Democrats’ Win Ends PAB Threat

The Bond Buyer - - Front Page - By Brian tu­multy

WASH­ING­TON – Democrats’ ma­jor­ity con­trol in the House of Rep­re­sen­ta­tives is ex­pected to staunch the mu­nic­i­pal bond mar­ket set­backs suf­fered un­der the Repub­li­can-writ­ten Tax Cuts and Jobs Act.

But with Repub­li­cans re­tain­ing a Se­nate ma­jor­ity, the two cham­bers of Congress could spend the next two years mostly in leg­isla­tive grid­lock. As of Wed­nes­day af­ter­noon, CNN was pro­ject­ing a 222-199 lead for Democrats in the House and a 51-46 edge for Se­nate Repub­li­cans with a few races left un­called in both cham­bers.

“Maybe it is the case that grid­lock would be our friend for the next cou­ple of years,” said Na­tional As­so­ci­a­tion of Bond Lawyers Pres­i­dent Dee Wisor. “We wouldn’t see any fur­ther at­tacks on tax ex­empt fi­nanc­ing.”

Wisor was con­cerned that a con­tin­ued Repub­li­can ma­jor­ity in the House could have made an­other at­tempt at ter­mi­nat­ing pri­vate ac­tiv­ity bonds as a pay for un­der their plans for a 10% mid­dle class tax cut in 2019.

“In that sce­nario, mu­nic­i­pal

bonds could cer­tainly be on the plate,” said Chuck Sa­muels of Mintz Levin, coun­sel to the Na­tional As­so­ci­a­tion of Health & Ed­u­ca­tional Fa­cil­i­ties Fi­nance Au­thor­i­ties.

House Ways and Means Com­mit­tee Chair­man Kevin Brady, R-Texas, pro­posed ter­mi­nat­ing PABs in the orig­i­nal House ver­sion of the 2017 tax leg­is­la­tion.

The fi­nal ver­sion of the 2017 tax bill pre­served PABs but re­tained two other pay-fors, the ter­mi­na­tion of ad­vance re­fund­ings and a $10,000 ceil­ing on the fed­eral de­duc­tion for state and lo­cal taxes.

Re­vers­ing those set­backs in the new Congress are among the muni in­dus­try pri­or­i­ties next year, along with an in­crease in the limit on bank qual­i­fied loans to $30 mil­lion from $10 mil­lion, and an end to se­ques­tra­tion cuts on the in­ter­est rate sub­si­dies for Build Amer­ica Bonds.

In the cur­rent Congress, a Se­nate bill to in­crease bank qual­i­fied loans to $30 mil­lion has only two spon­sors – Demo­cratic Sens. Robert Me­nen­dez of New Jersey and Ben Cardin of Mary­land -- while there is no House ver­sion.

The Pub­lic Fi­nance Net­work is com­pil­ing a mu­nic­i­pal bond primer to dis­trib­ute to new law­mak­ers of both par­ties as part of a lob­by­ing ef­fort that will high­light lo­cal projects in their dis­tricts that have been fi­nanced with tax-ex­empt bonds.

Emily Brock, direc­tor of the fed­eral li­ai­son of­fice of the Gov­ern­ment Fi­nance Of­fi­cers As­so­ci­a­tion, said the lob­by­ing also will high­light projects no longer el­i­gi­ble for ad­vance re­fund­ing and those fi­nanced with Build Amer­ica Bonds.

About $173 bil­lion in BABs were still out­stand­ing as of April 3, with $47 bil­lion of that callable, Brock said. The states with the most re­main­ing BABs are Texas ($5.9 bil­lion), Cal­i­for­nia ($5.8 bil­lion), Flor­ida (4 bil­lion) and New York ($3.3 bil­lion).

How­ever, the new Demo­cratic House ma­jor­ity pri­or­i­tized health care dur­ing the cam­paign sea­son and isn’t likely to switch gears to em­pha­size taxes as Repub­li­cans un­suc­cess­fully did, said Howard Gleck­man, a se­nior fel­low in the Ur­ban-Brook­ings Tax Pol­icy Cen­ter.

“I think it’s very un­likely we are go­ing to see much tax leg­is­la­tion over the next cou­ple of years,” Gleck­man said. “I think there are a cou­ple of places where they can fid­dle around the edges. There’s some pos­si­bil­ity that they could do a bi­par­ti­san tech­ni­cal cor­rec­tions bill.”

Gleck­man said a Repub­li­can Se­nate and Demo­cratic House most likely would limit the scope the bill of any tech­ni­cal cor­rec­tion bill, mak­ing any muni pro­vi­sions un­likely in his opin­ion.

Any leg­isla­tive gains for the muni mar­ket in 2019 are most likely to be part of an in­fra­struc­ture bill.

The tax treat­ment of bond fi­nanced in­fra­struc­ture will be a key part of any pack­age. Muni groups hope the leg­is­la­tion will ex­pand the use of tax-ex­empt pri­vate ac­tiv­ity bonds and will lobby for in­clu­sion of a pro­vi­sion to re­store ad­vance re­fund­ings.

Wisor said NABL is plan­ning to re­lease a pa­per in the first quar­ter of 2019 out­lin­ing op­tions for fi­nanc­ing ru­ral in­fra­struc­ture that may in­clude a rec­om­men­da­tion for in­creas­ing the limit on bank qual­i­fied loans to $30 mil­lion.

“It is cer­tainly those small ru­ral com­mu­ni­ties that could ben­e­fit from an ex­pan­sion of the BQ limit,” Wisor said.

The bank qual­i­fied loan limit was tem­po­rar­ily in­creased to $30 mil­lion un­der the 2009 Amer­i­can Re­cov­ery and Rein­vest­ment Act eco­nomic stim­u­lus bill.

Rep. Richard Neal, D-Mass., and the for­mer Sen. John Kerry, D-Mass., also in­cluded a pro­vi­sion in that 2009 leg­is­la­tion that ex­empted PABs from the Al­ter­na­tive Min­i­mum Tax for two years.

Neal is ex­pected to serve as the new chair­man of the tax pol­icy writ­ing House Ways and Means Com­mit­tee with Brady be­com­ing the Repub­li­can rank­ing mem­ber.

On the Se­nate side, the new Fi­nance Com­mit­tee chair­man is ex­pected to be Sen. Charles Grass­ley, R-Iowa, who will re­turn to a po­si­tion he held from 2003 to 2006 and for six months in 2001.

Grass­ley has a track record of bi­par­ti­san­ship on tax is­sues although he par­tic­i­pated in the Repub­li­can strat­egy in 2017 to block all Demo­cratic amend­ments to the Tax Cuts and Jobs Act.

His most re­cent po­si­tion as Ju­di­ciary Com­mit­tee chair­man was high­lighted by par­ti­san fights over ju­di­cial nom­i­na­tions.

The re­cent tax law changes gen­er­ally elim­i­nated the abil­ity to is­sue tax-ex­empt bonds to ad­vance re­fund out­stand­ing bonds.

So it’s un­cer­tain whether Grass­ley would take up muni-re­lated bills for con­sid­er­a­tion if they pass the Demo­cratic-con­trolled House.

Neal, a for­mer mayor of Spring­field, Mass., is thought of highly among muni bond lob­by­ists. “You’ll cer­tainly see se­ri­ous House con­sid­er­a­tions of mu­nic­i­pal bond re­forms,” Sa­muels said. “You would be hard pressed to find any­one who is more tu­tored and com­mit­ted to mu­nic­i­pal bonds.

Neal told The Bond Buyer in Septem­ber that if he be­comes chair­man of Ways and Means he will in­vite rep­re­sen­ta­tives of the Na­tional League of Cities, U.S. Con­fer­ence of May­ors and “the bond mar­ket peo­ple” to tes­tify on the im­pacts of the 2017 Repub­li­can tax leg­is­la­tion. ◽

“It’s very un­likely we are go­ing to see much tax leg­is­la­tion over the next cou­ple of years,” said Howard Gleck­man of the Ur­ban-Brook­ings Tax Pol­icy Cen­ter.

Pre­sump­tive new House Ways and Means Com­mit­tee Chair Ruchard Neal, D-Mass., is con­sid­ered knowl­edge­able of and sym­pa­thetic to muni is­sues.

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