Posted by a board member
Federal Tax Reform Bill Eliminates Advance Refinancing of Bonds
I want to make you aware of one of the changes approved today in the federal tax reform bill that will impact bond issues. This change primarily impacts school districts and local governments and ultimately your pocketbook!
The federal tax reform bill eliminates the ability for advance refinancing of bonds, which is when an entity refinances bonds in advance of the call date or redemption date on the bond. Historically the IRS has allowed one advanced refinance prior to the call date so school districts or local governments could refinance the bond if there are circumstances that would allow them to capture savings or shorten the terms. This is no longer allowed.
Why Did Congress Include This In The Tax Bill?
One can only guess, but I believe it's an off setting revenue-loss feature. In other words, in order to "pay for" the tax cut this is a small way to have an off-setting impact and here's how it's done: Advanced refinancing increases the number of bonds in the bond market. Currently about half of the bond issues in the country are these type of advanced refinancing bonds and they are tax-exempt.. The buyers of these tax exempt bonds don't pay income tax on these bonds. If you take away this form of refinancing there will be less tax-exempt bonds in the marketplace. So now the bond market will be reduced and investors will now have more limited investment options and will be driven to buy different kinds of securities that now they'll be paying tax on, thus off-setting the revenue loss due to the tax cuts.
Where The Rubber Meets The Road (aka "Why Should I Care!?")
This week, the Olathe School District Board of Education approved the advance refinancing of two bonds. We captured great savings and reduced the term. This single action saved $2.3 million dollars while paying off the bonds five years faster than originally planned.
Here's the real news...the grand total we've saved due to advanced refinancing since 2014 is $25.5 million. Let me say that again, in the past three years due to our strategic planning and the use of advanced refinancing of our bonds the Olathe School District has saved our citizens $25.5 million dollars and shorted the length of indebtedness by five years. This is something to celebrate!
In addition to the large savings and shorter terms, an early and aggressive amortization plan has allowed us to create a plan that will pay off 90% of our total bond indebtedness in just 16 years. For our growing district, this is a very impressive strategy that will save our district mlutiple-millions and this also allows us to have greater flexibility in the future.
Where Do We Go From Here?
The good news for OSD is that we've done all we can do to capture savings now. However, this effects us in the future and limits our ability to save money by advance refinancing future bonds. We likely won't need additional bonds until 2022-ish (based on my unofficial projections) and at that time we will have to be more creative with issuing future bonds that would have unique call features that allow prepayment of bonds earlier than the call date. This handcuffs our flexibility and limits our ability to capture savings in favorable market situations.
I wanted to make you aware of this change and how it will impact us here locally moving forward. If you care to reach out to our federally elected folks and share your thoughts on this please do so.
Sent from my iPhone using Tapatalk