In the previous sessions of Congress, bipartisan legislation was introduced to reinstate governments' availability to use advance refunding
. Advance refunding
bonds allow states and localities to refinance existing debt with the greatest flexibility, resulting in substantial reductions in borrowing costs.
Xing, "Advance Refundings
of Municipal Bonds," NBER Working Paper No.
There were four distinct types of Treasury financings at the beginning of the 1960s: bill financings, midquarter refundings, stand-alone offerings, and advance refundings
. All but the last were mechanisms for borrowing money to finance the federal deficit and to refinance maturing debt.
The data suggest that issuers of State and local bonds did indeed exercise call provisions, retiring outstanding high-interest bonds with the proceeds of new lower-interest bonds in so-called "current refundings" and "advance refundings
." Governmental bonds issued after 1986 are limited to one advance refunding
, with a transition rule that allowed bonds issued before the effective date of the Tax Reform Act of 1986 to be refunded twice (once if they had already had one or more advance refundings
Governments preparing to issue new municipal bonds may feel compelled to pursue issuance alternatives that provide early refinancing options in the absence of tax-exempt advance refunding
The regulations are aimed at putting a stop to what the IRS and Securities and Exchange Commission (SEC) term "yield burning." The two federal agencies believe this occurs when a city, as part of an advance refunding
, or refinancing tax-exempt debt before the first call date of the original tax-exempt bonds, invests the proceeds of the new municipal tax-exempt bonds in U.S.
One notable change in both proposals is a provision to eliminate advance refunding
. Under current law, governmental bonds and 501(c)(3) bonds are permitted one advance refunding
It was effective July 19, 1996 and defines the way cities must determine their liability to the Internal Revenue Service for failure to receive fair market value for securities in their advance refunding
Initially, the bond team planned to refund only the 2007A bonds and take level savings--a fairly vanilla approach--until they realized, early in the development of the preliminary official statement, that it made sense to include an advance refunding
of the 2011 bonds as well.
The first notable change in the proposal is a provision to eliminate advance refunding
(i.e., when issuers refinance outstanding bonds before the original bonds mature or are callable).