Update on Possible Legislative Alternatives to Repeal of Advance Refundings

The BDA is closely monitoring proposed tax policy initiatives to identify useful arguments that may be marshaled on behalf of alternatives to the repeal of advance refundings. Currently, there are 3 potential policy alternatives that BDA has been proactively assessing including:
  • Implementation of Revenue Ruling 2018-26 for advance refundings
  • Revision of the current 90-day limitation on current refundings
  • Condition the availability of advance refundings on the reinvestment of refunding bond proceeds into tax-exempt securities
Most recently, the BDA along with ACG has been reviewing the advance version of Revenue Ruling 2018-26, which the IRS issued on April 11th to determine if its rationale may be invoked to support alternatives to repeal.  A copy of the Ruling can be found here.
Revenue Ruling 2018-26 provides remedial actions that issuers of State and local tax-exempt bonds—and other tax-advantaged bonds—may apply to preserve the tax-advantaged status of the bonds when nonqualified uses of the bond proceeds occur.
Specifically, Revenue Ruling 2018-26 builds on existing remedial action that allows curing nonqualified uses through alternative qualified uses of proceeds.
Though Revenue Ruling 2018-26 relates to very different circumstances, BDA is nonetheless assessing whether there is a conceptual link to allowing advance refundings if the proceeds are used for alternative qualified—that is, other tax-exempt—purposes.

The BDA has also been examining possible legislative proposals that would, for example, revise the current 90-day limitation on current refundings to permit transactions up to 365 days prior to the retirement of the refunded bonds to be characterized as current refundings; doing so would afford issuers much greater flexibility in adjusting to the repeal of advance refundings.

Another option under consideration would be to condition the availability of advance refundings on the reinvestment of refunding bond proceeds into tax-exempt securities, which would address interest arbitrage issues while also mitigating any revenue loss from the transaction.
Next Steps
The BDA will be hosting a call in the coming weeks with the Municipal Bond Division to discuss the possible opportunities the ruling may provide and provide an update on legislative and regulatory develops that are relevant to advance refundings.