The return of tax-exempt advance refundings, among other measures, could come soon.
By: Erik Kelly, President of Blue Rose Capital Advisors
As we shared with you in a prior newsletter article in April, the possibility has existed that tax policy changes impacting the public finance sector could be a part of various stimulus measures that are undertaken by Congress. Favorably, growing momentum behind these changes has advanced these initiatives considerably.
Last week, a bill entitled The Moving Forward Act was proposed in the U.S. House of Representatives that addresses many infrastructure needs of our country. Among the measures included in the proposed bill were numerous elements that would impact the public finance market. Certain of the measures, including ones that Blue Rose has been advocating for over the last several years, include:
The reinstatement of tax-exempt advance refundings. Eliminated as part of The Tax Cuts and Jobs Act of 2017, tax-exempt advance refundings were previously a critical tool for issuers and borrowers of all types to lower their debt service obligations. If passed, the return of tax-exempt advance refundings may come with additional requirements (e.g. it may require positive PV savings, as opposed to using this financing tool for debt restructuring purposes), but their return will be a meaningful step towards giving municipal issuers and other tax-exempt borrowers additional opportunities to lock in today’s low long-term interest rates.
The increase in the tax-exempt “bank qualification” status amount from $10 million to $30 million, with the threshold test being made at the borrower level rather than the issuer level for conduit financings. These changes are similar to those made as part of stimulus actions during the Great Recession in 2009-2010. Their impact would be considerable in helping reduce borrowing costs for smaller issuers and borrowers.
The return of direct pay bonds, namely bonds similar to Build America Bonds that are issued on a taxable basis but for which the Federal government provides a direct subsidy to the issuer to offset the interest expense. Proposed subsidy levels range from 30% - 42% depending on the maturity (larger percentages for shorter maturities). Limitations on the use and applicability of this bond structure are expected if the bill passes.
Many other bond financing measures contemplated in the proposed tax bill are focused on particular sectors, such as primary schools and transportation. In totality, we view the proposal as a tremendous step forward for the public sector and are hopeful that it moves forward through Congress. To that point, the proposed bill could be voted on as early as the beginning of July. We will keep you apprised as this story unfolds. If you have any questions at the current time, we encourage you to reach out to our advisory team.
About the Author:
President | email@example.com
Erik Kelly serves as President of Blue Rose, providing leadership, coordination, and oversight of the firm’s advisory services since 2011. He also serves as the lead advisor to many of the firm’s clients, including advising higher education entities on the planning for and execution of all types of debt and debt-related derivative transactions. In managing the firm’s various advisory service areas, Mr. Kelly oversees both compliance with the changing regulatory environment and the delivery of professional advice to the firm’s clients.