Stakes rise for counties in municipal bond fight

Key Takeaways

At a cost of $300 billion over 10 years for Congress, the tax-exempt status of municipal bonds is a ripe target for budget hawks, the likes of whom are looking for cost savings right now during the budget reconciliation process.

But counties have a lot to lose, and a lot more to pay to finance infrastructure projects, if municipal bonds are taxed, underscoring the need for county officials to make their case to members of Congress.

“We have a target on us anytime the federal government needs to reach into the piggy bank,” said Emily Brock, director of the Government Finance Officers Association’s (GFOA) Federal Liaison Center. “We have just under about $4 trillion of municipal bonds outstanding — that’s a massive market underpinning our nation’s infrastructure,” accounting for roughly 75% of state and local infrastructure nationwide.

“It takes a lot of congressional will power to maintain the tax exemption,” she said.

Brock told NACo’s Finance, Pensions and Intergovernmental Affairs Steering Committee March 1 that if counties had to pay interest on municipal bonds, it would likely increase borrowing costs by 2%, greatly reducing how far that money can stretch.

“To maintain 75% of our nation's infrastructure, you will have to assume [that increase,] so you’re gonna have to make the decision of what 20% of that water system? What 20% of your county council building? What 20% are you gonna have to defer or not invest in it?” she said. 

The current budget reconciliation effort is part of a movement to extend the 2017 Tax Cuts and Jobs Act. That bill eliminated the tax-exempt status of advance refunding bonds, which allowed state and local governments to lower borrowing costs and take advantage of more favorable interest rates.

“Last time, we did not have a municipal advocate in the room and look what happened,” Brock said. “We need to make everyone an advocate of municipal bonds.”

Brian Egan, chief policy officer for the National Association of Bond Lawyers, pointed out that turnover in Congress since 2017 has wiped out institutional knowledge about the widespread use of municipal bonds, meaning counties likely have new audiences who are unfamiliar with how widespread municipal bond use is.

“What we can’t necessarily do as effectively as you all can do, is to share those anecdotes,” he said. “So go on the Hill and explain. ‘This nonprofit hospital in my community will get 200 new beds with this expansion, it would have only been 120 beds if we had to pay 2.1 percentage points more.” 

Brock concurred.

“Storyboarding and telling members what has been built by bonds in your community is absolutely priceless,” she said. “You want to point them to the schools, the universities, the toilets that flush, you want to tell them what has been built by bonds in their community, because I can tell you, there are a whole lot of 26-year-old legislative assistants that don’t quite understand what municipal bonds do, so you need to lay it out plain.” 

Egan laid out three additional points in favor of maintaining municipal bonds’ tax exemption:

• For every dollar that the federal government is foregoing, you all are getting about twice as much in savings. I can’t think of many other federal tax programs that have that kind of level of efficiency. 
• Tax exemption offers counties, parishes and boroughs the ability to create a very unique financial product. It allows you to create a unique financial product that investors want, and you all aren’t churning them out fast enough for the investor demand. 
• Municipal bonds have long been seen as a way for Americans to conservatively pay for their retirement, to get tax certainty later in life. Taking away this tool would create yet another disruption on the investor side. 

Brock warned against alternatives being pitched in lieu of tax-exempt municipal bonds, saying none would adequately replace them:

• National infrastructure bank: “I don't love the idea of a local infrastructure decision to be housed inside of the Beltway. How long will you be waiting for that bridge? How long will you be waiting for those potholes to be repaired?” 

• Public-private partnerships: “Can they provide the capital that is necessary to underpin $4 trillion of infrastructure assets?” 

• Opportunity Zones:  No developed capacity to underpin the current capital needs.  

“They are all tools that can be supplemental, but to supplant the municipal bond tax exemption? I don’t get it,” she said.