Dealers push for bond provisions in next coronavirus bill
Dealers are making a renewed push for lawmakers to include certain municipal bond provisions in a potential future coronavirus stimulus bill to help states and local governments suffering severe revenue shortfalls due to the pandemic.
In a letter sent to Congressional leaders, the Bond Dealers of America and American Securities Association both made tax provision asks such as the reinstatement of advance refundings.
“The crisis has put enormous strains on state and local budgets,” wrote Mike Nicholas, BDA CEO. “As constructive as the CARES Act is in helping state and local government stay afloat during the crisis, it will not be enough to fully restore state and local finances. The nation needs fiscally healthy state and local governments to continue to fight the pandemic and lead the economic recovery.”
The House is expected to release a stimulus package in the next few days.
In late March, the Coronavirus Relief Fund provided $150 billion to state, local and tribal governments.
In addition to cash assistance, Nicholas said incentives to plan and finance infrastructure would contribute significantly to the recovery of the economy.
“The most important tool available to state and local governments for infrastructure finance is the municipal bond market,” Nicholas wrote.
BDA and ASA both asked Congress to bring back advance refunding. Tax-exempt advance refunding was taken away after the Tax Cuts and Jobs Act in 2017. Nicholas said market interest rates for state and local governments are near historic lows, making it the perfect time to lock in low interest rates, saving municipalities’ money.
“Unfortunately, one of the most important tools for refinancing government bonds—advance refundings, the ability to issue new bonds to replace old, high-interest debt before the old bonds become 'callable'—was taken away in the Tax Cuts and Jobs Act of 2017,” Nicholas said. “We urge Congress to reinstate this authority.”
ASA wrote a letter to House Ways and Means Committee Chair Richard Neal, D-Mass., this week urging his committee to help states and local governments through the pandemic through reinstating tax-exempt advance refunding.
“Advance refundings would allow states and municipalities across the country to lower their borrowing costs and take advantage of an unprecedented low interest rate environment while still honoring outstanding bonds that fund longer-term projects,” wrote Chris Iacovella, ASA CEO.
BDA also wants to permanently raise the cap on bank-qualified bonds to $30 million from $10 million. Smaller issuers tend to face more friction when accessing the capital markets, Nicholas said, which is why in 1986, Congress created a provision to make it easier for small communities who sell less than $10 million bonds per year to place their bonds in commercial banks.
“The problem is that the $10 million figure has not been updated in 34 years, and in real terms is worth less than half what it was in 1986,” Nicholas said.
“Banks have been a stable funding source for all sectors of the municipal market during this unprecedented time,” Nicholas added. “By increasing the bank qualified limit, we would only encourage more of this valuable, local, and stable funding into the municipal market.”
BDA also wants Congress to reinstate a direct-pay bond program and want assurance that the interest reimbursement payments on those are exempt from sequestration. Build America Bonds, a type of direct-pay bond were widely popular, with more than $180 billion being issued.
Neal said last week that he supported reinstating Build America Bonds and the use of private activity bonds as part of a larger package of aid to state and local governments.
The Securities Industry and Financial Markets Association did not send in a formal letter, but said one of its top legislative priorities in the next stimulus package is to reinstance tax-exempt advance refunding.
“One of the top legislative priorities of SIFMA’s Municipal Securities Committee is to reinstate advance refunding for tax-exempt bonds, which provides state and localities with an important tool to refinance outstanding debt at lower interest rates and generates many billions of dollars of interest savings over decades,” said Kenneth Bentsen, SIFMA president and CEO.
SIFMA also supports increasing the cap on bank-qualified bonds, expanding private activity bonds and reinstating a direct pay program.