WASHINGTON — A new office at the U.S. Treasury Department will focus on state and local finance issues, including distressed municipalities and their management of pension and other unfunded liabilities.

Current JPMorgan managing director Kent Hiteshew will be the first to helm the Office of State and Local Finance when he takes it over in mid-May. He will report to Treasury Assistant Secretary for Financial Markets Matthew Rutherford, according to a story first reported by the Wall Street Journal and confirmed by The Bond Buyer.

Hiteshew currently oversees public finance for the Northeast region and the housing finance group at JPMorgan, where he has been since 2008. Before that he worked at the now-defunct Bear, Stearns & Co. for 18 years, and earlier at Morgan Stanley Inc. and the former Drexel Burnham Lambert. He also previously worked for New York City in various positions, including the Economic Capital Corp. and the Board of Estimate, from 1981 to 1983. He worked at the U.S. Department of Housing and Urban Development from 1978 to 1980. The new office will be a central resource for Treasury to evaluate state and local finance issues as well as developments in the bond market, according to a Treasury spokesperson.

"The office will serve as Treasury's liaison to state and municipal officials and associations, monitor developments in municipal bond markets, support policies to improve the management of public pensions and other liabilities, and develop potential federal policy responses to issues that emerge in municipal financing markets," the spokesperson said.

The idea for the office originated, in part, after the White House kept getting requests for assistance from troubled local governments, but lacked any centralized group capable of coordinating a federal response, said a source familiar with it. Detroit, for example, had reached out for help restructuring its finances, the source said. Treasury's tax-exempt bond group will remain separate from the new office, which will not be involved in tax law or regulations, sources said.

Several market participants applauded the idea of the office and said Hiteshew is a good choice due to his long experience as a public finance banker. "The establishment of an office of state and local government finance within the Department of Treasury is an excellent idea, given the critical issues confronting many governments, including financial distress and pension funding issues," said Howard Zucker, a partner at Hawkins Delafield & Wood in New York. "I could not think of a better choice to be the first director of such an office than Kent Hiteshew. I have had the opportunity to work with Kent since 1982 when he worked for the City of New York and during his long and distinguished career as a public finance investment banker. He is one of the most knowledgeable and intelligent individuals in the public finance arena, and has worked with issuers across the nation. I am fully confident he will do a first rate job."

Marc Jahr, former president of the New York Housing Development Corporation, said Hiteshew served as senior underwriter on some HDC bond deals and impressed him as a man of deep knowledge and integrity. "I don't think Treasury could have made a better choice. He is superb," Jahr said.

Jahr said that Hiteshew will bring to his new role not only a broad understanding of muni finance generally, but also an appreciation for the viewpoints of local governments and financing authorities with which he has worked closely with in his career.

"I always felt confident that the advice he was giving me was the advice the HDC deserved," Jahr said.

Dan Keating worked with Hiteshew at Bear Stearns, and said Hiteshew is a good fit for the job because he is a good listener and a fast learner. "He knows enough to ask a lot of good questions," Keating said.

Susan Collet, senior vice president for government relations with the Bond Dealers of America, said she believes the Treasury wanted someone who understood the muni business from a market perspective, as a complement to existing staff knowledgeable about muni tax issues.

"It's positive any time the government attracts anyone who comes from a business perspective," Collet said.

The idea of a new office got praise from Lynnette Kelly, executive director of the Municipal Securities Rulemaking Board. The MSRB conducts muni research and its EMMA website serves as the repository for issuer disclosures about their bonds and finances.

"The MSRB welcomes the creation of a new unit of the U.S. Treasury Department focused on the municipal securities market," Kelly said. "The MSRB works closely with our fellow regulators and other federal agencies to promote a fair and efficient municipal market."

But the selection of a banker from a major Wall Street firm may also send the wrong message, said Frank Shafroth, director of the State and Local Leadership Center at George Mason University in Virginia. Shafroth said the decision to hand control of the new office to someone like Hiteshew makes the office seem like an entity that will look out for Wall Street's interests. Although Hiteshew worked for New York City prior to his long investment banking career, Shafroth said Treasury has a tradition of not working with state and local governments, regardless of which party holds the White House.

"In Washington, there's a perception that those are lower forms of government," Shafroth said.

He added that while a federal outreach team could provide good resources for local governments, having a Treasury official viewing state and local governments as problematic could eventually lead to damaging overregulation by other regulators.

"I'm worried that it will cause more harm than good," Shafroth said.

Alan Anders, deputy director for finance of New York City's Office of Management and Budget, said the new office will be very good for issuers. "I think it's extremely valuable and important," Anders said. "The fact that there's a point person at Treasury that we can all contact is very valuable."

A Treasury spokesperson said Hiteshew is the only new hire assigned to the office at this time, but that Treasury will transfer existing and hire new staff as needed.