Re-instatement of tax-exempt advance refunding bonds is being re-introduced in the new Congress. It has bi-partisan support and has favorable odds of being signed into law this year. The legislation has been named the LOCAL Infrastructure Act with LOCAL serving as an acronym for Lifting Our Communities through Advance Liquidity. Under current federal tax laws, governments may only issue taxable advance refunding bonds.
Municipal Finance Industry SIFMA President and CEO Kenneth Bentsen, Jr. called the reintroduction of the Wicker-Stabenow advance refunding bill a signal of “their commitment to infrastructure investment.”
“By reducing their debt service expenses, states and localities would free up their borrowing capacity for new investments in infrastructure and other important public projects, in turn boosting their local economies with the creation of new jobs and making public services more affordable,” Bentsen said.
Advance refunding bonds are bonds issued by governments and other issuers of public obligations whose proceeds are used to redeem or retire an outstanding issue of bonds (refunded bonds) 90 days past the issuance date of the advance refunding bonds. The interest rate of the new issue of bonds is usually at a lower interest rate than the older, unpaid refunded bond obligation. State and local governments often use advance refunding to lower borrowing costs and to take advantage of lower interest rates. Advance refunding bonds proceeds are usually held in an escrow account until the proceeds are used to retire or redeem the older (refunded bond) issue. When advance refunding bonds are issued in connection with private activity bonds for purposes like housing, health care, small business, etc., private borrowers like affordable housing providers, hospitals and other non-profits are potentially able to deliver more their services to their constituencies at a lower cost as their interest costs are reduced. This is a public good.
In 2017, advance refunding bonds totaled $91 billion and comprised 22.2 percent of the $3.8 trillion total municipal bond market. See Bond Buyer for more info.