"Never put off until tomorrow what you can do the day after tomorrow."
Mark's Twain's cynical aphorism may generate laughs from some, but it seems to have been the attitude of Congress as it fled Washington to hit the campaign trail. In its wake, Congress failed to take action on critical tax and budget issues, preferring to wait until later this year — if then — to make legislative decisions.
One of those delayed decisions — whether to extend three critical municipal bond programs — is already creating serious uncertainty for local governments and investors and could jeopardize the future of some of the most successful public finance programs in history.
Build America Bonds, bank-qualified bonds, and tax-exempt economic development financing are three essential entrées on the menu of financing options available to states, counties, cities and towns. Responsible financing of government operations depends on access to a variety of revenue-raising and debt-financing options.
Just as governments rely on a mixture of income, sales, property, and other taxes to raise revenue, they also rely on a range of financing options to fund capital projects. When the Great Recession gripped the nation in 2008, the municipal bond market took a beating and borrowing costs on traditional municipal debt soared.
In response, Congress created the BAB program, expanded access to bank-qualified bonds, and exempted interest on tax-exempt economic development financing from the alternative minimum tax. This enabled governments to raise capital at reasonable costs to keep their economic engines running at a critical time in the economic crisis.
That crisis is not over, but Congress is on the brink of allowing these programs to expire at the end of the year. That would be a terrible mistake.
Why has Congress failed to act? While the bond provisions have bipartisan support in Congress, they are tied up in political wrangling over the extension of current tax rates. This is political reality in Washington. However, there are strong arguments for Congress to take immediate action to separate these municipal finance provisions from the legislative thicket, approve them, and restore some sense of fiscal certainty for cities and towns across the country.
BABs are taxable bonds that are subsidized by the federal government and are a cost-effective financing option for municipalities. Created by Congress in 2009, more than $140 billion of BABs have been issued to fund projects like bridges, schools, and roads.
Many of these projects, and the jobs they created, might not have been undertaken if BABs did not exist. Build America Bonds provide the added benefit of bringing new investors to the municipal bond market and helping to reduce tax-exempt borrowing costs.
The financial crisis sent many bond investors (like hedge funds and insurance companies) heading for the exits, and Congress understood the critical need to bring new players into the muni market in order to restore competition and lower borrowing costs.
Bank-qualified bonds permit small issuers to save money by allowing them to borrow directly from local banks. In 2009, Congress opted to expand the number of small issuers — like school districts and towns — that could take advantage of the lower financing cost offered by bank-qualified debt.
Congress did this by increasing to $30 million from $10 million the annual limit on what an issuer could borrow. As a result, the lower interest rates for bank-qualified bonds have enabled state and local governments to issue more than $58 billion of such debt in 2009 and 2010. The expanded limitation for bank-qualified bonds has allowed small municipalities to save hundreds of millions of dollars in interest costs — monies they can now use to meet other budget obligations.
Similarly, the increased market premium on alternative-minimum tax bonds that started during the financial crisis forced many issuers to abandon tax-exempt economic development projects given that this type of financing is so crucial to such critical infrastructure as airports and water and wastewater treatment systems.
Congress wisely moved to exempt the interest on private-activity bonds from the AMT and this has enabled issuers to avoid a substantial interest penalty. It has also permitted infrastructure projects to move forward that otherwise might not have been able to obtain financing.
Without access to these cost-effective financing options, many issuers will be forced to pay substantially higher interest rates to borrow the money they need. If that happens, some may be compelled to blow even bigger holes in their budgets in order to meet their obligations, or else forego projects and the jobs and public benefits they generate.
No one relishes the prospect of paying more for something that should cost less. However, if Congress fails to extend the BAB, bank-qualified, and AMT provisions, issuers will face higher costs and investors will have fewer investment options.
When lawmakers returns later this month, they have the opportunity to solve this dilemma by extending these essential programs and relieving the uncertainty that is starting to rattle the municipal finance community. Congress should act without delay.
Michael Nicholas is chief executive officer of the Bond Dealers of America.
