New Problem, Old Solution: Bring Back Tax-Exempt Advance Refundings
As the world grapples with the effects of the coronavirus disease 2019 (COVID-19) pandemic, state and local governments (collectively, State and Local Governments) are fighting for their financial health. The escalating costs of managing the COVID-19 crisis are straining State and Local Government budgets at a time when the taxes and revenues they rely on are being either delayed in the short term or disappearing. State and Local Governments need new options to cut costs and free up much-needed capital as soon as possible. While State and Local Governments wait for Congress to agree on a comprehensive infrastructure bill, a significant interim step would be the reauthorization of the issuance of tax-exempt bonds to advance refund outstanding tax-exempt bonds (tax-exempt advance refunding bonds).
As Congress prepares the next installment of the CARES Act, it needs to consider programs that will provide immediate help to struggling State and Local Governments. The Municipal Liquidity Facility program, announced by the Federal Reserve on April 9, 2020, is a promising start and may provide some much-needed relief, but it is not enough. It will take time for State and Local Governments to analyze the borrowing authority they have available under applicable state law to take advantage of the Municipal Liquidity Facility. Time is not a luxury State and Local Governments have at present. Although new programs can be beneficial, reauthorizing the issuance of tax-exempt advance refunding bonds will make a quick and noticeable difference for struggling State and Local Governments.
Prior to December 31, 2017, tax-exempt advance refunding bonds[i] offered many benefits to State and Local Governments, such as capturing the benefits of prevailing lower interest rates through refinancing outstanding tax-exempt bonds, effectively lowering debt service payments. The Tax Cuts and Jobs Act of 2017 (the Jobs Act) eliminated tax-exempt advance refunding bonds. On May 15, 2019, a bipartisan bill – Investing in Our Communities Act (H.R. 2772) – was introduced in the House to reinstate tax-exempt advance refunding bonds. As of today, the bill is sitting on the House floor, awaiting approval. Although Congress had its reasons for eliminating tax-exempt advance refunding bonds in 2017, circumstances have drastically changed since then. The old and new benefits of tax-exempt advance refunding bonds for struggling State and Local Governments during this ongoing financial crisis now outweigh contrary considerations.
Tax-exempt advance refunding bonds will provide State and Local Governments instant savings and cash flow relief by lowering and/or restructuring their debt service payments. If State and Local Governments can advance refund outstanding bonds on a tax-exempt basis, many of which feature higher interest rates than State and Local Governments can obtain in today’s market, the savings will be significant and immediate.
State and Local Governments need help and they need it fast. Bringing back tax-exempt advance refunding bonds will allow State and Local Governments to free up large amounts of capital and benefit from immediate savings and provide financial relief at a time State and Local Governments need it most. Such relief would also be packaged in a financing vehicle State and Local Governments are already familiar with.
Unlike many of the solutions Congress has devised in response to the current and unprecedented financial crisis, this is one solution that Congress can implement without growing pains. Before the Jobs Act was passed, issuing tax-exempt advance refunding bonds was a common transaction for State and Local Governments. State and Local Governments– and other market participants alike– are already familiar with how these transactions are structured and how to get them done quickly. Instead of learning new financing methods, State and Local Governments can merely dust off an old one. If Congress brings back tax-exempt advance refunding bonds tomorrow, State and Local Governments can gain access to capital and benefit from immediate savings in a matter of weeks, rather than months or years.
In these unprecedented and unpredictable times, there appears to be little downside to bringing back tax-exempt advance refunding bonds. We must also look beyond the immediate fiscal challenges State and Local Governments are facing and recognize that tax-exempt advance refunding bonds represent an essential liquidity management vehicle. The argument to restore tax-exempt advance refunding bonds to alleviate immediate liquidity issues, both now and for the future, is compelling.
[i] An “advance refunding bond” is a refunding bond that was issued more than 90 days before the date that the bond that it will refund can be redeemed. Only governmental units and 501(c)(3) organizations could benefit from tax-exempt advance refunding bonds.