With the start of the new federal fiscal year on October 1, congressional leaders found themselves facing the reality of not having a long-term solution in place for neither federal spending nor surface transportation funding. To avoid a federal government shutdown, leaders had to resort to temporarily extending federal spending at current fiscal year levels to December 3, 2021, and surface transportation funding at prior levels to October 31, 2021. Disagreements on moving forward on a bipartisan infrastructure bill and finding consensus on a larger overall spending plan via budget reconciliation ultimately caused the Democratically controlled Congress to miss a self-imposed deadline of September 27 of passing one or both legislative priorities. Outreach to the Senate is needed since including GFOA muni finance priorities such as restoring advance refunding, increasing the small issuer exception, and revitalizing direct subsidy bonds in any final package remains uncertain.
Although there are several moving pieces in this debate, GFOA muni finance priorities currently sit in the House version of the budget reconciliation bill, aka the Build Back Better Act. It remains uncertain whether the Senate version will follow the House's lead. See below for a quick summary of the provisions in the version advanced by the House Ways and Means Committee.
Quick Summary of Muni Provisions in Budget Reconciliation Package
Budget Reconciliation Bill Subtitle F
Public Finance Impact
The Tax Cuts & Jobs Act of 2017 made interest on advance refunding bonds taxable, effectively eliminating the usefulness of advance refunding for municipal bonds issued after 2017. Public finance stakeholders have sorely missed the use of advance refunding bonds as a fiscal management tool and have advocated for the provisions full return.
Subtitle F, subpart A of the budget reconciliation bill would reinstate the tax-exempt status of interest earned on advance refunded municipal bonds:
This (Advance refunding) provision would once again allow interest on advance refunding bonds issued by state and local governments to be exempt from tax.
Fiscal Management & Infrastructure Development
Bringing back such a powerful tool will allow for public money managers to take advantage of lower interest rates, while improving the access and flexibility of their financial resources.
Bank Qualified Debt (Small Issuer Exception)
Through “bank qualified debt,” current tax code allows debt issued by smaller entities (issuing less than $10 million in tax-exempt debt per calendar year) to tap resources in the municipal bond market when it may have been otherwise inaccessible. GFOA has advocated for:
The budget reconciliation bill would increase the existing cap for bank qualified debt while indexing the cap to inflation moving forward:
This provision revises the definition of qualified small issuers by increasing the $10 million limit to $30 million (indexed annually for inflation).
Expands Access to Municipal Bond Market for Smaller Communities
Greater access to the municipal bond market for those who could need it the most. Small communities don’t always have the resources to access debt markets the traditional way. Raising the cap on bank qualified debt puts critical financial resources within reach for smaller issuers while encouraging strong relationships with local banks, building community buy-in.
Qualified Infrastructure Bonds (Direct Subsidy Bonds)
Similar to “Build America Bonds,” Qualified Infrastructure Bonds offer federal support to communities investing in themselves. Public finance advocates have called for the return of direct pay subsidy bonds as a proven resource for spurring infrastructure development and managing public finances.
Rates for eligible issuances would follow the following schedule:
2022 through 2024 ........................................... 35%
2025 ................................................................. 32%
2027 and thereafter .......................................... 28%
Based on the successful “Build America Bonds” program, issuers of eligible infrastructure bonds would receive a tax credit covering a portion of the interest paid, providing direct support to state and municipal governments investing into local infrastructure.
Promotes Infrastructure Development & Upkeep
It’s no secret that the US infrastructure system is long overdue for a major investment. State and local governments account for roughly three-quarters of the total annual spending on public infrastructure. Through direct subsidies, federal partners to state & local governments are showing their commitment to supporting robust infrastructure growth nationwide.
GFOA Resources for Outreach Efforts
- In early September, GFOA was joined by nearly thirty public issuer groups from the Public Finance Network in a letter to congressional leaders emphasizing the need to enhance municipal bonds in order to unlock the infrastructure investment our country needs. Click here to download a copy of the letter.
- GFOA’s Advance Refunding Overview includes a whiteboard explainer video simplifying the concept and why it’s an important tool for finance officers, as well as a mythbuster document which discusses some of the common misconceptions about advance refunding.
- GFOA’s Bank Qualified Debt Overview also includes a whiteboard explainer video as well as a state-by-state one page profiles on BQ issuance.
- Click here to see the members of the Senate Finance Committee, with particular outreach needed to members of the majority (Democratic) side.