Make Muni Bonds Great Again

On Thursday City Council will vote to approve the city’s 2019 federal legislative agenda. It’s just a document explaining the federal policies that the city supports or opposes. On some of these issues the city may actively lobby. But on most, probably not.

Much of the 9-page document is boilerplate that expresses what the governments of just about any big, liberal city will support. More federal funding for local transportation. More federal funding for local law enforcement. More federal funding for local housing.

Similarly, like just about every other city, Austin strongly opposes any attempts to end the tax exemption on municipal bonds, which we use to fund infrastructure and other big capital projects. There had been a lot of talk about Republicans ending this exemption as part of their tax bill, but the bipartisan outcry from cities and towns of all sizes was enough to kibosh that idea. Here’s city staff explaining the fiscal Armageddon we would face without the exemption:

Screen Shot 2018-12-10 at 1.12.25 PMHowever, the tax bill did include a provision that essentially killed “advanced refunding,” which is basically when a city takes advantage of a drop in interest rates to refinance its bond debt, similar to a homeowner financing their mortgage. The tax bill would make interest on advanced refunding bonds taxable, thereby rendering them obsolete, since investors are only interested in buying muni bonds if they’re not taxed.

From what I’m seeing on investor sites, advanced refunding bonds accounted for about a fifth of the muni bond market. Their disappearance threatened to weaken the muni bond market in general, thereby driving up borrowing costs for cities. However, that threat was somewhat mitigated by the tax bill’s cap on state/local tax deductions. Apparently that increased demand for muni bonds among wealthy investors in high-tax states, like New York, California, Connecticut, New Jersey.

It’s not clear to me what Republicans gained from killing advance refunding except a little more revenue to (try to) make up for the deficits they were creating by cutting other taxes. Ideologically, it also makes sense that Republicans would support any effort that makes it harder for local governments to borrow and spend money. The problem is that most of that money is spent on roads, one of the few government programs that Republicans love.

There’s not much that can get done when Congress is split, but I wonder if party leaders could come to an agreement on making all muni bonds tax-exempt again. It’s the kind of low-profile issue that would fly under Sean Hannity’s, and therefore, Donald Trump’s radar. Indeed, there appears to be a bipartisan bill floating around already.

In the next two years, Austin voters will hopefully approve a major investment in a game-changing public transit project, such as light rail, bus rapid transit or something even cooler. I also hope that we’ll approve a major investment in pedestrian/bike infrastructure that increases the appeal of  biking/walking/scootering and further reduces vehicle trips. You know, stuff like this:

Library:Shoal Creek Trail

I think the political will is there. But it will require borrowing billions of dollars, and every additional dollar that we spend on interest represents a lost opportunity for further investment in the things that matter most.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s