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Stimulus Bill Should Support Tax-Exempt Bonds, Group Says

Posted on May 12, 2020

Measures supporting tax-exempt bonds should be included in any additional legislation Congress considers to promote economic recovery during the coronavirus pandemic, according to a municipal finance group.

Promoting exempt bonds “would provide meaningful assistance to states and localities and encourage new investment in infrastructure,” Mike Nicholas of the Bond Dealers of America (BDA) told congressional leaders in a May 7 letter.

Restoring advance refunding bonds, which make it possible to issue new bonds to replace old, high-interest debt before the old bonds are “callable,” would help state and local governments, Nicholas wrote.

“Market interest rates for state and local governments are near historic lows,” Nicholas said. “Now is the perfect time for governments to lock in low interest rates on their borrowing, potentially generating substantial savings.”

The BDA also urged lawmakers to permanently increase the $10 million bank qualified limit to $30 million, automatically index that amount for inflation annually, and apply the volume test at the level of the borrower rather than the issuer.

“Banks have been [a] stable funding source for all sectors of the municipal market during this unprecedented time,” Nicholas said. “By increasing the bank qualified limit, we would only encourage more of this valuable, local, and stable funding into the municipal market.”

Finally, the BDA asked Congress to reinstate direct pay bonds for state and local governments and to ensure the interest reimbursement payments are exempt from budget sequestration. Subjecting the payments to sequestration “goes against the promise the federal government made when the bonds were issued,” Nicholas said.

“Quarantine is beginning to wind down in many places,” the letter said. “Businesses are starting to reopen, and economic activity is beginning to resume. As you contemplate additional steps in response to the crisis, we urge you to focus hard on state and local fiscal conditions and provide meaningful assistance as we have described.”

This year groups including the National Association of Bond Lawyers and the American Council on Education have also asked Congress to restore advance refunding bonds, which were eliminated by the Tax Cuts and Jobs Act.

Infrastructure legislation introduced by House Ways and Means Committee Chair Richard E. Neal, D-Mass., and other House Democrats January 29 would restore advance refunding bonds.

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