State and local governments routinely refinance their outstanding debt obligations, just as corporations and homeowners do. The advance refunding technique allows state and local government issuers to benefit from lower interest rates when the outstanding bonds are not currently callable. It is important to note, that under previous law, tax-exempt bonds could be issued to advance refund an outstanding issuance only once, a significant restriction on these transactions.
According to recent Government Finance Officers Association (GFOA) data, between 2012 and 2017, there was over 9,000 advance refunding issuances nationwide, saving taxpayers over $14 billion in the five-year period. We note that this represents the “present value” measurement of the savings and the actual savings are substantially greater.
On a long-term basis, State and local governments will be significantly disadvantaged by the loss of the ability to issue tax-exempt advance refunding bonds. Most importantly, they will have lost the most efficient mechanism to take advantage of low-interest rates to refinance higher-rate debt in advance of when such debt can be called. The inability to lock in lower interest rates when they are available will, simply stated, result in increased costs to these governmental entities.
Moreover, both at times of relatively low rates and otherwise, state and local governments have lost an important means of restructuring their outstanding debt to respond to short or long term fiscal issues (which can include both paying off their debt more quickly or restructuring debt to deal with short term financial difficulties).
In addition, federal analyses of such tax-exempt bond proposals focus solely on federal tax revenues to be raised by such proposals, ignoring the effect on state and local governments and, thus, state and local residents. Private sector analyses, however, confirm that taxing municipal bonds, in whole or in part, or replacing municipal bonds with some other financing tool will increase state and local financing costs.
The ability to advance refund bond issuances benefits all Americans and creates infrastructure investments that provide high-quality jobs and spurs economic growth nationwide.
Municipal bonds help to support higher education – public and private universities borrow from the tax-exempt municipal market. (SMU Campus building)