Happy New Year from all of us at Ehlers!
With the official start of the 117th Congress this week, we highlight some of the legislative proposals in the area of public finance that may be revisited and how they can impact issuers.
The National Association of Bond Lawyers (“NABL”), as reported by The Bond Buyer, recently sent a letter to President-elect Biden’s transition team identifying a series of proposals related to the municipal bond market. Many of the proposals were included in the Moving Forward Act (“MFA”) passed by the House of Representatives in 2020. Some of the proposals in the MFA included reinstating tax-exempt advance refundings, encouraging banks and other financial institutions to purchase tax-exempt bonds by increasing the bank qualification limit, and restoring and creating new direct-pay bond programs. NABL encouraged the President-elect to review many of the public finance proposals included in the MFA legislation. Here is a summary of some of the key bond provisions included in that legislation.
Restoration of Tax-Exempt Advance Refundings
The 2017 Tax Cuts and Jobs Act eliminated the ability to issue tax-exempt advance refunding bonds. An advance refunding occurs when refunding bonds close more than 90 days prior to the first available call date for the refunded bonds and proceeds are deposited into a defeasance escrow. Many public finance groups have been advocating for tax-exempt advance refundings to be restored. Presently, advance refundings can still occur, but only through the issuance of taxable debt. The restoration of tax-exempt advance refundings would allow issuers/borrowers to refinance their existing debt at lower tax-exempt interest rates, thereby increasing savings.
Increasing the Bank Qualified Limit
Financial institutions that purchase tax-exempt, bank qualified debt enjoy tax advantages that provide more attractive after-tax yields for these tax-exempt issues. This often results in lower interest rates for the issuer. Presently, issuers that are not reasonably expected to issue more than $10 million in tax-exempt debt in a calendar year can avail themselves of bank qualified status on those obligations. The MFA proposed increasing the bank qualification limit to $30 million and indexing it annually for inflation. The American Recovery and Reinvestment Act (“ARRA”) passed in 2009 temporarily increased the limit to $30 million.
New Direct-Pay Bonds
The MFA authorized the creation of Qualified Infrastructure Bonds (QIB) modeled after Build America Bonds (BABs) and other forms of direct-pay obligations that were introduced in the ARRA. Issuers of QIB’s are provided a tax credit in the form of a direct payment to the issuer equal to a percentage of the applicable interest. The percentage of the credit for interest paid is based upon the year of issuance. In the MFA legislation the percentage of the credit for QIB’s decreases over time. Bonds issued through 2024 received a credit equal to 42% of the interest paid, 38% in 2025, 34% in 2026, and 30% from 2027 and thereafter. Net proceeds must be used for capital expenditures or the operation and maintenance of capital expenditures. When BABs and other direct-pay bonds were issued in 2009 – 2010, Ehlers recommended clients include an extraordinary par call provision that allowed the bonds to be optionally redeemed at face value if the direct payment to the issuer was reduced by the U.S. Treasury from the original stated amount (35% for BABs), which did occur though the sequestration process.
Restoration of QZAB’s; Authorization of Qualified School Infrastructure Bonds
Qualified Zone Academy Bonds (QZAB’s) were repealed in 2017. QZAB’s allowed for the rehabilitation and repair of public school facilities, funding of equipment, development of course materials, and training for school personnel. The MFA reinstated QZAB’s and allowed proceeds from QZABs to be used for construction and retrofitting of public school facilities; permanently increases the national limitation for QZABs from $400 million annually to $1.4 billion annually; and removed the 10% private business contribution requirement for local educational agencies to participate in the program.
The MFA also proposed designating a total national bond limitation of $30 billion for Qualified School Infrastructure Bonds (QSIB’s). QSIB’s receive a 100% tax credit on the interest from the federal government. States would be authorized to distribute up to 10% of the total bond allocation to enable local educational agencies to leverage existing public programs or public-private partnerships to expand access to high-speed broadband for digital learning.
If any of these proposals are re-introduced, they are expected to be part of a larger infrastructure bill. Stay tuned.
Economic Outlook for 2021
Many publications conduct polls and forecasts this time of year. One survey of economists published by The Wall Street Journal (“WSJ”) noted three primary reasons for optimism in 2021:
- The $900 billion economic relief package will provide a boost to the economy in the coming months.
- Higher personal savings rates in 2020 will likely result in increased spending as vaccination rates increase and households spend some of their reserves.
- Borrowing costs remain low as many expect the Federal Reserve to hold short-term rates near zero for at least three more years.
One concern noted about the economic relief package by economists surveyed is it may be arriving too late to prevent the economy from slowing further in the first quarter of 2021. Economists surveyed expect the economy to expand at a 1.9% annual rate from January to March down from 3.3% growth in November’s survey.
Municipal Bond Yields
Heading into the new year, bond yields remained flat. On Wednesday, the yield on the benchmark 10-year U.S. Treasury note rose above 1% for the first time since March of 2020. Treasury yields, which rise when bond prices fall, started climbing on Tuesday evening as results from the Georgia U.S. Senate races became known.
As you begin evaluating financial needs heading into 2021, please contact your Ehlers Municipal Advisor to begin preliminary discussions about financing options and refunding opportunities.
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