Restore Advance Refunding Bonds, Break Gridlock

Klotz on Bonds

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<h3>James A. Klotz</h3>

James A. Klotz

Here’s a way to bypass the standoff over aid to state and local governments: Restore advance refunding bonds.

It’s a sensible approach that has earned bipartisan Congressional support to help relieve debt pressure on issuers and steer clear of the wrangling in Washington over pandemic-related aid.

Now it’s time to act.

Restore advance refunding bonds, break gridlock

A recently introduced bill in the Senate calls for reinstating advance refundings, part of a larger package that also seeks to reestablish Build America Bonds. House members introduced a bill supporting advance refunding bonds last year.

Advance refundings a casualty of tax overhaul

The tax-free feature of advance refundings was removed as part of the tax overhaul in 2017, which effectively eliminated the bonds.

It was a bad idea and has been criticized by members of Congress, a cross-section of state and local government finance leaders and other officials from across the country.

Advance refunding bonds enable issuers to replace older, higher-interest rate bonds with new, lower-interest rate bonds.

From 2012 to 2017, more than $475 billion advance refunding bonds were issued, which saved taxpayers an estimated $14 billion, according to the National Association of Counties.

Prior to their elimination, they comprised about a third of the municipal bond market.

Taking advantage of interest rates

“The coronavirus outbreak has placed enormous pressures on state and local governments,” said Sen. Roger Wicker (R-Miss.), who introduced the bill to restore advance refundings in the Senate.

“At a time when interest rates are at historic lows, Congress should allow our local governments to seize this opportunity and pass along savings to their communities.”

The other major aspect of the Senate bill – reintroducing Build America Bonds – also merits support.

BABs, introduced in 2009, were taxable munis that, naturally, carried a higher interest rate than tax-exempt bonds. But the federal government reimbursed more than a third of the interest expense to issuers, thereby lowering the net interest cost to municipalities.

The bonds were a hit with investors and performed as intended, as municipalities were able to borrow at a lower net interest cost. More than $181 billion in BABs were issued, spurring public works projects and helping to stimulate the economy battered by the Great Recession.

Unfortunately, the program, which began in 2009, lasted only 20 months, a victim of sequestration. So far, subsequent efforts to revive the program (“Pols Push for BABs”) have failed.

Restore advance refunding bonds, BABs to bolster economy

Given the widespread support of advance refundings and their prominent place in the market, it was astonishing they were eliminated.

It’s time to sidestep the gridlock and help ease the financial pressures caused by the COVID-19 pandemic.

Congress and the president should restore advance refunding bonds and Build America Bonds. These vital financing tools help save taxpayer dollars, free up funds for additional vital infrastructure projects, and create jobs.

James A. Klotz is the President of FMSbonds, Inc.
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Aug 13, 2020

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