Bonds and Financing

Bipartisan bill would allow tax-exempt advance refunding bonds

Reps. Randy Hultgren, R-Ill., and Dutch Ruppersberger, D-Md., unveiled legislation on Feb. 13 that would allow states and localities to issue tax-exempt advance refunding bonds.

The tax reconciliation act of 2017 prohibited the issuance of tax-exempt advance refunding bonds after Dec. 31, 2017.  Advance refundings have traditionally made up about half of all annual refunding issuances, so losing the ability to issue tax-exempt advance refundings is expected to significantly hinder flexibility in refinancing existing debt. The new law would reverse this repeal and allow tax-exempt current refundings.

“In recent years, tax-exempt advance refunding bonds have saved Illinois taxpayers $80 million per year on average,” Hultgren said in a statement released by his office. “Given that interest rates are expected to increase, this tool is especially important to states and local governments responsibly planning for the future.”

Ruppersberger said that when counties can issue an advance refunding bond, “it saves taxpayers billions nationwide.”

The legislation is co-sponsored by Reps. Luke Messer, R-Ind., Ed Royce, R-Calif., Dan Kildee, D-Mich., and Michael Capuano, D-Mass.

The Association strongly opposed the repeal of advance refunding bonds and supports reversing that repeal.

About half of all refunding bonds issued by public power utilities in the last five years were advance refunding bonds, with net present value savings of at least $600 million.

The tax reconciliation act’s repeal precludes such savings in the future or forces public power utilities into complicated swap transactions to take advantage of interest rate changes if sought more than 90 days in advance of redemption.