An opportunity for COVID Recovery Bonds is here now

The municipal bond industry is well suited to help the nation recover from the economic and jobs crisis resulting from COVID-19.

As has been done with earlier economic, terrorist and climate-related catastrophes, new categories of tax-exempt bonds can be targeted to specific industries and areas in need of assistance.

For example, over the past 20 years this was accomplished through legislation creating Liberty Bonds, Gulf Opportunity Zone Bonds and Recovery Zone Bonds.

There are critically troubled businesses that could be significantly helped through the issuance of newly created tax-exempt “COVID Recovery Bonds” for unanticipated pandemic health and safety expenditures.

A similar approach now will require bold steps to provide COVID relief, but the current crisis requires creative thinking tailored toward those industries nationwide most impacted. Responsible, limited changes in the tax code and IRS regulations could go a long way toward economic recovery where needed most.

Muni bond interest groups have prepared detailed position papers and there has been much discussion of the increased need for tax-exempt bonds to develop infrastructure as well as the necessity to restore advance refundings, relax volume cap limitations and working capital restrictions, and more.

I strongly share those positions. But there are impacted segments of the economy that to date have been overlooked in the recent conversations over bonds.

Critically troubled businesses that could be significantly helped through the issuance of newly created tax-exempt “COVID Recovery Bonds” for unanticipated pandemic health and safety expenditures include the following: (1) restaurants and leisure facilities such as health clubs, bowling alleys, theaters, entertainment venues and cinemas requiring design improvements, (2) hotels and motels requiring enhanced ventilation and other protective devices, (3) professional sports facilities that need to provide fans with safety assurances, and (4) private and parochial schools in need of facility improvements for the health and safety of students, faculty and staff.

New categories of tax-exempt bonds should also be created to provide capital for (1) tourist attractions that could help restore vitality to urban areas and (2) manufacturing facilities for PPE and medical products for pandemic relief and the prevention of future health catastrophes. The new categories can be limited in duration, but must be free of unnecessary regulatory constraints that would take away with one hand what the other gives.

Sound policy reasons exist for lending financial help to these businesses, services and industries that have been hit so hard by the unexpected costs needed to reopen safely following the mandated closures. State programs can be quickly established so that federalism can work efficiently and the states can choose the mechanics that best fit under their laws.

Credit issues need to be addressed in the transactions, but perhaps some of the unused COVID relief money could be repurposed from Washington to establish state-wide reserve funds for these deals. Or perhaps special COVID surcharges — such as the ones currently in effect in New York City and other localities — could be pledged to secure payment of debt service on any COVID Recovery Bonds over a geographic area.

The market and professionals can craft technical solutions once the legal authority to issue these bonds is established. Regulatory relief would be required so that any surcharges would be considered “generally applicable taxes” that could be pledged for tax-exempt debt service costs and various other related IRS regulatory burdens would need to be lifted on an interim basis.

Another helpful legislative option to adopt would be similar to what was done under the American Recovery and Reinvestment Act in 2009 to address that economic crisis — expand the definition of “manufacturing” for IDBs to include these various types of industries and facilities without including overly burdensome restrictions on volume cap, capital expenditures, working capital and bond size. These bonds could be issued to meet the anticipated pent up consumer demand and address discrete manufacturing needs of the nation.

This unique period requires creative and responsible solutions. But we must keep the changes simple and not get bogged down with minutia and miss the opportunity. As an industry we can help the nation recover if given the opportunity through a targeted relaxation of the restrictions against tax-exempt bonds. The time for our leaders in Washington to act is now.

For reprint and licensing requests for this article, click here.
Coronavirus IRS
MORE FROM BOND BUYER