States and other municipal issuers use refunding bonds to essentially refinance an outstanding debt issue. The proceeds of the refunding are reserved to continue debt servicing of the original underlying bond until it can be retired. Generally refundings that occur more than 90 days prior to a call date are known as “advance refundings” and those issued within 90 days of call are known as “current refundings.”
Prior to January 1, 2018, issuers used to be able to issue a single-time tax exempt advance refunding bond to refinance an outstanding tax-advantaged bond. The Tax Cuts and Jobs Act of 2017 (P.L. 115-97) eliminated the tax exemption. Issuers may still issue tax-exempt current refundings and taxable advance refundings. The inability to issue tax-exempt advance refundings limits issuers’ ability to take advantage of favorable interest rate environments and thus save public taxpayer dollars. While taxable refundings are at historic highs, states and local governments miss out on savings that could be achieved if they were permitted to refund on a tax-exempt basis as they were prior to 2018.
The LOCAL Act (S.479) was introduced on February 25, 2021 by Senators Wicker and Stabenow, and would restore the ability for state and local governments to issue tax-exempt advance refunding bonds. Congressmen Ruppersberger (D-MD) and Stivers (R-OH) have reintroduced the Investing in Our Communities Act, which would similarly restore advance refundings.
Congresswoman Sewell (D-AL) has introduced a three-part bill, the LIFT Act, which would restore advance refunding bonds, modernize bank qualified debt and create a new direct subsidy bond program, known as American Infrastructure Bonds (AIBs).
NAST Position and Current Status
NAST strongly supports efforts to reinstate tax exempt advance refunding bonds, including legislation from municipal champions in the House and Senate.
- State and local governments need the tools and flexibility to respond to market conditions.
- Tax exempt advance refunding bonds allowed state and local communities the ability to refinance outstanding debt, achieve lower interest rates and ultimately free up capital for additional infrastructure investment and taxpayer savings.
- The Government Finance Officers Association (GFOA) estimates that between 2007 and 2017 advance refunding bonds helped municipal issuers save more than $18 billion in savings.
- Prior to 2018, advance refunding bonds made up more than 20 percent of the municipal market.