GFOA Unveils Bank-Qualified Debt Resource Center

Tuesday, February 2, 2016

This week, GFOA unveiled a new resource center to help local governments support HR 2229 – the Municipal Bond Market Support Act of 2015, legislation to increase the bank-qualified debt limit from $10 million to $30 million. 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 those municipalities issuing $10 million or less in a calendar year with access to the lower-cost borrowing.

Selling bank-qualified bonds directly to banks decreases debt issuance costs for governments by an estimated 25 to 40 basis points. This is because: 1) Smaller, less-frequent issuers do not have to pay higher yields to investors because they aren’t familiar with the issuer’s jurisdiction; and 2) Bank-qualified debt issuers do not have to pay transaction costs associated with traditional bond sales. A savings of 25 to 40 basis points on a 15-year, $10 million bond at current interest rates ranges from $232,000 to $370,000 – a substantial amount.

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, allowing them to realize corresponding cost savings. For example, a cost savings of 25 to 40 basis point on a 15-year, $30 million bond at current interest rates ranges from $696,000 to $1.1 million.

GFOA urges its members to write to their Congressional representatives today and ask that they cosponsor HR 2229. A draft letter is available here.