Washington Rethinking Its Position on Municipal Bonds

Klotz on Bonds

Home > News and Perspectives > Washington Rethinking Its Position on Municipal Bonds

<h3>James A. Klotz</h3>

James A. Klotz

With the ink barely dry on a new law limiting municipal bonds, there’s movement afoot in Congress to reverse course, and the administration is even looking to expand the use of munis as a linchpin in its new infrastructure plan.

Seems it’s dawned on our political leaders that the financing tool created to help build the country can be instrumental in rebuilding it going forward.

Why the U-turn on municipal bonds?

Despite years of being in the crosshairs of some in Washington, numerous state and local finance officials have urgently lobbied Congress to maintain the tax exemption on interest income from munis, arguing it reduces taxpayer borrowing costs for essential public works, (“Attacking Certain Munis Imperils Infrastructure Goals”).

Nevertheless, the House version of the recent tax overhaul bill would’ve eliminated certain munis known as private activity bonds. While the final version of the bill signed into law retained PABs, it eliminated advance refunding bonds.

Advance refundings, which comprise about 22% of the muni supply, enable issuers to refinance debt to lower their borrowing costs.

Washington Rethinking Its Position on Municipal BondsWhen the dust settled, it was inevitable there would be an outcry, and earlier this week a bipartisan team of the House Municipal Finance Caucus introduced a bill to reinstate advance refundings.

Rep. Randy Hultgren, of Illinois, said his state saved $80 million last year through advance refundings, while another House member, Dutch Ruppersberger, said the bonds save his state of Maryland almost $37 million each year.

Private Activity Bonds

Meanwhile, the Trump administration is looking to expand the eligibility of PABs and eliminate the state volume cap on them as a key component of its bid to spur investment in infrastructure.

PABs currently fund projects such as airports, toll roads, affordable housing and non-profit hospitals. They’re estimated to account for more than 25% of muni bonds sold.

Under the administration’s plan, PABs would allow more privately financed infrastructure projects to benefit from tax exemption.

Officials envision them being used for new hydroelectric power generation facilities and for such projects as rural broadband, flood control and storm water.

The plan is a sharp departure from just a few months ago, when the House chairman of the Ways and Means Committee said he’d consider preserving private activity bonds but wanted to limit their use.

Fast-forward to today, and the tone is much different. For example, Hultgren said advance refundings should be called “refinancing to save taxpayer dollars,” while private activity bonds should be named “public good bonds.”

Although it’s a long way for these proposals to be enacted, no one who understands how important projects are financed is surprised by this about-face on municipal bonds. More shocking were the proposals to curtail them.



James A. Klotz is the President of FMSbonds, Inc.
Email the Author

Feb 15, 2018

Please note that all investing entails risk. Fixed income securities are subject to risks that will affect their value prior to maturity. Some of these risks can be related to changes in market conditions, issuer creditworthiness, and interest rates. This commentary is not a recommendation to buy or sell a specific security. All references to tax-free income refer to U.S. federal income tax. Income earned by certain investors may be subject to the Alternative Minimum Tax (AMT), and or taxation by state and local authorities. Please consult with your tax professional prior to investing. For more information on these topics please click on the “Bond Basics” link below or search by keyword at the top of this page.