U.S. tax reform may limit bond refinancing, costing Florida billions


Florida taxpayers could lose billions of dollars in future savings under part of pending federal tax-reform legislation that would limit the ability of states and local governments to refinance bonds.

“This is down in the weeds, but it is extraordinarily important,” said Ben Watkins, director of the state Division of Bond Finance, after briefing aides to Gov. Rick Scott and Cabinet members on Wednesday.

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Sweeping tax bills have passed the U.S. House and Senate, and the final version will have to be worked out in negotiations between the two chambers. But Watkins said both bills contain a provision that would prohibit the “advance refunding” of tax-exempt bonds.

The ability to refinance bonds during a period of low interest rates allowed the state to save $2.5 billion in a 6½-year period that ended in December 2016, according to the Division of Bond Finance.

In the 2015-2016 fiscal year alone, the state executed 13 refundings, totaling about $3 billion in debt that resulted in $619 million in savings.

The ability to refinance bonds has been the prime reason Florida government has been able to reduce its overall debt — which peaked at more than $28 billion in 2010 — by more than $4 billion through June 2016.

But if the new tax law prohibits the refinancings, it means Florida will not be able to realize similar savings in the future, although the scope of the savings will depend on whether interest rates rise or not.

“It impairs our ability to reduce interest rates and save money for our citizens and taxpayers,” Watkins said in an interview.

Watkins said state and local government bond officials were given no early indication that federal lawmakers were looking at ending the practice as part of an overall effort to balance large cuts in corporate and personal income-tax rates in the new legislation.

“It’s like a drive-by shooting. It came from nowhere,” Watkins told the Cabinet aides. “It hadn’t been in any proposals, and it just came out of the blue.”

With the expectation that the prohibition will remain in the final tax legislation and take effect Dec. 31, Watkins said the state is moving forward with immediate plans to refinance about $400 million in school construction bonds and approximately another $100 million in debt related to Florida Turnpike projects.

“This is it. We’re done after this,” he told the Cabinet aides.

Watkins said he has alerted Florida’s congressional members to the issue, noting the inability to reduce debt costs will impact the state’s ability to build roads and other infrastructure projects.

“To the extent our debt costs more, that means we have less money to build schools, build roads, do water systems. It’s that way across the country,” Watkins said.

Watkins said tax-exempt bonds issued by state governments and other entities have long been a target for some federal officials who view them as “subsidies.”

“Since they can’t collect personal income taxes on the investment income for tax-exempt bonds, they view that as a federal subsidy,” Watkins said.

He said bond-refinancing supporters have argued that while the provision will benefit the federal government, it will cost state and local governments in lost savings.

“We’ve explained to them why from a policy standpoint that it doesn’t make any sense. But it makes no difference to them because they are fixated on the $1.4 trillion number,” Watkins said.

Watkins said the ban on advance refundings will produce an estimated $17 billion in federal revenue over the next decade, which is part of the overall plan to keep the tax-reform bill from increasing the federal deficit by no more than $1.4 trillion over that period.

Watkins said the provision will prevent advance refundings during the “no-call” period of the bonds, which typically is the first 10 years of a 30-year bond issue.

After that period, Florida and other governments will be able to refinance the tax-exempt bonds, although the limitation will make refinancing much less effective, Watkins said.

“(It is) a tremendous impediment to our ability to be able to be nimble and access the market to lower our interest rates when the market conditions are favorable,” Watkins said.



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