Congress eliminated a key tool state and local governments use to save money and fund hospitals, school, bridges and other public works.

Now they need to replace it.

A wide range of 33 organizations, representing hundreds of thousands of public-sector issuers, sent a letter to Congress last week urging lawmakers to get behind a House bill that would restore the tax exemption on advance refunding bonds.

We strongly support their efforts.

reviving-advance-refunding-bonds

Advance refunding bonds, eliminated under tax bill, key to infrastructure

Advance refunding bonds enable state and local governments to refinance their debt and lower borrowing costs. Borrowers can take advantage of favorable interest rates by issuing new bonds to retire outstanding issues with higher rates.

The tax exemption was removed at the end of last year as part of the massive tax overhaul.

In February, a bill to restore the exemption was introduced by Reps. Randy Hultgren, a Republican, and C.A. Dutch Ruppersberger, a Democrat, and has drawn bipartisan support (“Washington Rethinking Its Position on Municipal Bonds”).

‘A priority of issuers across the country’

“Reestablishment of tax-exempt advance refunding remains a priority of issuers across the country,” said Emily Brock, of the Government Finance Officers Association, reported the Bond Buyer.

“It must be included as a central part of any comprehensive approach to an infrastructure plan.”

Advocates for the bonds include representatives from states, cities, airports, hospitals and utilities as well as the national organizations representing governors, mayors, legislators and others.

“In the last five years, 2013-2017, the advance refunding of municipal securities saved taxpayers at least $12 billion,” municipal officials said.

Putting a crimp in the municipal bond supply

The Joint Tax Committee estimated that terminating the tax break will generate $17.8 billion in revenue for the U.S. government between 2018 and 2027.

As an offset to tax cuts that were part of the tax overhaul, however, it simply doesn’t add up.

The incentive for issuers to refinance their debt was eliminated, as it will cost them more to refinance their tax-free debt with taxable bonds.

Last year, issuance of advance refunding bonds totaled $91 billion, or more than 22% of the muni supply, according to Thomson Reuters.

Since tax-exempt advance refunding was eliminated, municipal bond market issuance has declined, putting a crimp in the supply of securities that are popular with investors and provide the foundation for public works projects across the nation.

A decision at odds with goals of Congress, president

The president and Congress have stressed the need to rebuild our sorely lacking infrastructure and create jobs.

We were perplexed and dismayed they eliminated a vital financing tool that is key to accomplishing those goals.

Now it’s time to reinstate advance refunding bonds.

James A. Klotz is the President of FMSbonds, Inc. Email the Author 05/16/2018