State and local governments use the municipal bond market in order to borrow to finance capital improvements much like homeowners use mortgage loans to finance home purchases. Similar to homeowners, state and local governments refinance their borrowings when interest rates fall in order to reduce their debt service payments – which helps reduce their expenses. Unfortunately, the Tax Cut and Jobs Act of 2017 prohibited tax-exempt advance refundings beginning in 2018. Before that time, tax-exempt advance refundings were common practice in the municipal market although each bond issue could be advance refunded only one time. When advance refunding was available, it allowed state and local government issuers to reduce their interest cost as rates decline. The interest on these advance refunding bonds was tax-exempt to the investors, allowing state and local governments to pay lower interest rates on their debt issuance. Efforts are underway to restore this critical cost-saving tool for public issuers. This brief debunks some myths and provides further education on points raised by opponents to restoring advance refunding.
- Publication date: November 2020