Tax-Exempt Advance Refundings Included in Proposed Build Back Better Act
September 16, 2021
On Friday, September 10, 2021, the House Ways and Means Committee released the text of a bill – known as the “Build Back Better Act” – that would restore the ability of state and local governments to issue tax-exempt “advance refunding” bonds, i.e., bonds issued more than 90 days before the redemption date of the bonds to be refunded.
As background, the ability to issue tax-exempt advance refunding bonds, which already had been heavily restricted by prior tax legislation, was eliminated by the 2017 Tax Cuts and Jobs Act. As a result, state and local governments have fewer options available to them when it comes to refinancing of existing debt. Many issuers have turned to issuing taxable advance refunding bonds, with varying levels of success due to the continued compression of interest rates. Other options, such as forward-starting bonds (bonds purchased at a specified date, but with a delayed issuance date to ensure tax-exempt status), and “Cinderella” bonds (taxable bonds that later automatically convert to tax-exempt), have also been explored.