Bonds and Financing

Lawmakers urged to ease advance refunding bond repeal transition

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The American Public Power Association and the Large Public Power Council have joined with a large group of stakeholders in urging lawmakers to support delaying to Dec. 31, 2018 the effective date of a provision in recently passed tax legislation that would repeal the ability to issue advance refunding bonds. The group proposed as another alternative disallowing advance refunding of bonds issued after Dec. 31, 2017.

The U.S. Senate on Dec. 2 approved its version of the Tax Cuts and Jobs Act (H.R. 1), which includes a prohibition on the issuance of tax-exempt advance refunding bonds after Dec. 31, 2017. The House version of H.R. 1 passed 227-205 on Nov. 16 and included a repeal of advance refunding bonds and a repeal of private activity bonds.

The Association, LPPC and the other stakeholder groups on Dec. 6 sent a letter to House and Senate leadership, as well as every House and Senate office, in which the groups expressed their deep concerns about the proposed federal income tax treatment of private activity bonds and advance refunding bonds.

In all, 35 stakeholder groups signed the letter, including the U.S. Conference of Mayors, National League of Cities, National Association of Counties, and the Government Finance Officers Association.

“Our support of all tax-exempt bonds is grounded in the harsh reality that a loss or restriction of the tax-exemption of interest on these bonds would immediately increase costs to state and local governments and nonprofit organizations (such as nonprofit hospitals, universities, and schools), in financing needed public services and the vital infrastructure that supports the economy,” the letter states. “This increase in cost will ultimately be borne by taxpayers, homeowners, renters, students, healthcare patients, commuters, air travelers, businesses relying on seaports, and other constituents,” the groups said.

They noted that under current law, governmental bonds and 501(c)(3) bonds are permitted a single advance refunding. “This allows public issuers to take advantage of reductions in interest rates to realize billions of dollars in savings, which ultimately benefits taxpayers,” the letter said.

“In fact, the Government Finance Officers Association (GFOA) best practices recommend an advance refunding should produce a minimum savings threshold on a present value basis of 3-5 percent. In 2016, the advance refunding of more than $120 billion of municipal securities saved taxpayers at least $3 billion, and this money stays in the pockets of your voters. The characterization of advance refunding bonds as an ‘abuse’ fails to acknowledge the substantial savings to taxpayers this financing tool provides,” the groups told the lawmakers.

The groups noted that state and local governments and nonprofit users discovered that advance refunding bonds may be eliminated when H.R. 1 was released on Nov. 2, 2017. “This provided less than two months’ notice for bond users to accelerate financing plans with respect to planned advance refundings of outstanding bonds,” the letter points out.

“For many local jurisdictions and other users, this is an insufficient amount of time to responsibly undertake a financing, taking into account local procurement and bond approval procedures that must be followed,” the groups said.

“Therefore, we are asking you to support delaying the effective date of the advance refunding provision to December 31, 2018, or to limit the provision to the advance refunding of bonds issued after December 31, 2017, thereby preserving to state and local governments the opportunity to achieve debt service savings for their taxpayers,” the groups said.

“This would be of immense help for planning and budgeting purposes for the local communities you represent, and the constituents we all put first,” the letter went on to say.