Update on tax reform and impact on California school bonds

February 27, 2018 ACSA Partner
 

With partner content from Stifel

The federal 2017 Tax Cut and Jobs Act will have an impact on municipal bonds issued by California school districts. The reductions in tax rates for individuals and businesses may reduce the appeal of the tax-exemption provided by municipal bonds.

Residents of high-tax states such as California, facing limits on the deductibility of state and local income, property and sales taxes and home mortgage interest payments, may exhibit more demand for school district bonds.

Several types of bonds commonly sold by California school districts, such as advance refunding bonds and tax credit bonds (QZABs, CREBs, QSCBs, and BABs) have been eliminated by the tax act.

Impact on K-12 school bond issuances

The tax reform bill, effective January 1st, 2018, impacts California school bonds as summarized below:

  • Tax credit bonds such as Qualified Zone Academy Bonds (“QZABs”) and Clean and Renewable Energy Bonds (“CREBs”) provide a low or zero interest rate financings for qualified projects
  • Elimination of advance refundings will reduce opportunities for lowering debt service and tax rates on outstanding bonds which create tax rate capacity for existing and new bond authorizations
  • Advance refundings represented a large portion of the total amount of bonds issued by California K-12 school districts in 2015 and 2016

The impact of tax reform on the municipal market and school bonds are summarized in this electronic handout.

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