Draft Tax Reform Bill Touches Municipal Bond Market and Kentucky Cities Including Refinancing Options

Draft Tax Reform Bill Touches Municipal Bond Market and Kentucky Cities Including Refinancing Options

While the proposed tax reform bill preserves the tax exemption of municipal bonds, the municipal bond market could be impacted in a major way. Tax-exempt municipal bonds are the primary method that Kentucky cities use to access capital markets for project finance.  The U. S. House version of the legislation prohibits the issuance of tax-exempt private activity bonds after 2017 (not included in the Senate's version).  Private activity bonds include bonds issued on behalf of 501(c)(3)'s including healthcare institutions and housing bonds, an estimated 20 percent of the market according to The Bond Buyer.   Private activity bonds issued before 2018 would be grandfathered and maintain their tax exemption. 

Also included in the legislation in both the Senate and House versions of the bill is the prohibition of the issuance of advance refunding bonds.  Advance refunding bonds are issued to refinance bonds in advance of the call date and are used to save issuers money by locking in lower interest rates.  Advance refunding bonds are a significant part of the Kentucky municipal market and are widely used by cities across the state. Current refunding bonds would still be allowed under both versions of the bill. Other items in the legislation include no tax credit bonds and no governmental bonds for professional sports stadiums, neither of which are widely used in the Kentucky market.

If all of these provisions are enacted, the impact would be significant to the supply and volume in the market. We are already seeing a rush to issue both private activity bonds and advance refunding bonds before year- end.   If you have bonds that you would like for KLC Financial Services and Ross, Sinclaire & Associates, LLC (RSA) to evaluate for refinancing, please contact Robin Cooper at 800.876.4552 (KLC) or Joe Lakofka at 800.255.0795 (RSA).