Urge Your House Member to Cosponsor HR 2229 - Municipal Bond Market Support Act of 2015
Urge Your Senate Member to Cosponsor S 3257 - Municipal Bond Market Support Act of 2016
In 2015 bipartisan legislation (HR 2229) was introduced that would increase the bank-qualified debt limit from $10 million to $30 million. Identical legislation was introduced in the Senate in July 2016 (S 3257). The GFOA needs your help with increasing support for this important legislation, and is urging members to send letters to their House and Senate members requesting that they cosponsor this bill. A draft letter has been developed for your use which is available here.
What are bank-qualified bonds?
Bank-qualified bonds were created in 1986 to encourage banks to invest in tax-exempt bonds from smaller, less-frequent municipal bond issuers, and to provide municipalities with access to the lower cost borrowing that they need in order to provide services and invest in schools, roads, bridges and other projects. Governments issuing $10 million or less in bonds per calendar year can designate those bonds as bank-qualified, which allows them to by-pass the traditional underwriting system and sell their tax-exempt bonds directly to local banks.
Selling bank-qualified bonds directly to banks decreases debt issuance costs for governments by an estimated 25 – 40 basis points (bps) for several reasons – (1) Smaller, less-frequent issuers do not have to pay higher yields to investors due to investor unfamiliarity with the issuer’s jurisdiction and (2) Bank-qualified debt issuers do not have to pay transaction costs associated with traditional bond sales. A 25 – 40 bps cost savings on a 15-year, $10 million bond at current interest rates ranges from $232,000 to $370,000. This is a substantial savings!
Why should you support increasing the cap on bank qualified bonds?
Since bank-qualified bonds were created in 1986, the program’s $10 million cap has not kept pace with inflation or the cost of labor, land and materials associated with most public infrastructure projects. Increasing the cap to $30 million not only brings the program into the modern age but also enables governments to increase the amount of bank-qualified bonds they can issue and realize corresponding cost savings. For example, a 25 – 40 bps cost savings on a 15-year, $30 million bond at current interest rates ranges from $696,000 to $1.1 million.