WASHINGTON — A bipartisan group of four House lawmakers introduced a bill last week would allow more issuers to be able to issue bank-qualified bonds.
The legislation, called the Municipal Bond Market Support Act of 2014 (H.R. 5199), would increase the annual issuance limit for issuers of bank-qualified bonds to $30 million from $10 million. It also would apply the limit to nonprofit borrowers rather than to the issuers through which they borrow.
The bill is sponsored by Reps. Tom Reed, R-N.Y., Richard Neal, D-Mass., Randy Hultgren, R-Ill., and John Larson, D-Conn. It has been referred to the House Ways and Means Committee, which includes Reed, Neal and Larson as members.
Generally, banks can't deduct the interest they pay to borrow the money they use to buy municipal bonds from issuers. But under current law, if an issuer expects to issue no more than $10 million of bonds in a year, banks can purchase its bonds and deduct 80% of the interest they pay. In addition, nonprofit borrowers have trouble issuing bank-qualified bonds unless the issuer from which they are borrowing falls under the $10 million of bonds per year limit.
Reed's bill would increase the annual limit to $30 million from $10 million and index that figure to inflation. For 501(c)(3) bond financings, the new limit would apply to the borrower rather than the issuer, meaning that bonds issued for nonprofits that borrow no more than $30 million in bond proceeds in a year could be bank-qualified even if the issuer sells more than that amount of bonds annually. If an authority issues one bond issue for multiple nonprofits, all of those bonds can be bank-qualified if each of the nonprofits borrows under $30 million a year.
The proposed changes to bank-qualified bond rules are similar to the provisions that were in effect during 2009 and 2010 under the American Recovery and Reinvestment Act. But they expired at the end of 2010. The recently introduced bill is similar to legislation Reed introduced in 2012.
Municipal bond groups support the bill.
"This is a very positive legislative proposal," because it will allow a greater number of small issuers to take advantage of selling bank-qualified bonds, said Michael Decker, managing director and co-head of municipal securities at the Securities Industry and Financial Markets Association.
Selling bank-qualified bonds allows issuers to have lower borrowing costs, Decker said. Hultgren said in a news release that under the bill, "a school investing in an infrastructure project in the range of $30 million could save nearly $4 million in interest costs."
Decker also said that the bill is overdue because current $10 million limit was set in 1986 and has never been adjusted for inflation. In real terms, $10 million is worth less than half of what it was worth in 1986, he said.
Chuck Samuels, an attorney at Mintz Levin and counsel to the National Association of Health and Educational Facilities Finance Authorities, said, "It's very important that members [of Congress] like this, on the Ways and Means Committee, continue to show their interest for tax-exempt financing, particularly for small governments and nonprofits." Both Samuels and Decker took note of the fact that the bill has bipartisan support.
The tax reform discussion draft that Ways and Means Chairman Dave Camp, R-Mich., released in February would eliminate bank-qualified bonds.
