Open Market Escrow Bidding – Some Thoughts from Bidding Experts (Not Us – The Real Experts)

Update:  Treasury has announced that the sale of SLGS is being suspended at 12:00 p.m. ET on Friday, December 8, 2017.  SLGS subscriptions filed before 12:00 p.m. ET on December 8, 2017 will be honored.

As we reported on November 22 in this blog (SLGS Will Soon be Unavailable for Subscription), beginning on or before December 8, we should expect the reinstatement of the federal debt ceiling to force the SLGS window to close.  The current suspension of the debt ceiling expires on December 8, and there is no expectation that the suspension will be extended or that the debt ceiling will be raised by that date.  This unfortunately occurs just as the glut of tax-exempt advance refundings is hitting the market so that those issues can close before the possible (likely?) year-end deadline before such advance refundings are outlawed by the pending House and Senate tax bills (a discussion of the Senate bill is available here and here and a discussion of the House bill is available here).  This points to open market escrow securities soon being the only game in town, raising questions as to the availability of bids and open market securities for all the escrows soon to require funding.  I recently had the nerve in this exceptionally busy time to ask two of the most experienced bidding agent representatives I know for a few moments of their time to share their perspectives on the market for these escrow securities.  Both were very generous with their time and thoughts, which I report below.

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While You Were Sleeping . . . . The Senate Passed Its Version of the Tax Cuts and Jobs Act

At about 2:00 a.m. EST on Saturday, December 2, 2017, the only people awake in Washington, D.C. were alcoholics, the unemployable, and angry loners.  Also awake were members of the United States Senate (but I repeat myself).  At that early hour, the Senate passed its version of the Tax Cuts and Jobs Act (the “Act”) by a vote of 51 – 49.  Bob Corker of Tennessee was the only one of the 52 Senate Republicans to vote against the Act; none of the 48 Senate Democrats voted for it.

The House of Representatives passed its version of the Act on November 16.  The differences between the versions of the Act as passed by the House and Senate will now be reconciled either by a conference committee comprised of members of the House and Senate or some other form of negotiation between the two chambers of Congress.  Once a final version of the Act has been negotiated, the House and the Senate will vote on this version, assuming it is not identical to either the House or Senate version.  For analysis and speculation regarding the Act’s effect on tax-exempt bonds, hit the jump.

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Advance Refundings, Paygo, and BABs

For those of you who were enjoying Thanksgiving last week and missed the Senate Finance Committee’s release of its proposed legislative text of the Tax Cuts and Jobs Act, see below for how succinctly tax-exempt advance refunding bonds can be removed from the Code:

Yes, I’m cheating a little; there are a few more lines devoted to conforming amendments and effective dates. But that’s it, out of 515 pages.

So let’s say you read all 515 pages and were wondering, is there anything else I’m missing? The answer is yes, maybe. As we have previously covered, there is currently a 6.6% haircut on the subsidy paid by the federal government to the issuers of direct-payment credit bonds, such as Build America Bonds (“BABs”). See here and here. As has been reported in the press, the tax reform legislation might result in further sequestrations under the legislation commonly known as “Pay as You Go” or PAYGO. See WaPo coverage here. Bill Daly, director of governmental affairs at the National Association of Bond Lawyers, has noted in a Bond Buyer article (here) that with PAYGO, “it looks like the BAB program could be zeroed out.” Or will it? Senate Finance Committee chairman Orrin Hatch has claimed that “There hasn’t been a single sequester ordered under the PAYGO statute.” See here.

Will the haircut remain at 6.6%? Will it go to 100%? Stay tuned.

SLGS Will Soon be Unavailable for Subscription


Are we having fun yet?

To add further stress to the advance refunding issues that everyone is scrambling to close by the end of the year, subscriptions for SLGS  will not be available on or after December 8, if not earlier.

The most recent suspension of the application of the federal debt ceiling expires on December 8, and Congressional leaders have said that Congress will not vote this December either to extend the suspension of the application of the debt ceiling or to increase the ceiling.  Instead, Congress will rely on the Treasury’s use of “extraordinary measures” to defer having to deal with the debt ceiling.

One of these extraordinary measures is the suspension of the sale of SLGS.  In all past instances when Treasury has suspended the sale of SLGS, Treasury has honored subscriptions for SLGS that were made before the suspension took effect, even if the delivery date of the SLGS fell after the suspension date.  We anticipate that the Treasury will continue its historic practice here, but we will not know for certain until Treasury announces the closure of the SLGS window.  Issuers should be prepared to bid for open market securities if a SLGS subscription cannot be made before December 8.

Because there are going to be a crush of advance refunding issues coming to market ahead of the potential December 31, 2017 repeal of tax-exempt advance refundings, issuers should also anticipate some difficulty in attracting at least three bids and/or favorable prices, given the likely volume of advance refunding issues that will be chasing a relatively limited number of providers of open market securities.



The Senate Gives the House the Byrd and Retains Tax-Exempt Qualified Private Activity Bonds, Tax Credit Bonds, and Tax-Exempt Stadium Financing Bonds. Tax-Exempt Advance Refunding Bonds, However? Not so Much.

We summarized last week the tax-exempt and tax-advantaged bond provisions of the Tax Cuts and Jobs Act (the “Act”), as introduced and referred to the House Ways and Means Committee.  As a reminder,  these provisions, which came as a shock to state and local governments, 501(c)(3) organizations, and others involved with public finance, would eliminate the ability of state and local governmental units to issue: (1) tax-exempt qualified private activity bonds (including qualified 501(c)(3) bonds); (2) tax-exempt advance refunding bonds; (3) tax-exempt professional sports stadium bonds; and (4) tax credit bonds (regardless of whether the bondholder receives a tax credit or the issuer receives a direct payment subsidy in respect of the tax credit bond).

The foregoing provisions were included in the version of the Act that was approved today by the House Ways and Means Committee.  With one notable exception – the prohibition on tax-exempt advance refundings —  these provisions, and indeed any tax-exempt bond provisions, are absent from the Senate Finance Committee Chairman’s Mark of the Act, which was also released today.  More analysis and speculation after the jump.

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So it Begins: First Draft Tax Reform Bill Eliminates 501(c)(3) Bonds and All Other Private Activity Bonds, All Advance Refunding Bonds, All Tax Credit Bonds, and Governmental Bonds for Sports Venues

Notwithstanding repeated assurances from all corners that tax reform wouldn’t touch the exclusion from gross income of interest on tax-exempt bonds (here, here, and here), proposed legislation would touch it indeed, and quite profoundly. The opening statement in what is sure to be a long legislative discussion on tax reform came this morning, as the House Ways & Means Committee released the first draft of a tax reform bill, which was introduced as the Tax Cuts and Jobs Act. The high[sic]-lights, if the bill were enacted into law:

  1. No private activity bond issued after 2017 could be issued as a tax-exempt bond. This includes bonds issued for the benefit of 501(c)(3) organizations.
  2. No tax-exempt bond issued after 2017 could be issued to “advance refund” another bond.
  3. No tax credit bonds (regular tax credit bonds or direct pay) could be issued after 2017.
  4. No governmental bond issued after November 2, 2017 (!) could be used to finance a “professional sports stadium.”

Let’s take them in order, after the jump.

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Finally: Withdrawal of the Political Subdivision Regulations Is Announced (updated)

(Updated on 10/20 – It’s official: Treasury officially withdraws proposed political subdivision regulations.)

The eagerly awaited verdict on the proposed political subdivision regulations (Proposed Political Subdivision Regulations) (“Proposed Regulations”) is finally in and their withdrawal has been announced.  These regulations have been a frequent subject of our posts (here,  here, here, here, here, and here) Treasury issued its interim Report on June 22, 2017 (here) under Executive Order 13789 (here) identifying eight regulations for review, including the Proposed Regulations.  (Discussed in previous blogs by Michael Cullers and Johnny Hutchinson here and here.) Now Treasury has issued its “Second Report to the President on Identifying and Reducing Tax Regulatory Burdens,” (“Second Report”) dated October 2, 2017, announcing its recommendations on those eight regulations as well as potentially far-reaching plans for further review of burdensome regulations.  Of the eight regulations reviewed, Treasury recommended full withdrawal of only two, one being the Proposed Regulations (the other being an anti-taxpayer regulation addressing transfers of family businesses, which could be an especially sympathetic area under the Trump administration).  In recommending withdrawal of the Proposed Regulations, Treasury noted that “some enhanced standards for qualifying as a political subdivision may be appropriate” but that “regulations having as far-reaching an impact on existing legal structures as the proposed regulations are not justified.”  So what might we expect in the future?

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When Gratuitous Honesty May be the Best Policy?

A few years ago, I wrote two blog posts (#1 and #2) regarding the likely penalties that a hospital qualifying for Section 501(c)(3) status (a “501(c)(3) hospital”) would incur if it failed to comply with the Patient Protection and Affordable Care Act (“ACA”) provisions set forth in Section 501(r) of the Internal Revenue Code of 1986, as amended.  In sum, there are three levels of penalties for three levels of violations.  Minor violations of the ACA made inadvertently or due to reasonable cause may be corrected by the 501(c)(3) hospital without any need to disclose them.  Mid-level violations of the ACA require corrective action, restitution, and a public disclosure of the violation by the 501(c)(3) hospital.  Willful or egregious violations may result in revocation of a 501(c)(3) hospital’s status as such. Continue Reading

“TEFRA is a Four-Letter Word”

The title of this post is taken from an observation that a client once made when the strictures of the notice, hearing, and approval requirements set forth in Internal Revenue Code Section 147(f), which with limited exceptions apply to all issues of tax-exempt private activity bonds, worked to prevent a hoped-for use of proceeds of a qualified private activity bond issue.  These notice, hearing, and approval requirements were originally enacted as part of the Tax Equity and Fiscal Responsibility Tax Act of 1982, so the acronym “TEFRA” is commonly used in connection with these requirements.  According to urban legend, the coarsest of the four-letter words is also an acronym, the components of which the esteemed etymologists Van Halen detailed in the title to the band’s triple platinum 1991 album.[1]                

If the application of the bureaucratic acronym has ever exasperated you to the point that you’ve uttered the vulgar one, take heart – relief is at hand.  On September 28, 2017, the Treasury Department issued proposed regulations (“Proposed Regulations”) that make the TEFRA rules much more manageable and that can be used before the Proposed Regulations become final.  For a summary of the Proposed Regulations, hit the jump below (or, in keeping with the Van Halen references, go ahead and jump).

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The future for the municipal bond tax exemption is bright following the release of the unified framework for tax reform.

Efforts to overhaul the Internal Revenue Code have been spearheaded thus far by a group of Republicans referred to as the “Big Six.”[1]  Earlier today, the Big Six released a “unified framework to achieve pro-American, fiscally-responsible tax reform” (the “Framework”).  The Framework proposes many changes to the U.S. tax system, but does not propose any changes to the municipal bond tax exemption itself.

Here is a link to the Framework, a 9-page document that provides an overview of the various measures that may be included in tax reform.  The Framework was preceded by the blueprint for tax reform released by House Republicans on June 24, 2016 (discussed in a previous blog post).   This post addresses a few of the highlights from the Framework.

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