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Securities Law

Bill Would Allow Second Advance Refunding for Governmental, Nonprofit Bonds

WASHINGTON — Rep. Mike Coffman, R- Colo., has introduced legislation that would allow governmental and 501(c)(3) nonprofit bonds to be refunded a second time so that issuers and borrowers could save money by taking advantage of low interest rates.

Under current law, governmental and 501(c)(3) bonds can only be advance refunded one time. Private activity bonds subject to the alternative minimum tax cannot be advance refunded at all.

Coffman, who served as the Colorado's treasurer from 1998-2005, said his Local Schools and Infrastructure Improvement Act of 2012, known as HR 6560, would help local issuers take advantage of low interest rates.

"After consulting with local officials, Coffman said in a statement, "I have come to the conclusion that we should revise our tax laws to allow school districts, municipalities, nonprofits and other local governments to refinance their bonds for a second time to save taxpayer dollars."

"We need to provide local entities with the opportunity to take advantage of record low interest rates to complete important projects that will benefit schools and local governments," Coffman said.

"Congressman Coffman's bill will provide significant help to schools, governments, and charities in Colorado and around the country, said Dee Wisor, an attorney in the Denver office of Sherman and Howard, LLC and a member of the Board of Directors of the National Association of Bond Lawyers. "Because we work with these issuers every day we, at the National Association of Bond Lawyers, know just how important this will be."

Wisor said that despite the education-oriented title of the bill, the legislation would actually be a far-reaching change that would apply not only to schools but to local government general obligation bonds, as well as water and sewer, hospital and other kinds of debt issued by state and local governments and for nonprofits.

The title of the bill likely comes from the local education leaders who expressed a need for the bill, said Wisor.

Coffman said the bill has been endorsed by two Colorado superintendents.

"The application of this would allow any governmental or 501(c)(3) bond a second advance refunding," Wisor said.

The legislation, which would allow these second refundings to occur after the bill's enactment, would contain three conditions. The issuer would have to expect to obtain present value savings from the refunding. In addition, the amount of the second refunding issue would not be allowed to exceed the outstanding amount of the bonds being refunded, and the average maturity of the refunding bonds could not be later than the average maturity of the bonds to be refunded.

The bill also includes language that Wisor said is intended to benefit distressed municipalities like Jefferson County, Ala., and Stockton, Calif. This special rule would exempt an issuer from the conditions attached to the second refunding if the issuer determines that a second refunding is necessary to avoid a default.

The bill does not currently have any cosponsors or companion legislation in the Senate, and is pending before the House Ways and Means Committee. The House is not expected to return to legislative work until Nov. 13, after the presidential and congressional elections.

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So bonds could be called before their call dates?
Posted by Robert G | Friday, October 12 2012 at 11:29AM ET
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