WASHINGTON -- Municipal industry officials disclosed new details yesterday about their proposal for the Treasury to adopt a rule easing restrictions on advance refundings.
Federal regulatory officials have said they are not sure they could or would want to write such a rule. But industry officials said yesterday the Treasury could write a rule if convinced that it would be a good policy move to relax the refunding limits to allow issuers to take advantage of historically low interest rates.
Congress gave the Treasury broad authority to "prescribe such
regulations as may be necessary or appropriate to carry out" the tax law's refunding provisions, the industry officials said.
Under the 1986 Tax Reform Act, governmental and 501(c)(3) bonds can only be advance refunded once if they were issued after Dec. 31, 1985, and twice if they were issued on or before that date.
The one-time and two-time limits apply to refundings of so-called "original bonds."
Industry officials said yesterday they are proposing that the Treasury adopt a rule defining "original bonds" for refunding purposes as the earliest outstanding set of tax-exempt bonds.
In other words, once tax-exempt bonds were redeemed, they could be ignored under the tax law's refunding limits. The bonds that refunded them, if still outstanding, would become the "original bonds."
The date of issuance for the earliest set of outstanding bonds would determine whether the bonds could be advance refunded again.
For example, bonds that were issued in 1985 and advance refunded in 1987 and 1990 could not be advance refunded again if the 1985 issue were redeemed as long as the 1987 and 1990 refunding issues remained outstanding.
Under the proposal, once the 1985 bonds were redeemed, the 1987 bonds would become the "original bonds." Because the 1987 bonds were issued after Dec. 31, 1985, they would be subject to the one-time refunding limit that already would have been met by the 1990 refunding issue.
However, once the 1987 issue was redeemed, the 1990 bonds would become the "original bonds" and could be advance refunded once.
For bonds issued and refunded more than once before Dec. 31, 1985, the proposal could result in three bond issues being outstanding at the same time for the same project for a period of time.
A good example of this, a supporter of the proposal said, would be bonds issued in 1983 and advance refunded in 1984 and 1986. Once the 1983 issue was redeemed, the 1984 bonds would become the "original bonds."
Since those bonds were issued before Dec. 31, 1985, the bonds could be advance refunded twice -- one more time after the 1986 refunding. But once the new refunding occurred, the 1984 and 1986 bonds and the new issue would all be outstanding for some period of time.
For bonds issued and then refunded several times before 1986, the proposal would not have any different effect initially than current tax laws. which contain a so-called "one-last-bite-of-the-apple" provision allowing a final refunding.
The difference is that under this tax law provision, the new refunding would be the last one, and under the industry proposal it could be succeeded by other refundings.
Industry officials stress, however, that under the proposal most pre-1986 bond issues would be redeemed and would, in effect, disappear so that all of the "original bonds" would have been issued after Dec. 31, 1985, and be subject to the one-time refunding limit.
The rulemaking proposal differs from a proposed tax law change that was floated earlier this year, the industry officials said.
Under that proposal, governmental and 501(c)(3) bonds could be advance refunded twice on a rolling basis as long as each refunding would result in a certain level of savings for issuers.
Federal regulatory officials have said they are concerned about the policy and revenue impacts of any proposal that would increase the number of advance refundings in the market. The tax law's limits were aimed at prohibiting bonds from being continuously refunded -- in some cases to provide fees for bond firms rather than real savings for issuers.
But Micah Green, executive vice president of the Public Securities Association and other industry offlcials said the refunding restrictions seem unfair in the current market when interest rates are historically low and show some signs of dropping further.
Industry officials said issuers are obligated to refund bonds once interest rates drop precipitously and that they should not be prevented from trying to save more money if rates plummet again.
Green said the proposal's revenue costs to the federal government should be weighed against the increased savings to state and local governments.
