Congress and the president need to stand behind municipal bonds and enhance their ability to fuel the nation’s economic recovery.

While states and cities are assailed with exploding costs, they have the authority to issue municipal bonds. These critical financing tools helped build the country over the last century and can now lead to its resurgence, but they need the support of lawmakers.

In its new bill, the House is contemplating substantial aid to state and local governments. We applaud this effort and encourage other initiatives.

How to Fuel the Nation's Economic Recovery

Action needed to fuel the nation’s economic recovery

For example, advance refunding bonds, which were eliminated in the tax overhaul of late 2017, should be restored (“Washington Rethinking Its Position on Municipal Bonds”). They enabled issuers to replace older, higher-interest bonds – before they became callable – with new bonds.

With interest rates near historic lows, this is an ideal time for state and local governments to lock in low interest rates and generate substantial debt savings.

It didn’t make sense to eliminate advance refunding bonds in the first place, and they can serve an important purpose now.

Additionally, we would like to see the successful Build America Bonds program, or a similar initiative, reinstated.

The program was launched as part of the 2009 American Recovery and Reinvestment Act. It was designed to help jump-start the economy in the wake of the Great Recession and open the market to more investors.

Under the program, state and local governments could issue taxable bonds, as an alternative to tax-free bonds, while the federal government reimbursed them 35% of the interest expense.

In its two years, more than $180 billion in BABs were issued and they were extremely popular with both issuers and investors.

However, the interest reimbursement payments were subject to budget sequestration. As a result, state and local governments had to step in to offset the unforeseen costs.

We urge Congress and the president to reinstate a direct pay bond program for state and local governments, with interest reimbursement payments exempt from sequestration.

Increase access to the bond market

Further, we support updating 34-year-old rules that will enable more smaller bond issuers to better access capital markets.

In 1986, Congress recognized the access problem facing smaller public entities, like smaller governments, school districts and finance authorities. In response, lawmakers made it easier for public entities who sell less than $10 million bonds per year to place their bonds at commercial banks.

Problem is, $10 million in 1986 is worth less than half that in today’s dollars. In 2009, Congress temporarily raised the limit to $30 million and it achieved its goal of sparking new investment. Raising the limit today can serve the same purpose.

We encourage raising the $10 million qualified limit to $30 million. We would also like to see the limit automatically indexed for inflation each year and apply the volume test applied at the level of the borrower, not the issuer.

All three of these recommendations were spelled out by the Bond Dealers of America, in a recent letter to Congress. As muni specialists for more than 40 years, it’s no surprise we support them as well.

But it’s worth remembering that since their inception, municipal bonds have played a vital role in financing schools, hospitals, roads and a raft of other public works. Their impact has been felt in every corner of the country and pumped untold dollars through the economy.

Now, more than ever, we urge Congress and the president to let munis do their job: Rebuild our infrastructure, create jobs and fuel the nation’s economic recovery.

James A. Klotz is the President of FMSbonds, Inc. Email the Author05/18/2020