WASHINGTON – Treasury Department sales of state and local government series securities are expected to dramatically decline this month now that issuers no longer need them for tax-exempt advance refunding escrows.

Congress, in tax law changes enacted in December, prohibited advance refundings from being done on a tax-exempt basis after the end of the year.

Rich Moore, a board member of the National Association of Bond Lawyers and partner at Orrick Herrington & Sutcliffe in San Francisco
Rich Moore, a board member of the National Association of Bond Lawyers and partner at Orrick Herrington & Sutcliffe in San Francisco Provided photo

Taxable advance refundings, however, are one option some local finance directors and state treasurers have told The Bond Buyer they are considering as an alternative, if the economics work.

State and local governments can purchase SLGS for taxable advance refundings of tax-exempt bonds.

Sam Gruer, managing director of the New Jersey office of Blue Rose Capital Advisors based in Minneapolis, said the demand for SLGS for taxable advance refundings won’t be strong in the short-term.

“Most of the refundings that would economically make sense now were accelerated into November and December of last year,” Gruer said. “And interest rates have only gone up. So the ones that didn’t make sense to do then probably make less sense to do now on a taxable basis.”

Gruer said “the bigger issue” for Treasury to continue the SLGS program is “for some of the older escrows that are still outstanding that continue to rely upon zero-yielding SLGS for yield compliance purposes.”

The window for SLGS purchases reopened midday Feb. 12 after President Trump signed legislation three days earlier that suspended the nation’s debt ceiling until March 1, 2019.

The SLGS window had been closed since Dec. 8 when Treasury began taking extraordinary measures to avoiding breeching the debt ceiling.

Richard Moore, treasurer of the National Association of Bond Lawyers and a partner in the San Francisco office of Orrick, Herrington & Sutcliffe, said there was “a rash” of advance refundings in December despite the unavailability of SLGS.

Moore described the return of the SLGS program as a “welcome development.”

“It is still an important tool for existing escrows with scheduled rolls into 0% SLGS and for acquiring escrow securities in the context of equity defeasances,” Moore said.

Treasury generally sold between $5 billion and $12 billion of these securities each month in the past, according to the Congressional Budget Office.

Treasury tracks overall sales of SLGS, though not how they are used/

As of Dec. 29, there were 21,015 SLGS bonds and notes outstanding valued at $94.4 billion. At the end of January – following a month and a half of no purchases – the number of SLGS had declined to 20,221 at a value of $86.57 billion.

The latest debt ceiling suspension is part of a larger agreement that keeps the federal government operating through March 23 while House and Senate appropriators finish work on fiscal 2018 spending bills. The deal also raised federal spending caps for 2018 and 2019 and included $89.3 billion in disaster aid.

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