Municipal bonds serve as essential financial instruments for cities, states, and various municipal issuers. These bonds enable local governments to raise capital for public projects, which can range from infrastructure improvements to community development initiatives. However, a critical tool for these issuers, advanced refunding of tax-exempt debt, was stripped away in 2017 with the passing of the Tax Cuts and Jobs Act under President Trump’s administration. The absence of this provision has left municipal issuers grappling with higher borrowing costs and stunted economic growth in their communities.
In a notable development, a bipartisan coalition of lawmakers introduced the Investing in Our Communities Act, seeking to restore that ability. Spearheaded by Representatives David Kustoff (R-Tenn.), Rudy Yakym (R-Ind.), Gwen Moore (D-Wis.), and Jimmy Panetta (D-Calif.), this legislative push presents an opportunity for municipal issuers to regain that crucial financial tool. Even though this legislation has appeared in previous congressional sessions without significant momentum, the recent reintroduction is notable not just for its bipartisan nature but also for the growing concerns tied to the tax-exempt status of municipal bonds in broader tax reform discussions.
This bill’s significance has been emphasized by its chief sponsor, Kustoff, who affirmed that it would provide state and local governments a “critical financing tool to stimulate economic development, create jobs, and save taxpayer dollars.” By restoring advanced refunding, the legislation promises to reduce borrowing costs, enabling municipalities to reallocate funds toward vital community projects.
Before its elimination, advanced refunding accounted for about 20% of bond market activities. This percentage underscores its importance for local governments in managing and optimizing their debt portfolios. The reintroduction of this tool aligns seamlessly with the need for municipalities to efficiently allocate their limited financial resources, particularly in challenging economic times. By offering the option to refinance existing debts, municipalities can alleviate financial pressures and enhance their capacity to invest in public services and infrastructure.
With shrinking budgets and increasing demands for public services, the resurgence of advanced refunding is particularly advantageous. Lower borrowing costs translate into savings that can be redirected toward community enhancements, ranging from education and transportation to health and safety projects.
The bill has garnered widespread support from a range of municipal market groups, including the National Association of State Treasurers, Airports Council International – North America, Bond Dealers of America, and numerous others. These endorsements signal a strong recognition among various stakeholders of the bill’s potential to bolster financial practices in municipalities across the country.
The American Securities Association (ASA) articulated its strong approval of the legislation, asserting that advanced refunding fosters efficient investments in communities, ultimately saving taxpayers’ money and promoting economic growth. Such endorsements play a pivotal role in legitimizing the need for this legislative action, as they represent the voices of constituents who directly benefit from municipal bond financing.
In parallel, Representative Terri Sewell (D-Ala.) introduced the Local Infrastructure Financing Tools (LIFT) Act, reflecting a competing effort to enhance local financing options for infrastructure investments. Similar to the Investing in Our Communities Act, the LIFT Act aims to rejuvenate the financial mechanisms available to municipalities but has yet to achieve the same level of traction. The existence of these competing legislative efforts highlights the urgency among lawmakers to facilitate adequate funding options for local governments, especially as they continue to recover from the economic strain exacerbated by the COVID-19 pandemic.
As discussions around municipal bond reform unfold, the Investing in Our Communities Act stands out as a critical step toward restoring vital financial tools for local governments. Its bipartisan support not only emphasizes the necessity of advanced refunding but also underscores a collective consciousness about the financial health of local municipalities. As lawmakers continue to navigate the complexities of tax reform and other legislative priorities, the urgency to reinstate advanced refunding remains stark—highlighting that vibrant, robust communities depend on sound financial practices and accessible funding resources.
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