Summary
# H.R. 1837: Investing in Our Communities Act
## WHAT THIS BILL DOES
This bill amends the Internal Revenue Code to allow advance refunding bonds (bonds issued to pay off earlier bonds) under certain conditions. The bill removes a previous restriction that had banned this practice and sets new rules for when these bonds can be used. The bill applies to bonds issued after it becomes law (Sec. 2(c)).
## WHO IT AFFECTS
State and local governments that issue bonds. Entities that issue private activity bonds (bonds used for private business purposes other than qualified 501(c)(3) organizations). Bond investors and taxpayers who rely on the tax treatment of municipal bonds.
## KEY PROVISIONS
* Governments can issue advance refunding bonds for certain private activity bonds, which were previously prohibited (Sec. 2(a)(2))
* For other types of bonds, advance refunding is allowed only if the original bond issued after 1985 can be refunded just once, or if the original bond issued before 1986 can be refunded up to two times (Sec. 2(a)(3)(A)(i))
* Bond issuers must redeem the old bond by the earliest date it can be redeemed without penalty, except that redemptions cannot be required before 90 days after the new refunding bond is issued (Sec. 2(a)(3)(A)(ii), (iii), and (B)(ii))
* Advance refunding is prohibited if it is designed to create unfair financial advantages based on arbitrage (the practice of exploiting price differences) rather than legitimate interest rate savings (Sec. 2(a)(4))
* The period during which bond proceeds must be invested in temporary holdings ends within 30 days for new bond proceeds and immediately for old bond proceeds (Sec. 2(a)(3)(A)(iv))
## WHAT CHANGES
If this bill becomes law, state and local governments regain the ability to issue advance refunding bonds to refinance earlier bonds under specific conditions. Previously, federal law banned advance refunding bonds entirely. Under this new law, governments can use this tool to manage debt, but only if they follow strict rules about timing, how many times they can refund the same bond, and what financial advantages they can gain. The law prevents governments from using advance refunding bonds in ways designed purely to exploit interest rate differences rather than achieve real savings.
## IMPORTANT DEFINITIONS
* **Advance refunding bond**: A bond issued to pay off and retire an earlier bond before that earlier bond is scheduled to mature (Sec. 2(a))
* **Private activity bond**: A bond issued for private business purposes (Sec. 2(a)(2))
* **Arbitrage**: The practice of taking advantage of price or interest rate differences to make a profit (Sec. 2(a)(4))
* **Purpose investments and nonpurpose investments**: Investments in bond proceeds where purpose investments are used for the intended project and nonpurpose investments are temporary holdings of money (Sec. 2(a)(3)(A)(v))
## EFFECTIVE DATE
The amendments apply to advance refunding bonds issued after the date this Act becomes law (Sec. 2(c)).
I
118TH CONGRESS
1ST SESSION H. R. 1837
To amend the Internal Revenue Code of 1986 to reinstate advance refunding
bonds.
IN THE HOUSE OF REPRESENTATIVES
MARCH 28, 2023
Mr. KUSTOFF
(for himself, Mr. RUPPERSBERGER, Mr. BARR, Mr.
FITZPATRICK, Mr. GARBARINO, Mr. KILDEE, Mr. KILMER, and Ms.
MOORE of Wisconsin) introduced the following bill; which was referred to
the Committee on Ways and Means
A BILL
To amend the Internal Revenue Code of 1986 to reinstate
advance refunding bonds.
Be it enacted by the Senate and House of Representa-
1
tives of the United States of America in Congress assembled,
2
SECTION 1. SHORT TITLE.
3
This Act may be cited as the ‘‘Investing in Our Com-
4
munities Act’’.
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SEC. 2. TREATMENT OF ADVANCE REFUNDING BONDS.
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(a) IN GENERAL.—Section 149(d) of the Internal
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Revenue Code of 1986 is amended—
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(1) in paragraph (1), by striking ‘‘to advance
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refund another bond’’ and inserting ‘‘as part of an
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issue described in paragraph (2), (3), or (4)’’;
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(2) by redesignating paragraphs (2) and (3) as
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paragraphs (6) and (7), respectively; and
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(3) by inserting after paragraph (1) the fol-
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lowing new paragraphs:
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‘‘(2) CERTAIN PRIVATE ACTIVITY BONDS.—An
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issue is described in this paragraph if any bond
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(issued as part of such issue) is issued to advance
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refund a private activity bond (other than a qualified
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501(c)(3) bond).
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‘‘(3) OTHER BONDS.—
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‘‘(A) IN GENERAL.—An issue is described
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in this paragraph if any bond (issued as part of
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such issue), hereinafter in this paragraph re-
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ferred to as the ‘refunding bond’, is issued to
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advance refund a bond unless—
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‘‘(i) the refunding bond is only—
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‘‘(I) the 1st advance refunding of
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the original bond if the original bond
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is issued after 1985, or
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‘‘(II) the 1st or 2nd advance re-
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funding of the original bond if the
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original bond was issued before 1986,
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•HR 1837 IH
‘‘(ii) in the case of refunded bonds
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issued before 1986, the refunded bond is
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redeemed not later than the earliest date
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on which such bond may be redeemed at
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par or at a premium of 3 percent or less,
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‘‘(iii) in the case of refunded bonds
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issued after 1985, the refunded bond is re-
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deemed not later than the earliest date on
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which such bond may be redeemed,
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‘‘(iv) the initial temporary period
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under section 148(c) ends—
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‘‘(I) with respect to the proceeds
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of the refunding bond not later than
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30 days after the date of issue of such
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bond, and
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‘‘(II) with respect to the proceeds
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of the refunded bond on the date of
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issue of the refunding bond, and
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‘‘(v) in the case of refunded bonds to
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which section 148(e) did not apply, on and
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after the date of issue of the refunding
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bond, the amount of proceeds of the re-
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funded bond invested in higher yielding in-
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vestments (as defined in section 148(b))
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which are nonpurpose investments (as de-
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fined in section 148(f)(6)(A)) does not ex-
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ceed—
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‘‘(I) the amount so invested as
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part of a reasonably required reserve
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or replacement fund or during an al-
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lowable temporary period, and
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‘‘(II) the amount which is equal
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to the lesser of 5 percent of the pro-
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ceeds of the issue of which the re-
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funded bond is a part or $100,000 (to
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the extent such amount is allocable to
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the refunded bond).
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‘‘(B)
SPECIAL
RULES
FOR
REDEMP-
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TIONS.—
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‘‘(i) ISSUER MUST REDEEM ONLY IF
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DEBT SERVICE SAVINGS.—Clauses (ii) and
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(iii) of subparagraph (A) shall apply only
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if the issuer may realize present value debt
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service savings (determined without regard
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to administrative expenses) in connection
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with the issue of which the refunding bond
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is a part.
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‘‘(ii) REDEMPTIONS
NOT
REQUIRED
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BEFORE
90TH
DAY.—For purposes of
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clauses (ii) and (iii) of subparagraph (A),
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the earliest date referred to in such clauses
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shall not be earlier than the 90th day after
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the date of issuance of the refunding bond.
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‘‘(4) ABUSIVE
TRANSACTIONS
PROHIBITED.—
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An issue is described in this paragraph if any bond
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(issued as part of such issue) is issued to advance
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refund another bond and a device is employed in
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connection with the issuance of such issue to obtain
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a material financial advantage (based on arbitrage)
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apart from savings attributable to lower interest
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rates.
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‘‘(5) SPECIAL RULES FOR PURPOSES OF PARA-
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GRAPH (3).—For purposes of paragraph (3), bonds
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issued before the date of the enactment of this sub-
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section shall be taken into account under subpara-
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graph (A)(i) thereof except—
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‘‘(A) a refunding which occurred before
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1986 shall be treated as an advance refunding
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only if the refunding bond was issued more
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than 180 days before the redemption of the re-
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funded bond, and
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‘‘(B) a bond issued before 1986, shall be
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treated as advance refunded no more than once
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before March 15, 1986.’’.
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(b)
CONFORMING
AMENDMENT.—Section
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148(f)(4)(C) of such Code is amended by redesignating
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clauses (xiv) through (xvi) as clauses (xv) through (xvii)
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and by inserting after clause (xiii) the following new
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clause:
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‘‘(xiv) DETERMINATION
OF
INITIAL
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TEMPORARY
PERIOD.—For purposes of
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this subparagraph, the end of the initial
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temporary period shall be determined with-
9
out regard to section 149(d)(3)(A)(iv).’’.
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(c) EFFECTIVE DATE.—The amendments made by
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this section shall apply to advance refunding bonds issued
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after the date of the enactment of this Act.
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Æ
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