Connecting state and local government leaders
Advance refunding helped state and local governments save on borrowing costs. The bipartisan effort to bring it back could get rolled into forthcoming infrastructure legislation.
A bipartisan pair of House lawmakers plan to reintroduce a bill on Monday that would revive a municipal bond refinancing tool that state and local governments used to save billions of dollars before it was eliminated during the 2017 federal tax overhaul.
U.S. Rep. Dutch Ruppersberger, Democrat of Maryland, said on Thursday that he and his House municipal finance caucus co-chair, Steve Stivers, an Ohio Republican, would put forward legislation to restore what is known as tax-exempt advance refunding. “This is a dry, wonky issue that has a juicy result, saving taxpayers money,” Ruppersberger said.
Sens. Roger Wicker, a Mississippi Republican and Debbie Stabenow, a Michigan Democrat, late last month introduced Senate legislation to restore the tax-exempt bonds.
It’s not the first time in recent years that the lawmakers have proposed restoring tax-exempt advance refunding. But the latest measures come as the Biden administration and members of Congress are beginning to discuss the possibility of a major infrastructure package.
Ruppersberger, speaking during an event organized by the Government Finance Officers Association, said he was optimistic that the legislation he plans to introduce would be rolled into whatever forthcoming infrastructure package House lawmakers might develop.
He acknowledged that the proposal faces a “slightly steeper climb” in the Senate, but noted that it has a bipartisan pair of champions with Wicker and Stabenow.
The Senate bill does count eight Republicans among its 19 co-sponsors, including key lawmakers like John Barrasso of Wyoming, who is the third-ranking member in the Senate Republican leadership, and Alaska’s Lisa Murkowski, often considered an important moderate GOP vote in the Senate, where Democrats hold just a one-vote majority.
GFOA and other groups that advocate on behalf of local governments have been pushing on Capitol Hill to revive the advance refunding tax exemption since it was cut.
Many of the bonds that state and local governments issue to finance projects like the construction of roads, waterworks and schools are tax-exempt under the federal tax code. That means investors don’t have to pay federal income tax on the interest they earn. Interest rates on tax-exempt bonds are generally lower compared to taxable debt, saving borrowers money.
Until 2018, the exemption was also available for advance refunding. And states and localities saved billions of dollars by using tax-exempt advance refunding bonds to restructure and refinance debt. GFOA has cited an estimate that during the five-years between 2013 and 2017, advance refundings saved taxpayers at least $12 billion.
But the Republican drafters of the 2017 tax law chopped the advance refunding exemption—which was costing the federal government money in terms of foregone tax revenue. This move helped to pay for tax cuts for businesses and individuals that were central to the law.
Advance refunding works by allowing state and local government borrowers to issue new debt to refinance or restructure outstanding bonds more than 90 days before the outstanding bonds reach their call date—a date when the borrower is allowed to pay them off.
This is in contrast to a current refunding, which occurs inside that 90-day window. Tax-exempt current refundings are still allowed under federal law.
The main perk with advance refunding is that it enables borrowers to take advantage of low interest rates that might be available outside of the 90-day refunding timeframe.
Houston’s chief financial officer, Chris Brown, said during the GFOA event that he thought this would be a great time for advance refunding. “The rates are so low now,” he said.
Brown described potential scenarios where a single advance refunding deal could save his city around $20 million over 15 years, money that could give a needed boost to Houston’s general fund. “This is a great tool to help us save a lot of money over an extended period,” he said.
Bill Lucia is a Senior Editor for Route Fifty and is based in Olympia, Washington.