Congress Considers Axing Private Activity Bonds

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In contrast, the future of advanced refundings is perhaps more clear, as both Senate and House proposals would eliminate the mechanism that would allow a one-time refinancing at lower interest rates.

In 2016, advanced refundings accounted for $2.78 billion of activity in Washington state alone, and represented 22 percent of all market activity. Cities and towns, counties, and school districts comprised one-half of all advanced refundings during 2016.

Partnership with Auditor saves local governments money

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“We would like to thank the State Auditor’s Office for their energetic efforts to make this happen,” said Bond Users Clearinghouse Program Coordinator Buck Lucas. “They have been a fantastic partner in working through the technical issues that have stymied previous attempts to integrate our surveys.”

The Clearinghouse is drawing upon the data jurisdictions report to the Auditor by an annually required report called “Schedule 9 — Liabilities.” For school districts we use data reported to the Office of Superintendent of Public Instruction.

Data Analysis and Emerging Trends

Tax-Exempt Debt as Percent of Total Debt Chart

Analyzing 2016 Public Debt Data:

Local government issue volume and tax-exempt debt fall slightly for 2016

State and local governments in Washington reported $12.46 billion in assumed debt in the 2016 calendar year. Of this total, tax-exempt debt totaled more than $11.35 billion, or 91 percent (see above graph). Historically, 86 to 96 percent of total debt assumed by state and local governments qualified as tax exempt, which follows from heavy use of both general obligation (GO) and revenue bonds.

The average interest rate in 2016 for 195 new issues with a total tax-exempt par value of $5.1 billion was 1.65 percent. This figure includes 93 new issues with a zero percent interest rate. Excluding those issues, the average tax-exempt interest rate was 2.86 percent. In comparison, 45 new and taxable issues with a total par volume of nearly $800 million averaged a 1.72 percent interest rate. This figure includes 18 taxable issues with a zero percent interest rate. Excluding those issues, the average taxable interest rate was 2.96 percent.

Thinking more broadly about the use of tax-exempt financing by state and local governments begs the question, who relies on tax-exempt debt most? The graph below offers an analysis of high-volume jurisdictions and the percentage of total assumed debt in 2016 that qualifies as tax-exempt. The significant volume and high percentage of tax-exempt debt at the state level and for school districts represents the intent of the tax-exemption: to lower borrowing costs.

As for other governmental entities, in 2016 only 55 percent of total debt was tax-exempt for joint operating agencies (JOAs) such as the public utility collaborative Energy Northwest. In contrast, 92 to 93 percent of total debt was tax-exempt for cities and counties. The varying usage of tax-exempt financing reflects how JOAs use a somewhat different mix of debt instruments than cities and counties. JOAs’ tax-exempt debt relied exclusively on revenue bonds and bond anticipation notes (BANs), while cities, counties, and ports issued 60 percent of tax-exempt debt as GO bonds and 33 percent as revenue bonds.

Tax-Exempt Debt as Percent of Total Debt Chart

This activity has occurred despite continuing uncertainty over what the feds will do regarding tax reform, and any rulemaking or legislation designed to cap or limit on the muni exemption. Any changes would certainly influence the pool of willing investors and their market behavior toward municipal bonds. Research conducted by the National Association of Counties (2013) found that the repeal of the muni exemption might produce a 2-percent increase in interest rates.

This would likely result in an increase in the cost of borrowing, and while there are advanced statistical models that study the potential effects of modifications to the muni exemption, nothing is certain except that state and local governments are the primary builders of infrastructure and must borrow to advance their capital needs.

Local government debt spiked in 2015-16

From 2012 to 2016, the State of Washington held 40 percent of cumulative debt volume. Grouped below the state were school districts, cities and towns, PUDs, and counties. In 2016, the state assumed 36 percent of total debt and school districts assumed 20 percent, followed by PUDs, counties, and cities/towns. With the exception of housing authorities, each jurisdiction’s total volume declined from 2015.

Cumulative and total volume of government debt spike chart

Local governments have assumed more new debt and more total debt in recent years. In 2015, local issue volume approached $10 billion, more than doubling state issues. In 2016, local issue volume neared $8 billion and state issues neared $4.5 billion. Tracking market interest rates may demonstrate the value of the debt assumed at a point in time.

Data for some years represented in the above chart are sorted by the date when the Bond Users Clearinghouse received bond information. As a result, some volume totals may be slightly different from those listed in all other tables and charts included in this and previous reports, which sort data by the dated date of the bond issue. The prime rate refers to the prime bank interest rate established by the Federal Reserve. The Bond Buyer-20 Index refers specifically to municipal bond rates. Amounts are not adjusted for inflation.

Frequently asked questions about Bond 101 reporting

There are two new URLs, depending upon whether you are a current or new Bond 101 reporter. Note that if you’ve recently moved to a new job, you will need to register as a new reporter. Feel free to contact Clearinghouse staff if you have any questions.

Yes. State law (RCW 39.44) requires all bond issuers in the state — both state and local — to report bond and other debt issuances to the Department of Commerce within 20 days of closing on the bond. You will enter your information in a convenient online tool, which we call a Bond 101 report.

Most Bond 101s are completed by the bond counsel. At times the financial advisor or underwriter completes the report. More rarely, issuers submit their own reports.

The data that needs to be reported includes issuer name and contact information; user name (if different from issuer); official name and type of issuance; purpose of issuance; issuance par value and interest rate; costs of issuance; bond ratings; issuance team members (bond counsel, underwriter, rating agency, etc.)

The Clearinghouse publishes the Bond 101 data in monthly Excel spreadsheets and in the annual Public Debt Report (go here). The Clearinghouse can also customize a search of the data and send a spreadsheet of all data that meet whatever criteria you specify.

Clearinghouse Reports

Other information

Need help?

Buck Lucas, Program Coordinator
buck.lucas@commerce.wa.gov
Phone: 360-725-5040