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Lobbyists for publicly owned utilities are fighting to preserve advance refunding bonds—repealed in both the House and Senate tax reform proposals—to prevent the loss of billions in savings.
The bonds are “a significant tool that municipal issuers are using and have used with great frequency” over the last five years, said Emily S. Brock, director of the Government Finance Officers Association’s Federal Liaison Center.
According to data provided to Bloomberg Tax by GFOA, public water and sewer utilities issued about $45 billion in advance refunding bonds from 2012 to 2016. Over the same period, public power utilities issued about $20 billion in such bonds and gas utilities almost $51 million.
The bonds allow municipal issuers to take advantage of lower interest rates by refinancing an existing bond issue with a new one. Advance refundings, as distinct from current refundings, occur when the outstanding—refunded—bonds remain outstanding for more than 90 days from the date the refunding bonds are issued. Under current law, municipal issuers may engage in a tax-exempt advance refunding only once over the life of the bonds.
Current refundings, which would still be allowed under the tax reform proposals, occur when the refunded bonds are redeemed within 90 days from the date the refunding bonds are issued.
Generally issuers won’t “pull the trigger” for advance refundings unless they see at least 3 to 5 percent in savings on a present value basis, Brock said.
John Godfrey, senior director of government relations at the American Public Power Association, said at a minimum that translates to $600 million in savings for public power utilities over the last five years, based on the $20 billion in advance refunding bond issuances.
“That’s a big number; it’s real money,” he told Bloomberg Tax. So getting rid of the ability to use advance refunding bonds is a “concern to us,” Godfrey said. (For a road map of where to find key provisions and compare the House tax reform bill ( H.R. 1) with the Senate Finance Committee version, read Bloomberg Tax’s analysis.)
And while current refundings would still be allowed, being forced to meet the 90-day window could be problematic, Godfrey said. “It takes a while to wind these deals up.”
Having advance refunding provides more flexibility and more opportunity for reducing costs, he said.
Advance refundings can also mean more money for infrastructure projects, said Phillip C. Gildan, a principal shareholder at Greenberg Traurig LLP.
“When you lower debt service costs, you can use those extra capital dollars to fund more infrastructure,” Gildan, who is a senior fellow for Public Private Partnerships and Infrastructure Delivery at the Mossavar-Rahmani Center for Business and Government at the Harvard Kennedy School of Government, told Bloomberg Tax.
Savings on debt service “ultimately benefits taxpayers,” several associations, including the GFOA and APPA, wrote to lawmakers in a Nov. 10 letter.
In 2016, the advance refunding of more than $120 billion of municipal securities—by all public issuers, not just publicly owned utilities—saved taxpayers at least $3 billion, the groups said.
If advance refunding bonds are repealed, “municipal bond issuers would be challenged to manage interest rate risks and the cost of borrowing for state and local governments would skyrocket,” the Bond Dealers of America said in a Nov. 15 letter to Senate Finance Committee Chairman Orrin G. Hatch (R-Utah). Higher costs would mean “increasing taxes for everyone regardless of income level,” contrary to the stated goal of the tax reform package, the BDA said.
In a Nov. 15 letter to House Speaker Paul D. Ryan (R-Wis.), the BDA said that denying the tax exemption for municipal bond advance refundings would “likely drive many issuers into the swaps and derivatives markets to find new ways to manage debt issued for infrastructure and capital improvement.”
Brock said the GFOA was surprised by the advance refunding provisions because in the approximately 90 visits the group had with lawmakers on Capitol Hill, repeal of advance refunding bonds was never brought up.
“It’s like a freight train right now, and we’re doing everything we can” to prevent that change, Brock said. “The utilities sector has been extremely active in grassroots organizing and reaching out, and I hope that this extraordinary effort will pay off in the end.”
Lawmakers who champion municipal bonds—like those in the Congressional Municipal Finance Caucus, which includes both Democrats and Republicans—should want to preserve advance refundings, Brock said. “It’s important that we continue to tell them that these are traditional municipal issues and they are being impacted in this tax reform legislation.”
Doug MacGillivray, director of government affairs for the American Public Gas Association, said the APGA is involved in discussions with both the House and the Senate and wants lawmakers to maintain advance refunding bonds, among other things.
“We are supportive of whatever can drive down costs or make it easier to finance projects like pipelines,” he told Bloomberg Tax.
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