Change is not just in the air for the municipal bond market, it's here on the ground. Whether the deductability of muni bonds from federal and state income taxes survives the current federal budget debate or not, transformation is on the way. And it starts with the Securities and Exchange Commission's (SEC) determination to step up disclosure enforcement.

Illinois was the warning shot across the bow when, this past March, the commission charged the state with securities fraud. The fraud was not letting investors know how underfunded the pension plan was when the state sold bonds between 2005 and 2009. Illinois has since taken what the SEC considers "multiple steps ... to correct process deficiencies and enhance its pension disclosures." No fines were involved but the state was admonished to "cease and desist from committing or causing any violations and any future violations ... of the Security Act."

In May, the SEC called out South Miami -- a community of 11,000 residents in Miami-Dade County -- for misleading investors. This time it wasn't about pensions but rather a failure by the city to disclose that it had used a $12 million tax-exempt bond to help a developer finance a downtown parking and retail project. It borrowed the money through the auspices of the Florida Municipal Loan Council, which raises money on behalf of cities. But South Miami's failure to disclose that it loaned the proceeds to a private developer "put bondholders in danger of incurring significant additional costs associated with their investments," Elaine Greenberg, chief of the SEC's municipal securities enforcement unit, said in a statement.

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The Internal Revenue Service (IRS) is also making its weight felt. For years, community development districts (CDD) have acted as special purpose governments authorized to manage and finance local infrastructure. In most states, community development districts -- by that name or similar ones -- have been able to fulfill that mission by issuing tax-exempt muni bonds.

A little history first: Florida law first established CDDs in 1980. Since then, their number has grown mightily. There are now more than 600 of them. All totaled they have issued more than $6 billion in bonds, according to Richard Lehmann, publisher of the Distressed Debt Securities newsletter. Most of the CDDs were set up during Florida's housing boom from 2003 to 2008. But when the boom went bust, the developers who had borrowed through the CDDs started defaulting on payments. So far, 168 Florida CDDs have thrown in the towel on repayments on more than $5 billion worth of bonds. That's not a record any state wants to compile. So it's not surprising that the IRS is saying not so fast on CDD bond issuance -- at least not when the CDD is controlled by a single developer or land owner who controls a majority of the votes and elects the CDD board of supervisors.

Naturally, the issue has attracted the attention of bond lawyers. The National Association of Bond Lawyers (NABL) has issued a statement that says the IRS position "could substantially undermine the market for special district bonds, a long standing form of financing utilized by a wide range of issuers in many states."

"This could create some widespread problems," Scott Lilienthal, NABL's president, told Bloomberg News. "Special districts are a pretty widely used method of financing in various states."

Far away from the sturm und drang of the SEC and IRS moves, there are more upbeat trends in the market. Just as user fees are more popular with voters than general taxes, so it seems bonds that carefully target a project or cause are more popular with investors than all-purpose general obligation bonds.

A case in point: When Massachusetts came to market this year with a $1.1 billion general obligation bond, it embedded within it a $100 million green bond -- a general obligation bond that specifically targets energy efficiency improvements. The $1.1 billion overall debt did not sell out immediately (part of it was withdrawn for later sale); but the $100 million green bond had more buyers than bonds it could sell. Some of those buyers included endowments and pension funds that are required to invest in environmental ventures.

Social impact bonds are taking a giant step forward too. A few days ago, the Rockefeller Foundation and the Social Impact Bond Technical Assistance Lab at the Harvard Kennedy School awarded six state and local governments pro bono technical assistance to develop pay-for-success contracts using social impact bonds.

With a social impact bond, governments partner with service providers and private-sector investors to fund programs aimed at fixing social problems. Investors are repaid only if and when there are measurable improved outcomes. The issues targeted in the batch of six awards range from early childhood education to helping seniors remain in their homes longer.

In its official statement, the Rockefeller Foundation, through its associate director for innovation, Kippy Joseph, said, "Social impact bonds have traveled from concept to execution faster than any other social innovation in recent history." The competition for assistance awards -- there were 28 applications -- demonstrates, Joseph added, "the power of public-private partnerships to provide sustainable solutions to the funding problem for critical social services, while creating an environment for impact investors to test this exciting new form of innovative finance."

The six state winners were: Colorado, Connecticut, Illinois, New York, Ohio and South Carolina. In addition, Goldman Sachs just announced a $4.6 million social impact bond for a preschool program in Salt Lake City  that aims to reduce the need for special education and remedial services.