POTENTIAL IMPACTS OF TAX REFORM ON OUTSTANDING AND FUTURE MUNICIPAL DEBT ISSUANCE.
Passage of the tax reform bill in December 2017 eliminated state and local governments' ability to use tax-exempt bonds to advance refund outstanding bonds.
Federal tax laws previously provided issuers with an opportunity to advance refund bonds on a tax-exempt basis. Since 1985, issuers had been permitted a single advance refunding before the call date of the bond. Market solutions seeking to provide similar outcomes to that of previous tax-exempt advance refundings are emerging, as are changes to new bond issuances.
GFOA best practices recommend using the skills and expertise of bond counsel and municipal advisors in making financing or refunding decisions. GFOA also cautions many entities against entering into swap or derivative agreements.
Market participants will likely recommend previously utilized tools or develop new tools or mechanisms to simulate the beneficial impacts of tax-exempt advance refundings. Issuers should be particularly mindful of the unique risks and uncertainties associated with these options and discuss these options with their municipal advisors and legal counsel.
Issuers should also be aware that outstanding bank loans or direct placements could be affected by tax law changes that reduced corporate tax rates. "Gross up" provisions included in many bank loan agreements may result in increased interest costs effective immediately, and issuers should discuss possible solutions with their debt management team.
Governments preparing to issue new municipal bonds may feel compelled to pursue issuance alternatives that provide early refinancing options in the absence of tax-exempt advance refunding provisions. Issuers should be certain that specific benefits, risks, and costs of any financial tool are fully understood and are consistent with the entity's debt policies.
We continue to watch for potential unintended consequences resulting from the 2017 comprehensive tax reform package to state and local government finance and will report back as frequently as events occur.
Emily S. Brock
Director, GFOA Federal Liaison Center
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|Author:||Brock, Emily S.|
|Publication:||Government Finance Review|
|Date:||Feb 1, 2018|
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