Rep. Terri Sewell is pledging to file legislation later this month that would increase to $30 million the annual issuance limit for issuers of bank-qualified bonds.
Sewell, an Alabama Democrat, on Wednesday delayed filing the bill in conjunction with a Public Finance Network event touting the benefits of these bank qualified loans and advance refunding to congressional staff.
The congresswoman is continuing to fine tune the bill so it can gain broad bipartisan support, according to a staff member. Sewell is an expert in this field, having become the first black attorney in Alabama to specialize in public finance before being elected to the House in 2010.
Sewell, however, declined Wednesday to discuss the bill before it is ready for filing.
Bank-qualified debt, also known as BQ debt,bank-eligible, and small issuer bonds, allows banks to deduct most of the carrying cost of that debt as a business cost. The bonds have to have been sold by an issuer who issues no more than the cap that calendar year.
The tax reform law of 1986 set that cap at $10 million and it’s remained there except for a two-year period in 2009-2010 when the American Recovery and Reinvestment Act raised the limit to $30 million.
ARRA also applied the limitation to individual borrowers rather than conduit issuers, which the law snapped back to afterward.
Small colleges, rural hospitals, long-term care facilities and small schools would be among the primary beneficiaries of the legislation involving bank-qualified debt, said Dennis Reilly, executive director of the Wisconsin Health and Educational Facilities Authority.
Reilly told the congressional staffers his agency served as the conduit issuer for 35 bank-qualified placements totaling $340 million in 2009-2010. Thirty two of those issuances were under $20 million and many were private placements with banks.
Among them: a $12 million private placement for Pine Haven Christian Communities which operated nursing homes and memory care facilities in Sheboygan Falls and Ooostberg; $16.1 million for a private placement by Lakeland College in Plymouth; $11 million for a private placement by Door County Memorial Hospital in Sturgeon Bay; and a $11.6 million private placement by Goodwill Industries of North Central Wisconsin.
“On a $10 million transaction, if you save 20 basis points, you’re saving $20,000 a year in annual interest costs,” Reilly said. “The deals are still getting done with tax-exempt bonds. However, this would allow us to lower the borrowing rate even more for the not-for-profit.”
Although some banks don’t have an appetite for bank-qualified deals and can’t offer a lower rate, there are community and regional banks that remain interested in working with local institutions, Reilly said. “They know that local not-for-profit the best,” he said. “They are willing to lend them money and any way we can help facilitate lowering that rate, we are big proponents of.”
Charles Samuels of Mintz Levin, counsel to the National Association of Health & Educational Facilities Finance Authorities, acknowledged that current spreads are small between taxable and tax-exempt bonds.
“But the fact is, we’re supporting legislation for the long haul to make this option permanent,” said Samuels. “Interest rates will change over time and his will become an increasingly valuable tool. That’s why we have to get started pursuing the legislation right now.”
Eighty percent of the interest cost of a bank-qualified bond can be deducted by a bank internally as a business expense.
In addition, a private placement with a bank is less expensive to prepare than a public bond offering.
Rep. Tom Reed of New York, who is the Republican cosponsor of the pending bill, told The Bond Buyer on Wednesday he considers the bill to be common sense legislation offer local governments cheaper financing.
Reed said the difficulty in passing the bill will be finding a way to get floor votes in the House and Senate.
“It’s a matter of finding that priority, that financing bill that’s going to carry this to the finish line,” Reed said. “There’s a couple of things like [tax] extenders, like the debt deal that maybe you could hook up to or maybe just do it the good old fashioned way [as a separate bill]. And that’s why having a partner like Terri [Sewell] could help. Just build the consensus to 218 in the House and 60 in the Senate and see it we can’t have a bill where most people say, ‘We can support that.’”
The Government Finance Officers Association, which organized Wednesday’s briefing on behalf of the Public Finance Network, is looking for members of the House Municipal Finance Caucus to sign up as cosponsors.
