Municipal market lobbyists are pushing for the restoration of tax-exempt advance refunding in the Senate version of Build Back Better, arguing that the loss of the financing tool has cost issuers more than $10 billion.
“There is definitely support on the Senate Finance Committee for [tax-exempt] advance refunding,” said Emily Brock, director of the federal liaison center at the Government Finance Officers Association. “It’s not time to stop” lobbying for the proposal, Brock said.
The House first has to approve the reconciliation bill before the Senate gets its bite at the apple. The House may take it up as soon as next week.
The $1.75 trillion package encompasses much of President Joe Biden's domestic agenda. The advance refunding proposal, along with a direct-pay bond program and the expansion of bank-qualified debt provisions were included in an early version of the bill but later stripped out as lawmakers trimmed the size of the package.
If the House approves the bill, it would head to the Senate Finance Committee, which includes muni market supporters. Among them are Michigan Democrat Sen. Debbie Stabenow, who last year was co-sponsor on a bill to restore tax-exempt advance refunding, and Colorado Democrat Sen. Michael Bennet, who last year was co-author of a bill that would have established a direct-pay bond program.
“We are pleased that members of the Senate Finance Committee are continuing to promote and advocate for the benefits of this key public finance tool,” said Brett Bolton, vice president for federal legislative and regulatory policy at Bond Dealers of America. “As the score for current House bill provisions continue to be released, we look for opportunity to reinsert provisions such as tax-exempt advance refundings, especially as attention turns to the Senate, and plan to advocate for these muni provisions.”
Municipal Market Analytics estimates that the loss of tax-exempt advance refunding under the Tax Cuts and Jobs Act of 2017 has cost state and local issuers that sold taxable refunding bonds since 2020 between $8 billion to $10 billion in lifetime interest costs.
Because the tool has been banned since 2018, the cumulative cost of the loss will be “materially” higher and growing, MMA said in the Nov. 9 report.
“While these numbers represent a manageable added cost for most borrowers, they still come at the expense of other state and local spending priorities and are thus limiting or delaying governments’ ability to extend services and aid, invest in growth, and/or regain more traditionally balanced budgets,” MMA said.
MMA’s estimates included $151 billion of the $274 billion in municipal taxable bond issuance that was listed as refunding during 2020 and 2021, the group said. More than $151 billion of taxable advance refunding debt may have been issued during the period, which could mean the estimated cost is even higher, MMA said.
Brock noted that the federal government, when scoring the Tax Cuts and Jobs Act, valued the elimination of tax-exempt advance refunding at $17.6 billion over 10 years. If MMA’s estimates are accurate, then “from a 10-year perspective, it’s going to cost issuers more than the federal government estimated it would save,” she said.
If the House passes Build Back Better, Majority Leader Chuck Schumer has said he wants to pass the package by Thanksgiving. Assuming the Senate makes changes, it would then head back to the House. Congress meanwhile faces a Dec. 3 deadline for government funding to expire and a looming debt ceiling limit.
