Tax reform draft could change the status and availability of bonds
This is the time of year when bond proposals are voted on by residents so cities and towns can take on improvement projects. But new laws might be enacted in 2018 that could take some of the attraction away from bonds. Last week, a tax reform draft, called Tax Cuts and Jobs Act, H.R. 1, released by the House Ways and Means Committee, comes with provisions that, if enacted into law, would eliminate significant segments of the tax-exempt bond market. Bond reforms, under subtitle G of the draft, calls for the termination of private activity bonds, repeal of advance refunding bonds, repeal of tax credit bonds and no tax-exempt bonds for professional stadiums.
A few of the categories of private activity bonds (PABs) that could no longer be issued on a tax-exempt basis include airport and seaport facilities; certain mass transportation facilities even if governmentally-owned; charter schools, depending on their legal status in particular jurisdictions; state and local government debt components of public-private partnership (P3) arrangements where the governmental bond component would be private activity bonds; and private utilities or waste disposal facilities, as well as certain governmentally-owned facilities that significantly benefit one or a small number of private sector entities.
Eliminating the tax exemption for PABs could have a major impact on important infrastructure. This would apply to bonds purchased on or after Jan. 1, 2018. According to the United States Department of Transportation, the current law limits the total amount of such bonds to $15 billion and directs the secretary of transportation to allocate this amount among qualified facilities. As of Jan. 23, 2017, nearly $6.6 billion in PABs have been issued to date for the 17 projects listed here.
State and local governments issue refunding bonds for various purposes. One main reason is to achieve interest cost savings if market rates drop or if the issuer’s credit profile has improved since the initial issuance. Refinancing at lower rates can save taxpayer money over the life of a bond-financed capital project. Refunding bonds are characterized as either current refundings or advance refundings. A current refunding is one in which the outstanding, refunded bonds are redeemed within 90 days from the date the refunding bonds are issued. In an advance refunding, the refunded bonds remain outstanding for a period of more than 90 days from the date the refunding bonds are issued. Under federal tax law, governments may engage in a tax-exempt advance refunding only once over the life of the bonds. If the tax reform is approved, this would apply to bonds purchased on or after Jan. 1, 2018.
Repealing tax credit bonds (TCBs) means no tax credits would be allowed for any clean renewable energy bonds, qualified tax credit bonds or Build America Bonds issued on or after Jan. 1, 2018. Qualified tax credit bonds include qualified forestry conservation, energy conservation, zone academy and school construction bonds. TCBs provides a tax credit or direct payment to the issuer or investor that is proportional to the bond’s face value. TCBs represent an alternative to tax-exempt bonds, which exclude interest earnings from the investor’s federal taxable income. The majority of TCBs are designated for a specific purpose, location or project. Issuers use the proceeds for public school construction and renovation, clean renewable energy projects, refinancing of outstanding government debt in regions affected by natural disasters, conservation of forest land, investment in energy conservation and for economic development purposes.
Professional stadium bonds are defined as any bond issued to finance or refinance capital expenditures for a facility or related real property used for as few as five days per year as a stadium or arena for professional sports exhibitions, games or training. Municipalities often use tax-exempt bonds for stadium construction in order to entice sports teams to remain in a city.
A provision in the 429-page bill could jeopardize financing plans for the proposed $1.9 billion Las Vegas Raiders stadium project in Nevada. The bill also states that the provision applies to bonds issued after Nov. 2, 2017. The proposal involves the Oakland Raiders’ bid to build a 65,000-seat domed football stadium at Interstate 15 and Russell Road. The financing package includes a $750 million public contribution that would be financed through tax-exempt bonds. This could potentially affect the financial models being used in estimating the potential cost of the project. A 2016 report by the Brookings Institution found the federal government has lost about $3.2 billion in federal tax dollars on construction or renovation of professional sports stadiums since 2000.
In Massachusetts, the Cambridge Housing Authority plans to renovate 300 units of public housing in the city. Funding to renovate the 19-story Millers River apartment complex on Lambert Street would evaporate if private activity bonds were eliminated in the tax reform package. The housing authority has already completed construction on two developments and plans on repairing four more. The housing authority will get the bonds to renovate the Leonard J. Russell apartment complex in Porter Square by the end of the year, but might not secure funding for the Millers River complex in time. If the housing authority were able to secure the bonds, construction would be scheduled to start in December 2018.
The House Ways and Means Committee said last week that terminating these bonds and the tax breaks that go with them would increase federal revenues by $38.9 billion through 2027.