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  #521  
Old 03-08-2018, 08:21 PM
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CINCINNATI, OHIO

https://www.cincinnati.com/story/new...-no/398991002/

Quote:
Cincinnati now pays nearly $50M in interest on its debt. Is that a problem? City says no.
Spoiler:
What would you do if your monthly credit card bills jumped more than 50 percent over 10 years? What's worse, you're nearly maxed out on those cards, because you needed to keep borrowing to keep up with expenses.

Congratulations. You now face the same situation as the city of Cincinnati.

Rising debt and payments on it are forcing the same hard decisions for city officials that anyone would need to make at their kitchen table.

The city's now paying nearly $50 million a year in interest on its debt – roughly equal to what it takes to run Cincinnati's health department, including its eight neighborhood clinics, for a year.

Here are just a few such recent decisions:

Borrowing $35 million to help patch a hole in Cincinnati's ailing pension system.
Taking out nearly $100 million in bonds to repair roads and replace aging city police cars, dump trucks and other vehicles.
Letting development projects linger, including the block-long expanse of concrete and mud at the site of the former city parking garage at Fourth and Race streets, because the city can't borrow more.
What's at stake with this balance sheet bingo?

In the short term, the city wants to borrow even more for high-profile projects. The projects include:


New or renovated buildings for the police and fire departments for nearly $30 million.
A $33 million loan to cover the city's share to replace the Western Hills Viaduct.
A potential multimillion-dollar contribution to help cover infrastructure costs around a new pro soccer stadium for FC Cincinnati.
The huge debt load worries some observers, given Cincinnati's role as the economic hub of the region.

After all, look what happened to Hamilton County during the Great Recession. County officials laid off a third of the workforce because they had no cash reserve or ability to borrow.

City officials say they are managing Cincinnati's debt conservatively and could borrow more comfortably in case of an economic or infrastructure emergency.

They say they have a plan to reduce, or at least effectively manage, Cincinnati's debt load with new limits put in place over the last three years.

Mayor John Cranley argues that some debt is necessary to pay for investments such as street repairs to keep the city in decent shape.

"The moral obligation for us is to use the resources available to us to leave the infrastructure and financial health of the city to in good shape for our successors and not take away their freedom" to make future investments, Cranley said in an interview

Still, the city's higher debt already has taken a financial toll on residents. City Council raised taxes for property owners in January to make it possible for Cincinnati to borrow more.

Raising homeowner fees for Cincinnati's stormwater system also is under discussion – again to be able to cover previous debt and borrow more.

Here are some key findings from an Enquirer analysis of the city's balance sheets:

Numbers show red ink rising
Cincinnati currently owes different debtors nearly $1.25 billion. That's just under 10 percent of what the city is worth as a whole ($15 billion in property).

The debt is triple what it was 25 years ago when adjusted for inflation, with big-ticket items such as the streetcar and adding more police following the 2001 racial unrest.

The Enquirer analysis shows the debt rose more than 11 percent between 2013 and 2017. Compare that to a 5.8 percent rise in liabilities for local and state governments overall, according to Federal Reserve data.

From 2013 to 2017, the increase in debt was triggered primarily by $100 million spent to improve streets and the city's vehicle fleet as well as a $35 million one-time pension payment. The city notes the $35 million judgment bonds were part of a court-supervised pension settlement. Borrowing money to put into a pension system is otherwise illegal in Ohio.

police carBuy Photo
City of Cincinnati police car (Photo: The Enquirer/Liz Dufour)

The increased debt has increased annual payments on it to about $132 million. For comparison, the police department cost $146 million to operate this year.

According to one fiscal watchdog group, Cincinnati's debt plus its unfunded pension liability puts the city as the 12th worst in the nation when it comes to debt load – with those two figures adding up for about $14,000 in debt for every city taxpayer.

"We don't think they have enough money to pay their outstanding debt and bills, including the pension," said Sheila Weinberg, founder and chief executive officer of Truth in Accounting, a nonprofit out of Chicago.

How much more can, should city borrow?
City officials disagree with any negative outlook, saying they have been prudent with their borrowing and that they match up well to other cities of similar size in the Midwest.

They also argue that under both Ohio law and self-imposed limits that Cincinnati has room to borrow.

The state caps any city's tax-supported debts – those bonds paid back with income or property taxes – to a small percentage of the city's overall worth or assessed property value.

In 2015, however, the city went lower than that, voluntarily reducing the amount it could borrow.

Given that self-imposed limit, Cincinnati officials have about $100 million of borrowing room under their own self-imposed rules. They have nearly $265 million under Ohio's legal cap.

"We feel we're well positioned if we need to borrow more," said city Finance Director Reginald Zeno.

Ratings not what they seem?
Just last week, debt rating agency Standard & Poor's raised the rating on several current Cincinnati bonds to the second highest grade possible.

The move was heralded at City Hall as another sign of a strong balance sheet and an ability to borrow in the future at lower interest rates.

But S&P officials told The Enquirer in an interview that almost all bonds not reliant on tax revenues for payoffs, like those on water or sewer systems, were upgraded across the country. Such bonds account for about half of Cincinnati's debt.

In fact, S&P still has a negative outlook on Cincinnati's debt structure even as the city's overall grade is still the second-highest available.

"In our view, Cincinnati's debt and contingent liability profile is very weak," S&P wrote in a 2016 report, pointing out that the city spends more than 10 percent of its expenses on debt payments – a figure that has only gotten bigger since.

Still, the debt profile is only 10 percent of an S&P rating. And in that same 2016 report, the company upgraded the city's bond rating to AA, and reaffirmed the rating last year.

That's up from AA-minus in 2014, when the lousy economy and declining tax revenues, as well as the ballooning pension debt, pushed the rating down.

The upgrade enabled Cincinnati to score lower interest rates, lowering its overall borrowing costs. The city's most recent bond was issued in 2017 at 2.82 percent for a 20-year loan. Compare that rate to the average APR on a personal credit card, which has been running around 16.4 percent.

New borrowing limits in place
Cincinnati administrators in 2015 imposed limits on both the amounts and types of borrowing the city would allow.

In addition to the cap of tax-supported debt as compared to the value of the city, Cincinnati now requires at least 60 percent of all bonds to be paid off within 10 years.

Most cities use 20- or 30-year bonds, City Manager Harry Black says. So Cincinnati's debt is paid off more quickly, providing more ability to borrow in the future (63 percent of the city's current bonds are on a 10-year term).

In addition, annual payments for tax-supported debt can't exceed 12.5 percent of total city revenues. The city is at 11.2 percent currently.

"Those had never existed prior to this administration," Black said. "That has helped us get into better shape than before."

Debt shuffling on the city's books
The rising debt has forced some interesting accounting decisions by the city.

The fees supporting the city's stormwater system are now paying for expenses such as salting city streets during winter or picking up yard waste – expenses previously paid out of Cincinnati's general fund.

The additional expenses have put pressure on the stormwater system's ability to keep up with its own maintenance, and it actually borrowed $4.4 million two years ago.

Now there is a move to increase stormwater fees up to 64 percent – or nearly $2 a month – for houses that are 10,000 square feet or smaller.

The goal: Enable more borrowing because the stormwater system needs $6 million in new capital projects over the next five years. That's on top of the property tax increased City Council passed in January to give Cincinnati what finance director Zeno calls "debt flexibility," or the ability to borrow more.
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  #522  
Old 03-09-2018, 06:54 AM
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Originally Posted by campbell View Post
Unfortunately for you, many closed end muni funds are chock full of puerto rican bonds.

and check out my puerto rico debt watch thread for that bit
Yeah, I look at the top holdings and my CEF's by state and they don't have much/any from PR do have lots of California, Illinois, New Jersey...etc. which is likely ripe for default at some point. I always wonder how up to date the ratings are.

The discounts in the Muni CEF space are pretty close to their widest points (over the past 3 years) right now which usually seems to signal that retail investors have over sold them... but who knows.
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Old 03-09-2018, 07:05 AM
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I had read an interesting blurb on Twitter where part of a Ben Bernanke book he had discussed the option of purchasing Muni debt at some point (limited to maturities of 6 months or less). I don't think it's as necessary as with the ECB and PIGS, basically had to purchase debt to prevent the european union falling apart but it does seem possible that they bail out municipalities if things get bad enough/across enough of them. Although, given they are mostly blue areas, I'm not sure if trump/republicans would be supportive (seems dems might if in power).

https://pro.creditwritedowns.com/201...l#.WqJo6q2ZNE4
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Old 03-09-2018, 07:55 AM
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Just like how Detroit was bailed out? That would have been relatively affordable for the feds.

And Central Falls, Rhode Island.

and Jefferson County, Alabama.

etc.

No, the munis aren't going to get bailed out. Many/most are still just fine, and the ones that aren't are not exactly "unlucky".

The bigger question is whether the public pensions will get bailed out, and I'm still seeing that as a no.
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Old 03-09-2018, 04:15 PM
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Just like how Detroit was bailed out? That would have been relatively affordable for the feds.

And Central Falls, Rhode Island.

and Jefferson County, Alabama.

etc.

No, the munis aren't going to get bailed out. Many/most are still just fine, and the ones that aren't are not exactly "unlucky".

The bigger question is whether the public pensions will get bailed out, and I'm still seeing that as a no.
I don't like your attitude. You are certainly right that thus far the trend has been to stick it to the bond holders increasingly for the benefit of pensioners and even they've been forced to take some haircuts.

It's very possible you are both right. And there is no bailout as you suggest and CW is right that the Fed eventually buys munis to spur infrastructure investment... maybe just not from junk municipalities.

I'm going to keep dancing though until the music stops... then I'm going to be the first to grab a chair. It's easy... like winning trade wars!
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Old 03-09-2018, 04:53 PM
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Yes, a lot of people don't like my attitude of saying there will be no bailouts.

From 2016:
http://stump.marypat.org/article/464...be-no-bailouts


The MEPs may get a partial bailout, but it's not clear to me at this point. There's just a Congressional committee right now. They're supposed to propose something by fall. We'll see if it is any different from the bailout proposals already put forth.
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Old 03-13-2018, 03:52 PM
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CONNECTICUT

https://www.bloomberg.com/news/artic...-director-says

Quote:
Connecticut Won't Default on Pension Bonds, Budget Director Says
By
March 13, 2018, 1:50 PM EDT
Treasurer warned governor’s plan would cause technical default
Governor’s aide says he won’t back plan that would affect debt
Spoiler:
Whatever plan Governor Dannel P. Malloy proposes to avoid skyrocketing payments to the state’s teachers pension, it won’t trigger a technical default on Connecticut’s pension bonds, his budget director said in an interview.

“We’re looking at a whole series of options right now, but none that we pick, unless they carry me out feet first, are going to involve the state defaulting or not honoring its bond covenants," said Benjamin Barnes, Secretary of the Office of Policy and Management.

Connecticut Treasurer Denise Nappier warned that Malloy’s proposal to stretch out payments on the teachers’ pension’s unfunded liability beyond 2032 to sidestep a potential $5 billion payment increase would trigger a technical default. Municipal Market Analytics, an independent research firm, said last week that such a breach would be a “clear credit negative" and investors should demand higher yields on Connecticut bonds to compensate for the risk.


A covenant in a $2.1 billion pension bond issue from 2008 requires the state to appropriate the full annual contribution to the pension and amortize its unfunded liability through 2032, the year the bonds mature.

The governor’s office has said the legislature can authorize the board overseeing the teachers’ pension to change the assumed rate of return and extend the amortization period, meaning the state would continue to make full annual contributions, just over a longer period. But he’s also considering alternative proposals.

“We would be better off with a longer amortization period and lower investment return assumption," Barnes said. "We would like to get there, if there’s a way to do so, without defaulting on the covenant."

A series of proposals to shore up the teachers’ pensions could be released as soon as Wednesday. “I’m certain bondholders won’t be harmed by what we’re proposing," Barnes said.


The governor, who is set to leave office in 2019 and isn’t seeking re-election, is acting because Connecticut’s annual contribution to the teachers’ pension is estimated to rise to $6 billion in 2032 from $1 billion in 2014 if investments return an annualized 5.5 percent, according to a Nov. 2015 study by the Center for Retirement Research at Boston College commissioned by the state. The teachers’ pension had 10-year annualized returns of 5.3 percent as of June 30, 2016.

To make the required payments to the pension, Connecticut’s governor has said residents would have to choose between deep cuts to local aid or large tax increases if investment returns didn’t meet their benchmark.

Nappier argues that Malloy’s "doomsday scenario" won’t happen because it was calculated using "inconsistent and inflammatory assumptions."




Last year, the state extended the amortization period for the state employee pension to 2046. The deal, which also reduced the assumed return on the pensions’ investments to 6.9 percent from 8 percent, avoided an increase of annual payments to the pension ranging from $4 billion to $6 billion annually. Connecticut’s general fund budget is currently about $19 billion.

The move reduced the risk that the pension would consume a growing share of the budget, Barnes said.

“We would like to do the same thing for the teachers’ system," he said. “Nobody had done any of this work for 30 to 40 years before us. We’re trying to finish this up and put theses funds in good order during our tenure."


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Old 03-15-2018, 03:46 PM
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https://www.marketwatch.com/story/he...ounts-mw#false

Quote:
Here’s why muni-bond demand could get a lift from bank legislation
Banks own close to 15% of the municipal bonds outstanding


Spoiler:
As municipal bondholders continue their struggle to make sense of last year’s tax legislation, Congress is set to knock down one argument against participating in the $3.8 trillion market.

Investors are expecting the Senate to pass a bipartisan bill that would include municipal debt in the coveted category of high-quality liquid assets as part of a bid to roll back some elements of the Dodd-Frank law put in place after the financial crisis. The proposed legislation would stoke appetite for municipal bonds among banks, steadying a market still reckoning with the recent tax cuts.

“It takes one of leg of the argument against the muni market as it goes through a shake-up,” said John Mousseau, director of fixed-income strategy at Cumberland Advisors.

See: Volcker, Angelides in opposition on regulatory rollback

It was only a few months ago when President Donald Trump’s revamp of the tax code threatened to sink the viability of municipal debt by eliminating private activity bonds and advanced refunding paper, two key pillars of the $3.8 trillion market. That led local governments to issue billions of dollars in bonds in December in order to front-run the tax changes. But since then, municipal bonds have largely recovered.

Read: Municipal bonds see deluge of supply as Republican tax plan fears build


–– ADVERTISEMENT ––



The bill would put municipal bonds in the company of high-grade corporate paper and government debt in the eyes of financial watchdogs.

Rules elevating corporate bonds above munis in the regulatory environment has been a chip on the shoulder of market participants. The National Association of State Treasurers blamed the absence of municipal debt from the high-quality liquid assets designation, or HQLA, for contributing to higher borrowing costs for local governments.

Regulations mandating banks hold a minimum amount of HQLA to handle market turmoil were designed with the intention of avoiding a repeat of the 2008 financial crisis when banks found much of the investments on their books were difficult to off-load and less creditworthy than they had initially seemed.

On that front, analysts point out municipal debt features a lower default rate than their private-sector peers at every rung of the credit ladder as they are backed by the full taxing authority of local governments. According to a Moody’s historical study stretching from 1970 to 2015, the frequency of defaults among BBB-rated municipal bonds was lower than that of AAA-graded corporate bonds.

“Why wouldn’t you want better credit collateral than you're getting with existing legislation on corporation debt,” said Mousseau.

Moreover, municipal debt could hold good value for banks with extra cash. The yield difference between municipal bonds and comparable Treasurys is still wider than historical levels, with the tax-free yield on a 10-year municipal bond slipping to around 85% of the taxable yield on a 10-year Treasury TMUBMUSD10Y, +0.16% for most of this year. A ratio higher than 80% implies munis are cheaper relative to Treasurys.

Though the revamped bank legislation should boost their investment in municipal paper, its unlikely to return Wall Street to their previous role as the linchpin of the market.

Nonetheless, Mousseau says the bill, if passed, is an under-appreciated step that could prove a boon to smaller financial institutions and commercial banks that have few avenues for long-term investments.

In 1975, banks owned close to half of the municipal bonds outstanding. Their share hit a low in 2004, shrinking to 5%, before making a comeback to 15% in 2017 after former President Barack Obama expanded the allowance for banks to qualify for tax exemptions on interest payments, a key appeal of the municipal bond market.

“If individual investor ownership is the bedrock of municipal holdings, then bank ownership is the topsoil,” said Thomas Kozlik, municipal strategist for PNC Capital Markets, in a January note. He added that “bank buying patterns have historically been sensitive to tax reform and government incentives.”

Their role as a backstop against weakening demand for municipal paper has come to the fore in recent years. Bank holdings of municipal paper rose close to $120 billion from 2015 to 2017, even as households sold around $110 billion of municipal bonds, according to the Federal Reserve data.

But some investors are still waiting for the dust to settle from the Republican tax legislation before making up their minds on how much of a boon a renewed Dodd-Frank bill would be for the municipal bond market.

“Right now the market is trying to figure out what bank activity will be as a result of the tax-cut legislation. Banks very well could find relative value elsewhere,” wrote Kozlik.
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Old 03-15-2018, 06:06 PM
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CALIFORNIA

https://www.bloomberg.com/news/artic...nough-for-some

Quote:
California's $83 Billion of Bond Debt Isn't Enough for Some
By
March 6, 2018, 9:55 AM EST
Golden State is selling $2.1 billion of bonds this week
California has $31 billion of unissued bonds still pending
Spoiler:
California’s sale of $2.1 billion in bonds this week isn’t enough for some buyers and interest groups.

The state is sitting on $31 billion of unsold bonds, about a fifth of the $149 billion approved by voters over the decades, according to a financial report by the state treasurer. And the state hasn’t matched recent voter enthusiasm for billion-dollar measures with immediate sales: most of the $17 billion added to the authorized pool since 2014 haven’t been issued.

Proponents of initiatives approved by voters, such as school construction and water infrastructure, would like to see California sell those bonds sooner. State officials, on the other hand, have focused on paying down outstanding debt and timing sales more closely to when those projects get started.

The subdued pace demonstrates the fiscal restraint that along with the state’s economic rebound has helped boost California bond prices. But California isn’t seizing the opportunity to tackle its significant capital needs such as water projects at low costs, said Dora Lee, vice president at Belle Haven Investments, which manages about $7 billion of municipal bonds.

"They’re not only missing out in terms of lower interest rates, they’re missing out on future economic growth and they’re limiting their choices down the road," she said.

Sitting Idle
California has about $83 billion in outstanding general obligation and lease revenue debt, down by $3 billion from 2016, according to state treasurer reports.

Governor Jerry Brown’s administration doesn’t want to sell bonds before the proceeds are needed for different stages of construction, said H.D. Palmer, a spokesman for the finance department. Otherwise, "you start racking up debt service costs for cash that’s sitting idle," he said.

Indeed, a large increase in outstanding bonds could pressure California’s rating, which at AA- from S&P Global Ratings is lower than the company’s average AA rating for states but is at the highest in almost two decades.

"They could afford to issue a bit more debt than they’re currently amortizing and maintain their current credit profile but not a significant amount," said Bernhard Fischer, senior fixed-income analyst at Principal Global Investors, which oversees about $8 billion in munis. Fischer said the state could probably sell about $1 billion more than it is now.

Those chafing at the pace include the California School Boards Association, which wants quicker sales of $7 billion on bonds for construction projects at elementary and high schools and $2 billion for community colleges. Brown, who opposed the measure, had wanted tighter accountability requirements before selling the debt.

So far about $433 million have been sold for the schools and about $17 million for community colleges, excluding what will be allotted from the proceeds of this week’s deal. If the current pace continues, it would take more than a decade to sell the bonds, said Nancy Chaires Espinoza, a lobbyist for the association.

"The bond sales aren’t keeping pace with demand," she said.
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Old 03-16-2018, 02:19 PM
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http://www.governing.com/week-in-fin...m_medium=email

Quote:
The Week in Public Finance: 3 Things State and Local Governments Should Know About the Banking Deregulation Bill
The first major bipartisan banking bill since Dodd-Frank has some potential pluses and minuses for states and localities.
Spoiler:
This week, the U.S. Senate passed the first major banking bill since the Dodd-Frank financial overhaul in 2010. If successful, it would roll back and loosen regulations on banking institutions prompted by the 2008 financial market meltdown.

The new bill is the result of a bipartisan effort. More than a dozen Democrats joined the Republicans to pass it. But passage in the House, where it heads next, is not guaranteed as Republican lawmakers there want an even bigger rollback of regulations.

The measure, supporters say, will provide regulatory relief for small banks. Meanwhile, critics argue that it benefits larger institutions more by loosening important consumer protection requirements for lending.

RELATED
How Banks Are Feeling Uber's Impact Why Few Cities Will Take the Supreme Court Up on Their Right to Sue Banks
If it ultimately passes the House and is signed by President Trump, the bill contains three provisions that state and local governments should keep tabs on.


The Regulation Threshold
Called the Economic Growth, Regulatory Relief and Consumer Protection Act, the bill would change the size of banks that are subject to federal regulatory scrutiny. It does this by raising the threshold for so-called systematically important financial institutions from banks with at least $50 billion in assets to banks with at least $250 billion on the books. These financial institutions are subject to higher regulatory standards than small banks.

The idea is to free up smaller, regional banks from the strict scrutiny they say hinders their ability to make small business and other loans. The stingy small business lending market has made it difficult for business owners to expand and grow. This stagnation is something that concerns state and local politicians.


Mortgage Lending Concerns
Supporters claim the bill would keep consumer protections intact, but some critics contend it would do the opposite. They point to the $50 billion threshold mentioned above, which many have said was too low. Some are concerned, however, that the bill would raise the threshold too high. For example, Countrywide Financial, a major subprime mortgage lender at the center of the foreclosure crisis in 2008, had assets of roughly $210 billion before it failed. Under the proposed bill, it would be exempt from the kind of regulatory scrutiny from the Federal Reserve that it’s subject to today.

There's another mortgage-related provision in the bill that has consumer groups like the Center for Responsible Lending railing against it: the proposal to loosen mortgage lending standards for small banks and credit unions.

The looser standards would apply to institutions with $10 billion in assets or less and would expand the types of mortgages they offer, ease appraisal requirements for some types of loans and exempt small banks from certain disclosure rules. “Not only would this bring back toxic loan products and elevated foreclosure rates,” says the Center for Responsible Lending, “it would also provide legal safe harbor for predatory lenders.”


More Flexibility for Munis
The bill contains a big plus for municipal debt: It would expand a federal rule outlining the kind of liquid assets that banks must hold in case of an emergency to include all investment-grade -- that is, anything above junk status -- municipal bonds.

The current rule limits the kinds of municipal bonds that qualify. Many were concerned that the limitation for munis would make it more expensive for states and localities to issue debt during the next economic downturn because demand for them would be lower from banks.

The proposed expansion isn’t perfect. The new classification for munis would make them similar in credit quality to mortgage-backed securities rather than on par with debt from foreign countries, which is typically more stable and what finance officials wanted.

Still, notes the Brookings Institution’s Aaron Kline, the fix in the bill strikes a better balance than what exists today.


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