Allowing private companies and nonprofit groups to borrow billions of dollars in tax-exempt bonds can be advantageous to municipalities recovering from disaster. Tax-exempt bonds encourage development in a municipality because companies benefit from lower interest rates as the bondholder can exclude interest income from federal and state income taxes. In 2012, we posted about ways federal tax-exempt bonds can assist recovery efforts in the wake of a natural disaster.

The Bond Buyer recently reported that the Council of Development Finance Agencies (the “CDFA”) is calling on Congress to approve a new permanent category of bonds.  If approved, these federal tax-exempt bonds would offer immediate financial support in natural and man-made disaster recovery efforts of states and municipalities.  In the aftermath of the devastation caused by recent hurricanes, CDFA’s president & CEO Toby Rittner stated in a press release, “[w]ith storms like Harvey and Irma becoming a more regular occurrence, Congress should act to create a permanent category of tax-exempt bonds so that recovery efforts don’t stall following a disaster.”  Early estimates place the hurricanes’ damages at $150 to $200 billion.

In response to disasters—in some but not all instances—Congress has authorized temporary relief programs utilizing tax-exempt bonds.  After September 11, 2001, Congress authorized the Liberty Bonds, $8 billion in tax-exempt bonds used to rebuild affected areas of Manhattan.  New Orleans and surrounding areas received similar benefits under the Gulf Zone Opportunity Act of 2005, after Hurricane Katrina devastated the region.  There, Congress authorized $14.9 billion in tax-exempt private activity bonds and $7.9 billion in advance refunding bonds.  One of our posts also discussed the Hurricane Sandy and National Disaster Relief Act of 2012 proposed by Senators Schumer and Menendez.  Ultimately, Sandy relief did not include the Senators’ tax-exempt municipal bond proposals.  As many are aware, delays and partisan pressures stalled Sandy relief—decisions that have haunted some lawmakers in Harvey and Irma recovery efforts.

Low-cost financing to replace or repair damaged infrastructure after a devastating event is a vital vehicle to recovery.  As proposed, the permanent category of federal tax-exempt bonds would offer state and local governments additional power to issue private activity bonds.  Each year, $20 billion would be available for issuance for future relief.  Special issuing powers would be immediately available once a disaster is declared.  Additionally, state volume caps would not apply to these bonds.  The state volume cap is the aggregate annual amount of private activity tax-exempt bonds that can be issued within a state, subject to certain exceptions (i.e. qualified 501(c)(3) bonds and veterans’ mortgage bonds).  The current proposed private activity bond financing would support efforts to replace transportation infrastructure, repair utility facilities and transmission lines, and aid businesses with construction and equipment purchases.  The CDFA also believes governments in affected regions, who are often in dire financial positions, would leverage private investment in public needs through these private activity bonds.  Lastly, the CDFA wants the proposal to be addressed as part of tax reform, rather than with other special assistance Congress is contemplating.

Full details and a list of supporting private activity and municipal bond stakeholders are still being gathered by the CDFA.  It is too early to tell how much momentum this effort will have moving forward, but we will continue to monitor it.  As we noted back in 2012, it is our hope that political differences can be set aside to seamlessly provide the much needed assistance to communities in Texas, Florida, Puerto Rico, the U.S. Virgin Islands, and future areas impacted by disasters.