The federal legislation that eliminated tax-exempt advance refundings will turn 10 years old next year, and that might beg a question: Has state and local government debt issuers' ability to cope with the loss of that tool hurt their case for why it should be restored?
"I would disagree with that assertion," said State of Michigan Treasurer Rachael Eubanks, who also serves as this year's president of the National Association of State Treasurers. "Clearly, issuers still need access to this very important financing tool."
The Tax Cuts and Jobs Act of 2017 took away that tool. Since January 2018, advance refundings have not been permitted on a tax-exempt basis under U.S. tax law.
There was almost no public policy debate about the topic prior to its repeal being included in the legislation at almost the 11th hour, taking the muni advocacy community by surprise.
Prior to that, tax-exempt advance refundings were common in the muni market, though each bond issue could be advance refunded only once.
Such refundings enabled state and local government issuers to reduce their interest costs as rates declined. Interest on those advance refunding bonds was tax-exempt, which allowed state and local governments to pay lower interest rates on their debt issuances.
For the first few years after the TCJA's implementation, "interest rates were fairly low," Eubanks said.
"On top of that, there was a compression between taxable and tax-exempt interest rates," she said. "So not only was there not a lot of need to refinance because interest rates were already low, but the penalty for refinancing at a taxable rate wasn't as severe as it is today."
Since then, interest rates have gone up and the relationship between taxable and tax-exempt interest rates has returned to a more normal level, she said. Consequently, "there is a much bigger differential" between refunding on a taxable versus a tax-exempt basis, Eubanks said.
"And issuers I think have tried to get creative," she said, adding that she's heard of issuers using "tenders and other types of creative structures." Those structures, however, are difficult to navigate and have varying degrees of success, Eubanks said. By comparison, an advance refunding is "a very straight-forward structure" used for decades, she said.
"So, it does make a big difference even though we've been without it for whatever it is – eight or nine years now," Eubanks said.
Like Eubanks, Brett Bolton, vice president of federal legislative and regulatory policy at the Bond Dealers of America, doesn't think issuers' ability since 2018 to do without such advance refundings has hurt the case for why the tool should be restored.
"This is definitely still a big priority for us," said Bolton, who like the Michigan treasurer, noted the rise in interest rates.
"Since 2017, rates have raised fairly dramatically in a short period of time and remain elevated," he said. "So I think that the case can be made down the road that advance refundings would still be a pretty useful tool for issuers."
While it's been nearly 10 years since the TCJA's passage, "the legislative process takes awhile" and efforts to restore the refinancing tool have continued to gain momentum, Bolton said.
"I would say over the last two to four years, we've really been working hard to gain Republican support of this provision," he said, citing efforts by the Public Finance Network, a coalition of associations dedicated to preserving state and local government use of tax-exempt bonds that includes BDA among its members.
Bolton pointed to H.R. 1255, legislation introduced by Rep. David Kustoff, R-Tenn., in February 2025. The legislation, known as the Investing in Our Communities Act, would amend the Internal Revenue Code of 1986 to reinstate advance refunding bonds. Kustoff, a member of the House Ways and Means committee, had also introduced the legislation in the previous Congress.
Co-sponsors of H.R. 1255 include Rep. Rudy Yakym, R-Ind. Yakym, who like Kustoff is a member of the influential House Ways and Means Committee, is co-chair of House Municipal Finance Caucus.
"So I mean those are big developments," Bolton said. "But as I mentioned, these things take time."
The bill is unlikely to pass as a standalone provision, and instead would require "some kind of kind of massive bill to hop onto – ride with if you will – to pass," he said.
"So clearly, we continue to work with the sponsors, both Republican and Democrat, looking for opportunities," Bolton said. "But as of now, it seems this next reconciliation push is going to be pretty narrowly focused on just funding Border Patrol and ICE, so that window may be closing."
However, looking ahead to the end of this year, Bolton said that historically after midterm elections there is a bipartisan tax package that comes together, which may offer a limited opportunity to get advance refunding legislation passed.
"My hope is fading for 2026, but 2027 is a new Congress," he said, adding that the midterm elections are likely to bring a shift to a divided government in Washington. "And I think that's a prime opportunity to push something like advance refunding across the finish line because it does garner such strong bipartisan support in both chambers of Congress."
Efforts to educate lawmakers ahead of last year's One Big Beautiful Bill Act – legislation that not only left the municipal bond tax exemption unscathed but also authorized tax-exempt private activity bonds for spaceport projects – included education efforts relating to advance refundings, Bolton said.
"We were playing offense while on defense, and now we can kind of just go on offense for advance refundings for a little bit," he said.
Ed Oswald, a partner at law firm Orrick, Herrington & Sutcliffe LLP, where he is a member of the firm's tax group, said the ability to advance refund bonds was a long-standing tool used in the municipal finance sector that enabled issuers to achieve debt service savings when interest rates declined.
"And I think that, by and large, it's been a difficult time for state and local governments with this tool being gone," said Oswald, who earlier in his career served in the Office of the Tax Legislative Counsel at the U.S. Department of the Treasury, where he developed policy, legislative initiatives and regulations affecting public finance and structured finance.
Many issuers are just waiting until their bonds are callable to do a refinancing, "because that's really the only tool they have," Oswald said.
"So the market has adapted in that sense because it has to, but I do feel it's really hurt the flexibility of state and local issuers to manage their finances," the attorney said.
So what kind of chance is there that efforts to restore tax-exempt advance refundings will eventually succeed?
"I'm going to say it's probably 50-50," Oswald said. "I think there is some strong advocacy and there's some strong policy at least in a historical sense of Federalism that this tool should be made available to state and local governments once again."
Emily Brock, who as director of the Government Finance Officers Association's federal liaison center leads the PFN's advocacy efforts, said there has been a lot of turnover among Ways and Means Committee staff.
"So we're doing a lot of re-meeting the staff, we're doing a lot of educating staff," Brock said. "We're doing a lot of educating the new members and of course the potential new members of the committee."
PFN has to "educate the people who are still going to be there and start to ramp up educating who's going to be there in the next Congress," Brock said.
However, while the people may change, PFN's strategy remains the same, she said.
"The strategy is to make sure that they understand that advance refunding is a tax-savings mechanism to create infrastructure," Brock said.
