During our time as governors both of us worked hard to improve Pennsylvania’s infrastructure. Simply put, we had no choice. Our great state contains more miles of highway than New York and New Jersey combined and we come in second in the country when it comes to number of state-owned bridges. Beyond that, we saw infrastructure as perhaps the best creator of well-paying blue-collar jobs in construction and manufacturing. We also understood that to successfully govern, we would have to couple responsible fiscal management with innovative efforts, like advance refunds on municipal bonds, to generate additional resources.
Unfortunately, legislation in 2017 eliminated the ability of state and local leaders to use advance refunds to improve their community’s infrastructure. Now, we are asking Congress to step up and reenact one of the most reliable mechanisms for local infrastructure financing.
With the possibility of a federal infrastructure bill looking further and further away, there’s a very near-term opportunity for congressional leaders to reinstate advance refunds in the current tax bill being contemplated. Doing so would generate substantial savings that could immediately be invested back into a community.
In 2018, the municipal bond market totaled $3.8 trillion (as reported by the Municipal Securities Rulemaking Board). Municipal bonds provide a reliably safe form of investment for many Americans and the needed capital to invest in the infrastructure that supports our communities. While 75% of public infrastructure spending is funded through municipal bonds, access to capital to support local budgets is currently restrained by the cost of bonds issued in prior years when interest rates were higher than the current market.
That’s where advance refunding of municipal bonds comes in. Just as millions of families are lowering monthly mortgage payments by refinancing their loans at lower interest rates, communities across the nation could realize billions of dollars in additional funding capacity for our schools, transportation infrastructure, and workforce development simply by lowering the interest cost on existing debt and redeploying the savings for much-needed investments.
The recent change in the interest rate makes advance refunds on tax-exempt municipal bonds even more attractive. As municipal bonds typically follow U.S. Treasury bond rates, the 30-year interest rate recently fell close to 2%, leaving a vast untapped fiscal resource that could be utilized immediately to rebuild an infrastructure that is all too often crumbling around American families and make progress on the immense backlog of infrastructure renewal needs.
While more than $325 billion in tax-exempt municipal bonds were issued in 2018, it represents the lowest year of municipal issuance since 2014. The lack of financial flexibility for municipalities cannot persist without real consequences to essential existing priorities. Bottom line: The ability to advance refund tax-exempt municipal bonds saves taxpayer dollars and provides resources to replace aging infrastructure. Without it, increasing maintenance and repair costs will continue to intrude on the basic needs of all citizens, reduce worker productivity, and siphon resources that will make America less competitive in the global economy.
The timing, duration, and impact of the next economic downturn can never be forecast with certainty; however, structural budget pressures are already a reality for many state and local governments. It is critical we take concrete steps for building more resilient communities to stave off the effects of declining economic activity.
While the federal government remains in partisan gridlock, unable to advance meaningful infrastructure legislation, commonsense policies that empower local innovation should be unleashed. Congress should act this fall in forthcoming tax legislation to reinstate advance refunding of municipal bonds as an innovative step to give additional resources our communities so desperately need.