A bipartisan group of senators introduced a bill that would authorize $5 billion in private activity bonds to rebuild schools, fire stations, courthouses, and other public buildings through public-private partnerships.

A House version of the bill, co-sponsored by 10 members of both parties, was introduced in February.

“Our bill will enable local governments to access private financing to support public building projects for the first time, so that much needed building upgrades can occur,” said Sen. Todd Young, (R-Indiana), who introduced the bill earlier this month along with Sen. Catherine Cortez Masto, (D-Nevada).

The bill marks further support of tax-free bonds in the wake of attempts during the last Congress to constrict the muni market.

Getting More Done with Private Activity Bonds

Finding ways to increase use of private activity bonds

Private activity bonds are municipal bonds used to attract private funds for projects that have some public benefit. Currently, they can be used to develop transportation infrastructure, but not for public building projects.

“This unnecessary impediment prevents public building from combining tax-exempt financing with private, taxable financing, resulting in lower project costs for our state and local governments,” said Reps. Earl Blumenauer (D-Oregon) and Mike Kelly (R-Penn.), leaders of the House bill.

Two years ago, the IRS issued rules that enhanced the ability of public agencies to enter into long-term management contracts with private companies and still benefit from tax-exempt financing.

But public-private partnerships hadn’t come up with a way to use tax-free financing with the infusion of private equity in the capital structure. The new bill authorizes the issuance of $5 billion in bonds for government buildings financed in part with private equity.

“Once enacted, state and local governments would be able to enter into long-term contracts with a private sector company to design, build, finance, and/or operate the building for a defined period of time,” the House members said.

Turnaround in support

There have been various efforts over the years to shrink the muni market. In the run-up to the tax overhaul at the end of 2017, the House proposed eliminating both private activity bonds and advance refunding bonds.

Though PABs were ultimately saved, advance refunding bonds, which enable issuers to lower their borrowing costs by refinancing debt, were cut. Outcry over the move ensued, and within weeks, efforts began in Congress to reverse course.

The pushback was expected. Tax-free bonds have been used for decades to help finance a range of public projects across the country. They enjoy widespread support among political leaders, finance officers and investors.

A new law increasing their use to rehabilitate public buildings with the help of private dollars should be enacted. It’s a good first step in letting them do what they were designed for: addressing the nation’s important public needs.

James A. Klotz is the President of FMSbonds, Inc. Email the Author 04/22/2019