On February 13, Reps. Randy Hultgren (R-Ill.) and Dutch Ruppersberger (D-Md.), the chair and vice chair of the U.S. House Municipal Finance Caucus, introduced legislation to restore the tax-exempt status of advance refunding (AR) bonds, a financing tool allowing states and local governments to take advantage of favorable interest rates and refinance existing municipal bonds. AR bonds were eliminated in the tax reform package passed at the end of 2017. The bill is cosponsored by four additional members: Reps. Luke Messer (R-Ind.), Ed Royce (R-Calif.), Dan Kildee (D-Mich.) and Michael Capuano (D-Mass.).
Prior to the repeal of AR bonds in the Tax Cuts and Jobs Act (P.L. 115-97), governmental bonds – including municipal bonds – were permitted one advance refunding during the lifetime of the bond to refinance the bond. This allowed public issuers to take advantage of fluctuations in interest rates to realize considerable savings on debt service, which ultimately benefited taxpayers. The Tax Cuts and Jobs Act made the repeal of AR bonds effective at the end of 2017, meaning counties had only a few days to issue advance refundings for any outstanding bonds that qualified – a process that usually takes months or years.
The ability to advance refund outstanding bonds provided substantial savings to taxpayers and counties throughout the country. In 2016, the advance refunding of more than $120 billion of municipal securities saved taxpayers at least $3 billion, with taxpayers saving nearly $12 billion from 2012 to 2016. Best practices advanced by the Government Finance Officers Association (GFOA) recommended minimum savings thresholds on a present value basis of 3 percent to 5 percent when advance refunding municipal securities. The repeal of AR bonds in the Tax Cuts and Jobs Act generated over $17 billion in federal revenue at the expense of local governments and infrastructure development.
The legislation from Reps. Hultgren and Ruppersberger would restore AR bonds and give a needed boost to locally driven infrastructure projects across the country. However, U.S. House Ways and Means Committee Chairman Kevin Brady (R-Texas), who helped author the tax reform legislation and has oversight over AR bonds, expressed skepticism about restoring AR bonds, saying he’d prefer to focus on leveraging existing funding for infrastructure projects and shifting the current uses of private activity bonds.
NACo will continue working with our congressional partners to restore the advance refunding financing tool and support additional local financing options for infrastructure development. Contact your representative today and urge them to cosponsor the bill by contacting Reps. Hultgren or Ruppersberger.