Panelists discuss whether there's a future for advance refundings

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NEW YORK – A panel of muni market experts disagreed Friday on whether Congress can be convinced to restore advance refundings during the next few years.

Also, George Friedlander, managing partner of Court Street Research Group, said this year will be “the bottom of the well” for issuance following late last year’s rush to market before Congress prohibited advance refundings after 2017 in the tax law enacted in December.

Friedlander was among four experts who discussed the impact of the next tax law at a luncheon sponsored by the Municipal Analysts Group of New York.

Emily Swenson Brock, the director of the federal liaison office at the Government Finance Officers Association, who as also on the panel, was optimistic that advance refundings will be restored by Congress.

She said there’s a 75% chance of that happening.

Brock joked to the audience that her timeline for that happening is within the next 10 years, but after the luncheon she clarified that she does foresee it happening in the next three years.

But Michael Decker, managing director of the Securities Industry and Financial Markets Association, was doubtful of it happening in the near term.

“I love Emily’s optimism, but I don’t think I can agree,” Decker said, noting that SIFMA has been working unsuccessfully for 10 years to raise the $10 million limit on the bank-qualified bonds.

Brock said support for muni bonds in the House and Senate is bipartisan and her organization continues to work at educating lawmakers how the savings from advance refundings are used by local governments to pay for infrastructure.

“I think there is a foot in the door again,” she said, noting that members of the House Municipal Finance Caucus already have filed a bill that proposes bringing them back.

House Ways and Means Committee Chairman Kevin Brady, R-Texas, has said, however, that his committee won’t consider the bill.

Friedlander said he expects current refundings and “gimmicky refundings” to replace the advance refundings that Congress terminated.

He said muni bond issuance will rise next year. “I think supply goes up after this year,” he said.

The reasons for the drop this year, according to Friedlander, is the loss of advance refundings and the pre-issuance of private activity bonds late last year before the final tax bill saved them from termination.

Friedlander said that a separate issue involving the impact of the tax legislation is that “net demand by banks will be down by more than half on a trend line basis.”

“Banks over the last eight years have bought an average of $47 billion per year of bonds in an environment where the amount of bonds grew only very, very slightly,” Friedlander said. “So they bought way more than the net amount of bonds all by themselves.”

But the drop in the corporate tax rate to 21% from 35% will reduce the attractiveness of tax-exempt munis relative to other investments for banks.

The tax law also limited the household federal deduction for state and local taxes to $10,000 which is likely to act as a restraint on the ability of local governments to raise taxes.

New York State last month enacted legislation that allows the state and its local governments to form charitable trusts to accept tax deductible payments in lieu of property taxes or income taxes.

New York’s law makes the establishment of the trusts voluntary. Any governmental entity that sets one up would be required to issue a tax receipt for any payments.

New York City and Yonkers have local income taxes that are levied on top of the state income tax.

Property taxes in New York are levied by counties, cities, towns, villages, school districts and special taxing districts such as libraries and fire districts.

The National Conference of State Legislatures says eight other states are considering similar workarounds of the federal cap on SALT deductions. They are: California, Illinois, Maryland, Nebraska, New Jersey, Rhode Island, Virginia and Washington.

Brock predicted the charitable trusts will withstand legal challenges because states have a constitutional protection for sovereignty.

The federal cap on the SALT deduction also expires at the end of 2025 along with the lower tax rates on individual taxpayers.

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Tax reform Refunding bonds Munis SIFMA GFOA Washington DC