NABL asks Congress, Treasury for direct-pay bonds, advance refunding
The National Association of Bond Lawyers proposed a plethora of actions Congress and the Treasury could take to help state and local governments weather the pandemic.
In a letter sent to the Treasury and Congress late last week, NABL asked for several legislative and administrative actions to help state and local governments as well as 501(c)(3) organizations dealing with cash flow and liquidity issues due to COVID-19. NABL wants those actions to be done as soon as possible in a new coronavirus stimulus bill.
“Adopting these proposals will enable state and local governments to access much-needed capital at a time when support to our communities is of paramount and immediate concern,” wrote Rich Moore, NABL president.
Among the bigger asks from Congress is to introduce a direct-pay taxable bond program to cover the needs of state and local governments responding to COVID-19. So far, NABL does not have any leads on sponsors for that proposed bill.
Those bonds would be modeled off Build America Bonds, which were created during the American Recovery and Reinvestment Act of 2009. They were widely popular as from April 2009 to December 2010, more than $185 billion in BABs were issued.
BABs carry a 35% direct-pay federal subsidy to issuers, but NABL wants its American Infrastructure Bonds to have a 40% direct-pay subsidy for bonds issued at the time of passing the legislation to December 31, 2025. NABL also wants the bonds to be eligible for the same uses as tax-exempt bonds, including working capital financings and refundings.
Those bonds should also be used to include certain private activity bonds impacted by COVID-19 such as airports and hospitals, NABL said.
NABL also wants Congress to reinstate tax-exempt advance refundings, which were cut in the 2017 Tax Cut and Jobs Act.
“As a result of the COVID-19 pandemic, many state and local governments and other obligors of tax-exempt bonds are experiencing dire financial situations and are having difficulty paying scheduled principal and interest on their outstanding debt,” NABL said. “It would greatly benefit such entities to be able to refinance their debt at today’s interest rates that are often lower than the interest rates payable on outstanding debt, which often was issued years ago.”
NABL urged Congress to restore tax-exempt advance refundings permanently.
NABL also wants to raise the cap on bank-qualified bonds to $30 million from $10 million to help stimulate demand by financial institutions. That increase happened for a limited time under ARRA, but NABL wants the change to be permanent this time.
“These suggestions were utilized after the financial crisis and they were designed to stimulate demand by banks,” said Carol Lew, shareholder at Stradling Yocca Carlson & Rauth. Lew is the chair of NABL’s task force, which penned the letter.
“We’re trying to stimulate investor interest in tax-exempt bonds because it would give lowered costs to state and local governments and then they can provide infrastructure for their communities,” Lew added.
NABL also asked Treasury to clarify issuers’ ability to issue tax-exempt bonds for long-term working capital projects. Under current law, issuers are constrained in issuing tax-exempt bonds to finance working capital expenditures, NABL said. To use those bonds for working capital, issuers have to spend all other available funds with a few exceptions such as a legal judgment.
NABL specifically asks for a safe harbor beginning now until Dec. 31, 2025 for states, local governments and 501(c)(3) organizations to issue long-term cash flow tax-exempt bonds with an average maturity of up to 10 years.
“We’re suggesting that right now one of the biggest needs for state and local governments is going to be cash flow help,” Lew said. “We’re trying to make a suggestion to provide some clarification through, what could be an IRS notice, that lays out the guidelines of the amount state and local governments can issue tax-exempt bonds, not for forever, but in this aftermath.”
NABL also wants more flexibility from Treasury to allow issuers to make changes to the terms of tax-exempt bonds. Many stakeholders are negotiating bond terms now because of COVID-19, Lew said, extending payment dates being an example. Right now, issuers run the risk of changes resulting in a reissuance of the bonds.
NABL also asked Treasury that issuers would have no additional retesting or monitoring be required following the date of issuance for those tax-exempt bonds.
“That new bond would have to be tested with all of the tax law restrictions and the law could have changed,” Lew said. “It requires a lot of work for state and local governments and expenses.”