Fearing more changes from Congress, fewer states and cities are turning to the municipal bond market.
While the most direct effects of the 2017 Tax Cuts and Jobs Act (TCJA) have been on tax revenues, the law is also influencing the way governments borrow money.
The 2017 federal tax reforms have left many stakeholders, including state and local governments, uncertain about longer-term effects. One such area is with municipal bonds, which were threatened to lose their tax-free treatment during early stages of the federal debate. While that proposal was successfully resisted, many fear that Congress may once again be gearing up to meddle with the bonds’ tax-exempt status.
Tax-exempt municipal bonds finance highways, bridges, transit systems, airports, water and wastewater systems, schools, higher education facilities, and many other essential infrastructure projects. Tax-exempt bonds bring affordable capital to these projects, saving an average of 25 to 30 percent on interest costs compared to taxable bonds. In an age of constrained federal and state budgets, the ability to save billions of dollars on infrastructure financing is critical for state and local governments and their taxpayers.
Concerns over the future of municipal bonds, coupled with limits on tax deductions and the elimination of the tax deduction on advanced refinancing bonds, has led to uncertainty in the markets.
According to Governing:
Governments have continued to be reluctant to increase their debt, a trend that started following the Great Recession. According to the latest report from Moody’s Investors Service, the total net tax supported debt issued by all 50 states in 2018 was essentially flat for the eighth straight year with just $523 billion issued. This puts average annual state debt growth since 2011 at just 0.6 percent.
Moody’s said in its analysis that lagging infrastructure investment has contributed to limited growth in state debt. “State governments are remaining cautious when it comes to bond issuance,” the report continued, “and are increasingly relying on operating revenue to meet their transportation infrastructure needs.”
And as the debate over the federal deficit heats up in Washington, some are concerned that Congress will do away with grant or matching grant programs altogether.
State and local governments use the money from these programs in two main ways. They can use grant money to directly pay back bonds they have issued. Matching funds, on the other hand, offer an incentive for states and localities because money raised by issuing bonds can be at least partially matched by the federal government.
Municipal bonds are commonly used to finance infrastructure projects. Combined with tax reform, [Ksenia]Koban [vice president and municipal strategist at the investment firm Payden & Rygel] says the uncertainty around the federal government’s commitment to infrastructure funding is also creating uncertainty in the municipal bond market. “It’s definitely changing the landscape,” she says. “We’re already seeing a lot more hybrid projects or public-private partnerships while local governments are stepping back from traditional types of projects.”
Read the full article for more information.
MACo’s Summer Conference session, “Perfect Storm for County Budgets? (Spoiler: Yes),” will focus on best practices for planning, budgeting, and forecasting, and discuss strategies for how counties can best prepare for future fiscal uncertainties. The session is scheduled for Friday, August 16, 2019, from 1:00 pm – 2:00 pm.
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