Advance Refunding Overview

Tax-exempt advance refunding bonds allowed 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 2017 Tax Cuts and Jobs Act (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). Advance refundings represented 27% of municipal bond market activity in 2016 and 19% in 2017. As a result, state and local governments are now paying more in interest, a cost that must be paid by state and local residents.

Furthermore, in addition to eliminating tax-exempt advance refunding, the TCJA decreased the overall corporate tax rate from 35% to 21% and ended other tax incentives that could impact overall demand for municipal bonds. Market experts are keeping a keen eye to see how the market will react to possibly reduced supply, less demand due to corporate tax changes, or perhaps increased demand by individuals who are looking for tax exempt products to help alleviate tax exposures due to new state and local tax deduction limits. Governments should be aware of these market dynamics as they consider going to market and determine appropriate action with consultation of outside professionals.

The 115th Congress saw a bipartisan effort to restore tax-exempt advance refunding to the federal tax code. But in the 116th, advance refunding witnessed even more substantial support and progress for reinstatement.

Efforts began with House Municipal Finance Caucus Co-Chairs Dutch Ruppersberger (D-MD) & Steve Stivers (R-OH), when they introduced H.R. 2772, the Investing in Our Communities Act. And for the first time, a bipartisan companion bill was introduced in the Senate - S. 4129, the Lifting Our Communities through Advance Liquidity for Infrastructure (LOCAL) Act - by Sens. Roger Wicker (R-MS) and Debbie Stabenow (D-MI). And in yet another positive development, H.R. 2772 was incorporated into the massive infrastructure bill (H.R. 2, the Moving Forward Act) passed by the House on July 1, 2020.

RESTORE ADVANCE REFUNDING BONDS

Talking Points:
Urge Congress to reinstate the authority to issue tax-exempt advance refunding bonds.

  • The 2017 TCJA repealed this critical cost-savings tool for state and local governments and has limited the options to refinance debt, which could free up capital and be put to immediate public works purposes.
  • Having the option to refinance debt is a valuable financial management tool especially since interest rates will certainly fluctuate over the lifetime of outstanding governmental bonds (which in many cases is 30 years). Without tax-exempt advance refunding bonds, state and local governments will pay more in interest, a cost that must be paid by state and local taxpayers.
  • Support legislative initiatives like S. 4129 and H.R. 2772 by cosponsoring them and calling on leadership in both chambers to advance this critical legislation to reinstate advance refunding bonds. Both bills would fully reinstate tax-exempt advance refundings, including private activity bonds and qualified 501(c)(3) bonds.
  • 10-year revenue effect estimated at ~$17 billion.