2019 Legislative and Regulatory Agenda


While the tax exemption for municipal bond interest remained intact despite threats of elimination during the tax reform debate in 2017, Congress may continue to look at changes to the tax code that impact public finance going forward. If state and local governments lose the ability to use tax-exempt bonds and are compelled to issue taxable bonds as an alternative, it is estimated that debt issuance costs would increase around 25%, and possibly more for smaller governments. Government should continue efforts to educate their Congressional representatives of the role tax-exempt bonds play for financing essential infrastructure in their communities. Below is an overview of expected federal activity in 2019 that includes discussion of GFOA’s related advocacy campaigns.  The GFOA’s Federal Liaison Center will monitor these legislative and regulatory activities and work to advance the public policy positions adopted by the GFOA membership.  The association’s legislative and regulatory priorities for the year are listed below.


Tax Reform

Advance Refunding Tax-Exempt Municipal Bonds

In the previous session of Congress, bipartisan legislation was introduced to reinstate the availability for governments to use advance refundings. Advance refunding bonds allow states and localities to refinance existing debt with the greatest flexibility, resulting in substantial reductions in borrowing costs. The elimination of advance refundings in the TCJA as a cost-savings tool for state and local governments has limited the options to refinance debt, especially since interest rates will certainly fluctuate over the lifetime of outstanding governmental bonds (which in many cases is 30 years). As a result, state and local governments are now paying more in interest, a cost that must be paid by state and local residents.

Proposed Legislative Change:

  • Reinstate authority to issue tax-exempt advance refunding bonds.
  • Call for and support legislation, similar to H.R. 5003 in the 115th Congress that sought to amend the Internal Revenue Code of 1986 to reinstate advance refunding bonds. H.R. 5003 would have fully reinstated tax-exempt advance refundings, including private activity bonds and qualified 501(c)(3) bonds.
  • 10-year revenue effect estimated at ~$17 billion.


Bank Qualified Bonds (Small Issuer Exception)

The bank qualified provision offers a proven incentive for local banks to purchase the tax-exempt debt of small local governments and borrowers such as small colleges, health care facilities and other charities. During the two years in which it was liberalized (late 2000s), it created a market for thousands of small borrowings that stimulated the economy as well as cash strapped small governments and nonprofits. Governments issuing $10 million or less in bonds per calendar year can have those bonds designated (or qualified 501(c)(3) bonds) as bank-qualified, which allows them to bypass the traditional underwriting system and sell their tax-exempt bonds directly to local banks at a cost savings for taxpayers.

Proposed Legislative Change:

  • Increase the maximum allowed bond issuance of “bank eligible" bonds to $30 million from the current level of $10 million. Set in 1986, the limit should be increased and then tied to inflation in future years. »Permanently modify the small issuer exception to tax-exempt interest expense allocation rules for financial institutions (Section 265(b)(3)).
  • The provision should be modified to apply to governmental issuers and the borrowing organizations separately regardless of the issuer and permit the 501(c)(3) organization to provide the designation.


Direct-Pay Subsidy Bonds

Direct-pay subsidy bonds, like Build America Bonds (BABs), are debt securities (e.g. municipal bonds) issued by a state, municipality, or county to finance capital expenditures. In general, there are two distinct types of BABs: tax credit BABs and direct payment BABs. Tax credit BABs offered bondholders and lenders a 35% federal subsidy of the interest paid through refundable tax credits, reducing the bondholder’s tax liability. The direct payment BABs offered a similar subsidy that was paid to the bond issuer. The U.S. Treasury made a direct payment to BAB issuers in the form of a 35% subsidy of the interest they owed to investors. As a result of sequestration, issuers saw a reduction in their subsidy payments.

Proposed Legislative Change:

  • Protection of Build America Bond payments to issuers in case of sequestration (Section 6431(b)).»Credit payments to issuers of Build America Bonds were not intended to be subject to budget sequestration. This would conform treatment of these payments to treatment of other tax credit payments.
  • 10-year budget effect ~$1.7 billion.


Private Use Limitations

The core private use restriction applicable to a governmental bond issue is found in Section 141(b) of the Code and provides that no more than ten percent of the proceeds of such issue can satisfy the private business tests. The only use that is not private business use is use by (i) a state or local government, (ii) an individual not in trade or business, or (iii) the general public. The rule is complicated by a number of supplemental restrictions.

Proposed Legislative Change:

  • Repeal the five percent unrelated or disproportionate test (Section 141(b)(3) of the Code).
  • Repeal the $15 million per project limit on private business use on certain output facilities (Section 141( b)(4)). »Repeal the volume cap requirement for governmental bond issues with a nonqualified private business amount in excess of $15 million (Section 141(b)(5)). (10-year revenue effect of preceding three items $75 million.)
  • Repeal the limit on the use of bond proceeds to acquire non-governmental property (Section 141(d)). The 10-year revenue effect of this change is unknown


Partnership Financings

The Administration has proposed various new programs that would provide incentives for public-private partnerships to help fund public sector infrastructure needs. While it is unclear if Congress will address these proposals, governments should be aware of potential financial tools that are or may be available and evaluate them to determine if they may be appropriate for their government.



Other Municipal Bonds Initiatives

Disclosure Standards:

In August 2018, the Securities and Exchange Commission (SEC) approved Amendments to Rule 15c2-12. While this Rule applies to broker-dealers buying or selling municipal securities, governments, as well as any other obligated persons that issue obligations subject to the Rule on or after the effective date of February 27, 2019 are required, through contractual undertakings, to commit to additional continuing disclosure requirements.

The Amendments are an effort by the SEC to require disclosure of the new material financial obligations as well as certain events with respect to new or outstanding financial obligations that reflect financial difficulties of the issuer. Governments will have to agree in new continuing disclosure agreements (CDAs) (including supplements to master agreements for new bond transactions) entered into on or after the effective date that they will disclose to the market (via the Municipal Securities Rulemaking Board’s (the MSRB) electronic municipal market access website (EMMA)) (1) any new material financial obligations and (2) when certain events occur with respect to outstanding or new financial obligations that reflect financial difficulties, in both cases within 10 business days of the occurrence of the event.

It is critical for state and local governments to be aware of these changes to SEC Rule 15c2-12, and all other continuing disclosure obligations that issuers assume when issuing bonds subject to the Rule. While outside professionals, including bond and/or disclosure counsel, will provide advice regarding CDAs so that they are in line with the new requirements, governments will continue to be responsible for their own disclosure documents and compliance with the contractual undertakings, including ensuring that event notices are filed on EMMA within 10 business days of the occurrence of the reportable event.

Non-compliance with continuing disclosure undertakings could result in delays in future financings while past non-compliance is reported and corrected. Under SEC Rule 15c2-12, underwriters must have a reasonable basis to believe in a government’s future compliance before underwriting a transaction; past material non-compliance may result in the underwriters declining to underwrite future transactions.

The Federal Liaison Center will continue to education GFOA members for updates in definitions as they develop.

A GFOA Member Alert was published with other industry groups to recommend tracking of obligations to assist in compliance.



Pensions and Retirement

Continued scrutiny of state and local government retirement plans is expected to last into 2017. GFOA will continue to educate members of Congress about the true fiscal condition and disclosure practices of public pension systems.

  • Legislation that may be a potential threat in the 117th Congress is another iteration of The Public Employee Pension Transparency Act (PEPTA), sponsored in the past by Rep Nunes (R-CA)
  • GFOA is working to ensure that the provisions in the now-established Puerto Rico Oversight Management, and Economic Stability Act (PROMESA) and recommendations from its Congressional oversight committee do not apply to state and local governments in the US.



Health Care and Compensation

There are specific items of concern that are especially important and will be dealt with in a particularly swift manner in the 2019 Congressional calendar.

  • It is widely believed that Congress will address changes to the Affordable Care Act early in the 117th Congress.  Those efforts may include changes to the Cadillac Tax, which GFOA policy acknowledges as an unfunded mandate.



Marketplace Fairness & the Preemption of State and Local Government Taxes 

On June 21, 2018, the U.S. Supreme Court handed down the decision for South Dakota v. Wayfair, Inc., which struck down a long-held physical presence standard that has vexed state and local sales and use tax administration for years. GFOA’s publication Bringing Sales Tax Into the 21st Century details the case and considerations for tax collection going forward. So what has been happening over the past six months?

 Many states have implemented or are contemplating new sales tax laws as a result of the decision. Local governments have a role to play, especially if your state legislatures are debating changes or additional simplification measures. The primary message should be that local governments want to work in partnership with the state to move forward on this issue and ensure success for both the government and business communities.