Executive Report By SHELLEY DAVIS

Controversial municipal bond ruling postponed

POSTPONEMENT until May 31 of the controversial Internal Revenue Service's ruling concerning state and municipal securities used as collateral by banks could be a good omen, according to Don Smith, chief fiscal officer of the Illinois Treasurer's Office. The ruling, made on December 15, was to have taken effect January 8.

The postponement gives Congress, the IRS and the U.S. Treasury Department a chance to examine the ruling. The ruling could have a devastating effect on 34 states, including Illinois, which require some kind of collateral for negotiated time deposits made to banks by governmental units. Smith said there is a "good chance" that the ruling will be withdrawn or that some type of legislative action will be taken.

The ruling stems from a 1954 tax code regulation that prohibits borrowers from deducting interest payments on a loan used to buy tax-exempt issues. This is what banks that use tax-exempt municipal bonds as collateral, have been doing for years, the IRS said. The ruling says that banks may no longer deduct the interest paid on negotiated time deposits as a business expense if municipal bonds are used as collateral. However, an earlier IRS ruling permitted deduction for interest paid on U.S. securities, which are not tax-exempt.

Negotiated time deposits are those made by governmental units for short periods of time, often involving millions of dollars. Illinois law requires that banks pledge collateral of 110 percent of the market value of securities to insure that money will be there when the governmental unit wishes to withdraw it. The securities can be either U.S. issue or municipal bonds, which include all bonds issued by the state or any unit of local government. This allows the state to receive high interest benefits from these types of deposits while at the same time allowing banks that use tax-exempt municipal bonds to get a double tax protection — tax free bonds and a business expense deduction for the interest paid on the accounts.

State Treasurer Jerry Cosentino said if the new ruling is upheld, the effect on governmental units in Illinois could be devastating. The fear is that banks will opt for U.S. government securities, where deductions can be made, instead of buying municipal bonds. The decrease in the marketability of municipal bonds will in turn cause a reduction in state revenues derived from interest earnings, Cosentino said. He pointed out that for fiscal 1980, the state deposited more than $2 billion in public funds in over 1,000 banks in the state. These deposits earned about $216 million in interest payments.

The ruling, however, was softened somewhat when the IRS decided to remove a stipulation to apply it retroactively. Although it was predicted that banks would only be forced to repay the IRS for deductions dating back not more than three years, this in itself could have resulted in billions of dollars for all the banks involved. Smith said that attempting to determine the amount of money owed to the IRS in back taxes for just a three-year period would have been ". . . an impossible task. If you had 25 years, you wouldn't have gotten it done," he said.

It is still too early to tell what the total effect on Illinois will be if the ruling stands, Smith said. However, he estimated that if the effect is 15 percent — a figure he said is used only as an example — the state could lose $30 million annually in interest payments.

Farmland conversion update
THE AMOUNT of farmland in Illinois did not increase from 1974 to 1978, although U.S. Census Bureau figures seemed to indicate it did. The census bureau says its earlier published data showed 29.095 million acres of farmland in Illinois in 1974 and 29.734 million acres in 1978, an increase of 639,000 acres. But this increase, the census bureau says, was caused by an undercount of Illinois farms, particularly small and part-time farms.

Under a more accurate system used in 1978, some farms were counted for the first time. Adjusted figures released by the census bureau in December show a decline in Illinois farmland since 1969 — from 30.718 million acres in 1969 to 30.209 million acres in 1974 — and to 29.734 million acres in 1978. Between 1974 and 1978 about 475,433 acres of farmland were converted to other uses, or close to 118,000 acres per year. This is higher than the 100,000 acres per year estimated by the U.S. Soil Conservation Service; it also raises the estimated loss of revenue from Illinois farm products from $22 million each year to $23 million.

Weatherization assistance
Illinois received in January more than $15 million in federal funds under the Weatherization Assistance for Low-Income Persons Program, but requests total $26 million. The funds are channeled to homeowners or renters, particularly the elderly and handicapped, to pay for caulking and weatherstripping homes, installing insulation, storm doors and other improvements to reduce heat loss and conserve energy. The program is administered by the Department of Commerce and Community Affairs (DCCA), and is part of the federal energy assistance program.

David M. Farrell, head of DCCA's office of resource conservation, says the $15 million available this year is not enough. Requests total $26 million; Chicago alone wanted $8 million. The money is supposed to be available from February 1 to December 31, but at the rate requests are coming in, it may run out by July or August. Additional funds that were expected probably will not be available, Farrell said. Expected cutbacks in the federal Comprehensive Training and Employment Act program (CETA) will also raise the cost of the program since much of the work has been done by CETA employees.

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April 1981/ Illinois Issues/ 33