Advance refunding back in play

Tax-exempt advance refunding is back on the table, as a standalone bill titled the Investing in Our Communities Act has just been introduced in the House.

The bill, introduced by Rep. David Kustoff, R-Tenn. and House Municipal Finance Caucus leader Dutch Ruppersberger, D-Md., would restore the provision eliminated in 2017 by President Trump’s Tax Cuts and Jobs Act.

Talk of the bill has been circling around for a few weeks and muni lobbyists and advocates have been trying in several different iterations to restore the provision that is arguably the muni industry’s highest priority.

“It is crucial that every state and local government has the ability to invest in their future and make their communities a better place to live and raise a family,” Kustoff said. “I am proud to introduce the Investing in Our Communities Act,  with Congressman Ruppersberger, that will give state and local governments a critical financing tool to stimulate economic development, create jobs, and save taxpayer dollars. I urge my colleagues to support this important legislation that will help grow our nation and carry us further into the 21st century.”

The bill would be an essential tool to allow state and localities to refinance existing debt by issuing tax-exempt bonds. Before the provision was knocked out in 2017, advance refunding represented about 20% of bond activity. The muni market also saw just $384 billion of debt issued in 2022, a $100 million drop from 2021’s figures and the resurgence of advance refunding could help to spur the market.

“Advance refunding is an important tool which permits state and local governments to save billions of dollars in interest costs by refinancing their outstanding debt to a lower interest rate,” said Kenneth Bentsen, president and CEO of the Securities Industry and Financial Markets Association. “Our nation benefits by allowing for a robust capital market to flourish, which in turn helps local communities build affordable infrastructure specifically related to their needs. Reinstating the prior tax-exemption for advance refunding bonds is essential to making that happen and the Investing in Our Communities Act does just that.”

“This is a complicated finance issue that has a simple end result — saving American taxpayers money,” Ruppersberger said. “By empowering local governments to refinance outstanding bonds for projects such as new roads, schools, hospitals and fire stations, we reduce their borrowing costs and free up resources for other community improvements. We create even more jobs and, ultimately, reduce the need to raise taxes.”

Brett Bolton, vice president of federal legislative and regulatory policy at Bond Dealers of America, said Ruppersberger and Kustoff were shooting for a 50/50 list of Democrats and Republicans as co-sponsors and so far, their efforts have paid off. The list of initial sponsors includes Andy Barr, R-Ky., Brian Fitzpatrick, R-Penn., Andrew Garbarino, R-N.Y., Dan Kildee, D-Mich., Derek Kilmer, D-Wash., and Gwen Moore, D-Wisc.

“We’re excited about the folks who have signed on,” said Emily Brock, federal liaison for the Government Finance Officers Association. “It’s very much a bipartisan effort like it was from the beginning and that speaks volume as to where we are at this stage in Congress – it’s the bipartisan efforts that are the name of the game.”

The cost of restoring tax-exempt advance refunding is relatively small, Brock said, which is another big advantage for the bill. “As a full market we just have to say that we need this back in the arsenal,” she said. “The federal [infrastructure] grants will be utilized to the fullest capacity, it’s not like a market – a market is a forever thing.”

“The entire public finance community is delighted that there’s continued Congressional support for bringing back advance refundings in some form,” said Chuck Samuels, member at Mintz Levin and counsel to the National Association of Health & Educational Facilities Finance Authorities. “Having that mechanism available provides flexibility and opportunities for great savings for governments and nonprofit borrowers.

Caitlin Devitt contributed reporting for this story.