issuers and consistent accounting practices.\nContents\nIntroduction\t1\nTrends in Municipal Bond Holdings Following the 2007-2009 Recession\t2\nUnderstanding the Financial Risks Related to Holding Municipal Bonds\t4\nAsset Market Risk\t4\nLiquidity Risk\t4\nDefault Risk\t5\nSystemic Risk\t7\nDisclosing and Evaluating Municipal Bond Risks\t8\nRegulatory Actions to Improve Municipal Market Disclosures\t10\nCongressional Efforts to Improve Transparency\t12\nIncentives for Depository Bank Holdings of Municipal Bonds\t12\nLiquidity Requirements for Depositories\t14\nThe Dodd-Frank Wall Street Reform and Consumer Protection Act\t15\n\nFigures\nFigure 1. U.S. Municipal Bond Market: Total Outstanding and Bondholders, by Sector\t3\n\nAppendixes\nAppendix. The Financial Health of Municipal Bond Issuers\t17\n\nContacts\nAuthor Contact Information\t21\nAcknowledgments\t21\n\nIntroduction\nA municipal bond is a debt security issued by states, cities, counties, and other government-created entities to pay for capital projects, such as highways, airports, sewers, bridges, schools, hospitals, and other infrastructure expenditures. Municipal bond issuers include state and local municipal governments as well as other municipal entities (e.g., utilities, water districts, hospital authorities), and there are more than 55,000 issuers of municipal bonds. The estimate of more than 1.5 million different types of municipal bonds reflects the wide and diverse range of civic projects that are financed in this market. Municipal bonds are also distinguished from other types of bonds (e.g., corporate, U.S. Treasuries) by the tax treatment for individuals. The interest on municipals is generally exempt from federal taxes. Residents who invest in their state or local municipality bonds may also have the interest on these bonds exempt from state or local taxes.\nThe Municipal Securities Rulemaking Board (MSRB), an independent rulemaking entity established by Congress, provides oversight of the municipal bond markets and participants. The MSRB was created by the Securities Act Amendments of 1975. MSRB is considered to be a self-regulatory organization (SRO), and its rules are approved by the Securities and Exchange Commission (SEC) and enforced primarily by the Financial Industry Regulatory Authority (FINRA), which is another SRO. SROs are subject to SEC oversight and primarily regulate broker-dealers, who earn fees for trading in securities markets. All municipal broker-dealers as well as municipal advisors, who earn fees for advisory services, must register with the MSRB. Generally speaking, the main objective of the MSRB is to promote fairness and transparency in the municipal securities markets.\nFollowing the 2007-2009 recession, state and local public-sector entities have encountered rising fiscal gaps as well as rising indebted levels associated with the financing of long-term capital projects, and thus more distressed financial situations. While fiscal gaps may be narrowed by reducing spending and raising taxes, the proceeds generated by municipal bond issuances are typically designated for the funding of longer-term capital projects. All forms of lending, however, are risky, and bondholders face a range of financial risks. Proper disclosure of risk allows investors to determine whether they want to lend and how much of their funds they may be willing to lose in the event the borrower is unable to repay. In addition to the customary risk and return trade-off assessment, financial intermediaries (e.g., banks, credit unions, insurance companies) are also faced with additional regulations affecting the cost and, therefore, the return on municipal bond investments. \nThis report examines various influences on investors\u2019 demand for municipal bonds, with a particular focus on financial institutions; it also discusses policy issues for Congress. The report presents some recent investor holding trends, followed by an overview of various types of financial risks associated with municipal bond investments. In light of the financial risks, it discusses the challenges associated with improved financial disclosures of municipal bonds. Finally, depository banks that choose to hold municipal bonds face added regulatory requirements, which are also discussed given that banks may both lend and facilitate lending in this market. The Appendix provides an overview of the fiscal health of state and local municipal issuers since the 2007-2009 recession.\nFinancial Intermediaries: Institutions and Markets\nFinancial intermediation is the process of matching borrowers with lenders (i.e., savers). Depository intermediaries, such as banks and credit unions, for example, generally acquire funds from lenders (in the form of checking and savings deposits) and subsequently make loans to borrowers. The aggregate returns from lending activities are distributed between the intermediary (that keeps the loans in its asset portfolio) and the savers (that maintain deposits in the lending institution). Alternatively, financial intermediation may be conducted via the bond and asset-backed securities markets. Bonds are conceptually equivalent to loans. Investors assume the role of lenders when they purchase bonds from issuers, who are essentially borrowing the investment funds. Similarly, investors that purchase financial interests in an asset-backed security, which is created by transforming a pool of numerous bonds into tranches (i.e., sets of tiered payment structures prescribing the sequence that investors are to be repaid and associated investment yields), jointly act as lenders to the underlying pool of borrowers. Financial intermediation activities that occur in the financial markets (rather than facilitated by depository institutions) may be referred to as shadow banking activities. All forms of financial intermediation bear the typical risks (e.g., asset market, liquidity, default, systemic) associated with lending.\n\nTrends in Municipal Bond Holdings Following the 2007-2009 Recession\nFigure 1 shows that the outstanding issuances in the municipal bond market, as reported by the Federal Reserve, totaled $3.65 trillion in 2014, down from a $3.77 trillion peak in 2010. The municipal bond market grew in size by 24.9% from 2005 to 2010, but decreased by 3.2% from 2010 to 2014. The largest sector holding municipal bonds are household investors, which includes some nonfinancial businesses (e.g., nonprofit organizations). Household investors reduced their market share of municipal bond holdings from 54% to 43% between 2005 and 2014. Households still hold the largest share of municipals, perhaps as a result of the tax advantages for individual investors. \nFigure 1. U.S. Municipal Bond Market: Total Outstanding and Bondholders, by Sector\n2005-2014\n\nSource: Federal Reserve Flow of Funds.\nNote: Congressional Research Service (CRS) Computations.\nWhereas the household share of municipal holdings declined, the share of municipal bonds held by other financial entities increased. Figure 1 shows that depository institutions (i.e., banks and credit unions that maintain federally insured deposits) have more than doubled their share of holdings. Life insurance companies have quadrupled their share of holdings from 1% to 4%. As the share of municipal bonds held via money market deposit accounts fell since 2005, the share held via money market mutual funds rose. More time may be needed to determine whether the observed trends in investor composition reflect temporary or permanent shifts.\nUnderstanding the Financial Risks Related to Holding Municipal Bonds\nThe willingness to hold or the demand for municipal bond investments depends upon various factors, including investor appetites for financial risks. This section discusses the different types of financial risks that influence the willingness and therefore the decision to hold municipal bonds. One or more of these types of risks (discussed in no particular order) may influence investors\u2019 decisions to hold municipal bonds.\nAsset Market Risk\nAsset market risk with respect to bond holdings may also be referred to as interest rate risk. For example, suppose a lender makes a loan to a borrower at a fixed interest rate. A rise in market interest rates on the following day reduces the present value of the loan made the day before, meaning that the lender could have earned a higher yield by waiting a day. At times when interest rates are expected to rise, the lenders may want to sell the current loan for cash and originate a new loan the next day at the higher interest rate, thus avoiding ownership of the original asset should it decline in value. \nIncreased interest rate risk may cause some investors to sell municipal bond holdings. When current interest rates are expected to rise relative to the agreed-upon note rate of existing bonds, the present value (price) of existing bonds will decrease relative to newly issued bonds with higher rates of return (yields). Given that interest rates have remained at historic lows, some investors may have been anxious about holding existing bonds in their portfolios in anticipation of future increases in interest rates that would reduce current bond values.\nLiquidity Risk\nEconomists view the concept of liquidity from a variety of perspectives. Liquidity is a term that typically refers to how quickly an asset can be converted to cash. In the context of bond markets, liquidity pertains to how quickly an asset can be bought or sold in the marketplace. Liquidity risk, therefore, can refer to holding assets that cannot quickly be converted into cash to satisfy immediate needs or are traded in thin markets (i.e., low volume of buying and selling). Financial intermediaries typically assume liquidity risk when holding less liquid loans in their asset portfolios. If investors finance less liquid, longer-term assets (e.g. bonds) with more liquid, shorter-term obligations (e.g., demand deposits) they risk having to incur large losses if they need to liquidate some or all of those assets to repay the shorter-term obligations on time. \nNewly issued municipal bonds tend to be the most actively traded (primary market trading); bond trading after initial issuance, referred to as secondary market trading, declines significantly. The SEC cites studies reporting that one-third of municipals trade only once after initial issuance, the remaining bonds trade only two or three times during their lifetimes, and 5% of all municipals may only trade once every 12 years. Only a small amount of outstanding municipal bonds are purchased or offered for sale on a day-to-day basis, resulting in a thin secondary market for these securities. Hence, municipal bonds trade in small volumes in the over-the-counter market on an irregular basis (in comparison to trading in large volumes on organized exchanges). The thin secondary market is why the municipal bonds are generally characterized as being illiquid (although some municipal bonds may be considered less illiquid relative to others). \nThe thin secondary market trading volume is why the prices of individual municipal securities must be estimated, which increases the probability of incurring a loss (i.e., rising liquidity risk) under circumstances in which investors unexpectedly needed to liquidate their bond holdings. Prices are frequently determined by observing past trades of bonds that arguably share similar characteristics, which has become easier for individual investors in recent years as a result of the MSRB\u2019s Electronic Municipal Market Access website. Consequently, some investors, particularly those anticipating their future cash flow needs, may choose to convert their municipal bonds holdings into assets in which the values do not need to be estimated and, therefore, characterized by lower levels of liquidity risk.\nDefault Risk\nDefault risk refers to the risk that borrowers (or bond issuers) will not repay all principal and interest owed or as scheduled. In light of the thousands of issues, municipal bond defaults are likely to be idiosyncratic or unique to the financial conditions tied to the locality or entity where they were issued. The default rate for municipal bonds tracked by the S&P Municipal Bond Index, for example, was 0.144% in 2012, 0.107% in 2013, and 0.17% in 2014. In light of infrequent default experiences, municipals are considered to be historically safe investments.\nThe Federal Reserve Bank of New York has found that reports by major bond rating agencies about municipal bond defaults only include rated bonds, but inclusion of the unrated portion of the market significantly increases the number of municipal default frequencies. Furthermore, several state and local municipalities experienced financial distress episodes following the 2007-2009 recession. Some municipal bond issuers saw lower tax revenues and higher expenditures. Some municipalities saw their credit ratings downgraded due to growing indebtedness, frequently associated with underfunded pensions. Some general obligations were cut to junk (low grade, high default risk) bond status; since 2008, some issuers have filed for Chapter 9 bankruptcy. \nWhen an issuer\u2019s credit rating is low, bond insurance may be purchased to help attract investors. The financial guaranty insurance industry, that is, monoline (bond) insurers, provides insurance against the default risk of municipal bonds and asset-backed bond issuances. After 2007, monoline insurers experienced losses on mortgage-backed securities guarantees resulting in a loss of their AAA ratings. Some investors may be less comfortable holding insured municipal bonds in light of reports about some bond insurers that are still recovering from previous financial losses.\nIn the 114th Congress, the No Taxpayer Bailouts for Unsustainable State and Local Pensions Act (H.R. 1476) was introduced to prohibit the Secretary of the Treasury and the Board of Governors of the Federal Reserve System from providing any financial assistance to state and local government pension plan funds. If the source of financial stress for many municipalities is related to the funding of municipal employee pensions, then this bill would prevent the federal government from acting as the ultimate guarantor for municipal investors. This bill could encourage some municipalities to apply available funds to cover pension liabilities and fund more non-pension liabilities via borrowing, thereby shifting more default risk to non-pension liabilities where it may still be possible to request federal assistance.\nSystemic Risk\nBond markets, as with all financial asset markets, are also vulnerable to systemic risk crises. A systemic risk crisis can occur in the municipal bond market when bondholders suddenly lose confidence (or panic) about the likelihood of repayment and simultaneously rush to sell or liquidate their municipal securities holdings. Given that municipals trade infrequently and their prices are estimated, investors may not be able to obtain timely market information about changes in issuer default risk or changes in overall market perceptions of default risk. Although investors can obtain information about the risks associated with their bond holdings, (e.g., the financial statements of the bond issuers or on-site inspections of the progress of a municipal project), recurring announcements of various municipals\u2019 fiscal problems may influence bondholders\u2019 perceptions of risk exposure. Growing pessimism can suddenly manifest itself in the form of a market retrenchment\u2014often referred to as a systemic risk run or flight-to-quality event\u2014when investors suddenly attempt to liquidate their bond holdings before issuers become insolvent.\nThe Financial Stability Oversight Council (FSOC), established to identify risks to the financial stability of the United States, provided an assessment in its annual report regarding the potential of a systemic risk crisis in the municipal bond market generated specifically by the debt crisis in Puerto Rico. Puerto Rico has outstanding municipal debt totaling more than $70 billion, and the credit rating agencies have downgraded the issuances to junk status. According to the FSOC, evidence of an erosion of investor confidence in the broader municipal bond market stemming from financial challenges idiosyncratic to Puerto Rico has not been observed. As long as investors do not consider the financial distress of one or more municipal issuers to be indicative of the broader financial health of other issuers, then it may be possible to avoid a systemic risk panic in the broader municipal securities market. \nDisclosing and Evaluating Municipal Bond Risks\nThe Securities Act of 1933 requires full disclosure of material financial information about securities sold and granted in the securities market. The federal government, however, is limited in its ability to regulate the municipal bond market even though it is a national market due to concerns associated with federal-state comity. The Securities Exchange Act of 1934 created the Securities and Exchange Commission (SEC), giving it broad authority over the securities markets with the exception of the municipal securities market. The Securities Acts Amendments of 1975, commonly referred to as the Tower Amendment to the Securities Exchange Act of 1934, prohibits the federal government from requiring \nany issuer of municipal securities, directly or indirectly through a purchaser or prospective purchaser of securities from the issuer, to file with the [Securities and Exchange] Commission or the [Municipal Securities Rulemaking] Board prior to the sale of such securities by the issuer any application, report, or document in connection with the issuance, sale, or distribution of such securities. \nIssuers of municipal bonds are not required to register their securities and thus are not subject to SEC disclosure requirements. The SEC does not have the authority to require state and local municipalities to follow the Generally Accepted Accounting Principles (GAAP) for state and local municipalities, established by the Governmental Accounting Standards Board (GASB). Compliance with GASB rules by state and local municipalities is voluntary. Individual states can pass statutes to require compliance with GASB or other preferred accounting methods. For example, the SEC has noted that the state of New Jersey has passed a state law requiring its localities to use statutorily mandated accounting methods as opposed to a nationally recognized accounting standard, such as those issued by the GASB.\nBecause municipal issuers do not have to meet standard SEC disclosure requirements, disclosure practices may vary by jurisdiction, state requirements, and type of security offerings (e.g., general obligation bonds, revenue bonds). Accounting practices are inconsistent across state and local governments. State definitions of budget items may vary considerably, making the ability to compare risks across municipal jurisdictions less effective. Conflicts of interests that may exist between the issuer, underwriter, and other principals may not be sufficiently disclosed at an initial offering. Disclosures at new offerings may lack sufficient information about the existence of bank loans or other municipal obligations owed by the issuer. Investors may also be vulnerable to improper disclosures if municipal bond credit rating changes, particularly in municipal markets that trade infrequently. Such issues suggest that investors are unable to accurately determine how much default risk they would assume when considering municipal bond investments.\nComplicating matters, bondholders may be unsure whether they rank first or last in payment priority should an issuer become insolvent. In accordance with the Tenth Amendment of the U.S. Constitution, the federal government may not grant a bankruptcy petition for a municipality without permission from the state because bankruptcy is a federal process. Some 26 states allow municipalities to file for bankruptcy. For states that have not enacted laws specifying whether it or its local public-sector entity can declare bankruptcy, bondholders would not know the order of payment priority in case of an asset liquidation episode, possibly prompting some of them to sell their municipal bonds. In cases where state and local courts may favor pension funds over bondholders, it becomes particularly important for bondholders to be fully aware of the repayment risks. \nMeeting various disclosure standards may be considered burdensome particularly for smaller municipal issuers. For example, issuers pay standardization and transmittal requirements for data. Standardization of the reporting cycle, (i.e., quarterly or monthly) may be expensive if, for example, financial statements were required to be audited and credit ratings had to be updated at each interval. Generally speaking, small financial entities (e.g., community banks, credit unions, small bond issuers) typically lack the volume of transactions commensurate with the compliance costs of various industry regulations compared with their larger competitors. \nRegulatory Actions to Improve Municipal Market Disclosures\nThe SEC has brought attention to the need to improve disclosure practices of state and local governments in light of alleged omissions of material information that investors may have found necessary to fully understand the risks associated with municipal bond investments. The SEC may still enforce federal securities antifraud provisions against municipal issuers when pertinent financial information is withheld from or misrepresented to investors in violation of SEC Rule 15c2-12. The SEC has suggested recommendations designed to improve transparency and liquidity in the municipal securities markets. \nAlthough federal disclosure requirements may not be imposed on municipal issuers, broker-dealers that facilitate the buying and selling of municipal bonds are regulated. The Municipal Securities Rulemaking Board was established as an independent entity in 1975 by the Tower Amendment to issue regulations and rules for the municipal bond broker-dealers. The MSRB has authority to make rules regulating the municipal securities activities of securities firms and banks that underwrite, trade, and sell municipal securities, as well as municipal advisory activities of municipal advisors. Title IX of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act) expanded the MSRB\u2019s jurisdiction, which had included broker-dealers (that earn fees for trading municipal securities), to also include the regulation of municipal advisors (that earn fees for advisory services) and establish rules for their activities. \nOn March 10, 2014, the SEC\u2019s Division of Enforcement created the Municipalities Continuing Disclosure Cooperation Initiative (MCDC). The MCDC provides issuers and underwriters the opportunity to self-report any material misstatements in bond offering documents (within the last five years of any primary offerings) as well as to comply with continuing disclosures as required by SEC Rule 15c2-12. The objective of MCDC is to encourage issuers to voluntarily correct misrepresentations rather than wait for them to be detected, thereby increasing transparency in the municipal bond markets. The deadline for self-reporting was September 10, 2014, for underwriters (broker-dealers) and December 1, 2014, for issuers.\nIn addition, the GASB has announced Statement 67 and Statement 68 to further define the requirements for the reporting of accounting and financial information related to municipal pension funding. \nStatement 67, Financial Reporting for Pension Plans, pertains to disclosures primarily for pension beneficiaries and other stakeholders. Examples of information likely to be of concern to beneficiaries include items such as total (employee and employer) pension contributions, predicted rates of returns, and overall performance trends. Statement 67 amends existing Statement 25 to require greater disclosures about material (\u201cdecision-usefulness\u201d) pension fund details in the notes that accompany the financial statements as well as in the required supplementary information. Statement 67 went into effect for fiscal years beginning after June 15, 2013.\nStatement 68, Accounting and Financial Reporting for Pensions, pertains to disclosures primarily for taxpayers and creditors. Statement 68 amends existing Statement 27 to require that the reporting of pension liabilities occur in the official, accrual based financial statements (rather than mentioned as supplementary information). Statement 68 went into effect for fiscal years beginning after June 15, 2014. This requirement is likely to result in the reporting of larger expenses and liabilities for states and municipalities, arguably providing more complete financial representations.\nAlthough greater transparency and more complete disclosures arguably may be more beneficial for investors, investor reactions are difficult to predict. Some municipal investors may be comfortable with the level and types of financial risks held in their portfolios as long as they are made fully aware; others may be less comfortable. Better disclosures may attract some investors but deter others because risk appetites and tolerance levels are diverse, thus making it difficult to predict how credit flows to municipalities would change with greater transparency. Likewise, it is ambiguous whether improved disclosures would decrease or increase the need for possible federal government intervention, perhaps in the form of financial guarantees. Greater transparency theoretically would be expected to reduce bondholder speculation and, therefore, the possibility of a financial panic. In contrast, greater transparency might reduce the demand for municipal securities, and federal government interventions might still be necessary to reassure investors and support the flow of credit to public-sector entities.\nCongressional Efforts to Improve Transparency\nThe Public Employee Pension Transparency Act (H.R. 1628) and its companion bill of the same name (S. 779) were introduced in the 113th Congress. These bills proposed to foster greater disclosure by encouraging use of reporting requirements specified in the bills for state or local government employee pension benefit plans. The bills would have also removed the federal tax exemption on municipal bond yields during any period in which the issuing locality failed to comply with reporting requirements. In addition, the bills would have exempted the United States from any liabilities associated with shortfalls in any state or local government employee pension plan. These bills may have resulted in increased transparency, but it is unclear whether they would have increased or decreased investor participation in the municipal bond market. \nIncentives for Depository Bank Holdings of Municipal Bonds\nWhen deciding whether to hold municipal bonds, all investors, including financial institutions, typically consider their rates of return (or yields) as well as the various types of risk factors previously discussed. In addition, the total profitability for institutional investors would be affected by the funding costs (i.e., the cost to borrow the funds necessary to purchase municipals), the tax treatment, and the safety and soundness costs to hold municipal securities (as reflected in related capital requirements). Some of the legislative and regulatory factors that influence banks to hold municipal bonds are listed below.\nCongress passed the Community Reinvestment Act (CRA) of 1977 to encourage federally insured banking institutions to make sufficient credit available in the local areas in which they were chartered and acquiring deposits. Banks have a wide variety of options to serve the credit needs in the geographical area where they acquire deposits. During CRA examinations, banks may receive CRA consideration for holding municipal bonds that promote economic development in their assigned local areas.\nAlthough the interest from municipal bond investments is not subject to federal tax when held by individuals, the interest is subject to federal taxes when held by banks. The Tax Equity and Fiscal Responsibility Act of 1982 limited the interest deduction on municipals for banks to 85%; the Deficit Reduction Act of 1984 further reduced the deduction to 80%. The Tax Reform Act of 1986 eliminated the interest deduction on municipals for banks, but exemptions were made for \u201cqualified tax-exempt obligations\u201d up to a $10 million annual limit. Specifically, banks must pay taxes on the interest income earned from municipals, but they may deduct 80% of the costs incurred to fund municipals that satisfy certain regulatory requirements. \nUnder Basel III capital requirements for banks, the dollar amount of municipal bond holdings are multiplied by an assigned risk weight that is subsequently used in the calculation of the required capital reserves a bank must maintain. The current risk weight assigned to a general obligation bond backed by the full faith and credit of the public-sector entity is 20%; the risk weight is 50% for issuances that are expected to be repaid with revenues from a project rather than general tax funds. Should the status of a particular set of municipal securities change to nonperforming, the risk weight applied to the outstanding balance for troubled bank loans increases to 150%, resulting in greater capitalization pres",
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