States have used advance refunding bonds to refinance debt. Their tax-exempt status was nixed as part of last year’s tax rewrite.
State treasurers are pushing Congress to reinstate a municipal bond tax exemption that was scotched as part of last year’s tax overhaul.
The federal income tax exemption applied to interest earned on what are known as “advance refunding” bonds. These bonds are a refinancing tool that state and local governments have commonly used in the past to lower borrowing costs and restructure debt.
In a letter sent Wednesday to leaders in the Senate and House, the National Association of State Treasurers said reviving the exemption would help to achieve the goals outlined in an infrastructure investment plan that President Trump is pushing for.
“Advance refunding bonds save money for taxpayers and free up money for additional infrastructure projects, by allowing state and local issuers to refinance bonds at a lower interest rate,” they wrote.
“As experts on infrastructure financing, we believe that reinstating the tax-exempt status of these bonds will be critical for state and local governments to properly execute any infrastructure proposal.”
State and local governments finance over 75 percent of all U.S. infrastructure projects, and last year more than $100 billion in advance refunding bonds were issued, according to the letter…
WASHINGTON, D.C. – The National Association of State Treasurers (NAST) called on Members of Congress to expand the use of tax-exempt debt to meet future financing thresholds in response to President Donald Trump’s $1.5 trillion infrastructure proposal.
NAST President and Vermont State Treasurer Beth Pearce said, “State and local governments finance more than 75 percent of all U.S. infrastructure projects, and while we are pleased to see that the proposal recognizes the importance of partnering with state and local governments, policymakers must ensure we have access to the funding mechanisms needed to execute this robust plan. As the House and Senate develop legislation, we urge lawmakers to expand the use of tax-exempt debt to ensure state and local governments can maximize their ability to support critically needed infrastructure enhancement.”
Developed during NAST’s 2018 Legislative Conference yesterday in Washington D.C., state treasurers outlined the following three principles to guide federal policymakers as they consider the administration’s infrastructure proposal:
“State treasurers are experts on infrastructure finance, and we must ensure that this plan is implemented using smart strategies that optimize the use of public funds,” said NAST Senior Vice President and Utah State Treasurer David Damschen. “We welcome the expansion of private activity bonds in the President’s infrastructure proposal, and we urge lawmakers to build on this by providing state treasurers with access to the diverse funding mechanisms needed to expedite these important investments. We look forward to working with Congress and the Administration to advance these critical goals.”
Treasurer Damschen explained that tax-exempt advance refunding bonds helped save Utah taxpayers more than $105 million over the past five years alone by allowing the state to refinance bonds at lower interest rates. Last year, states issued more than $100 billion in advance refunding bonds. This refinancing tool was a common practice in states and allowed them to save hundreds of millions of taxpayer dollars per year, which could be reinvested in vital infrastructure projects. Unfortunately, the recent federal tax reform law eliminated the tax-exempt status of advance refunding bonds.
During a panel discussion this morning at NAST’s 2018 Legislative Conference, U.S. Representative Randy Hultgren (R-IL) announced that he and U.S. Representative Dutch Ruppersberger (D-MD), both Co-Chairs of the Municipal Finance Caucus, introduced legislation today to restore the tax exemption for advance refunding bonds that was repealed in the Tax Cuts and Jobs Act.
“States and local governments need flexibility for managing their finances so they can invest in infrastructure like roads, bridges, hospital, libraries and schools to support our communities,” said Rep. Hultgren. “In recent years, tax-exempt advance refunding bonds have saved Illinois taxpayers $80 million per year on average. Given that interest rates are expected to increase, this tool is especially important to states and local governments responsibly planning for the future.”
To learn more about NAST’s federal policies, or about infrastructure spending, click here.
NAST has signed a letter in response to Moody’s Investor Service, Inc. request for comments on the proposed revisions to their U.S. States Rating Methodology. The letter expresses concerns with the proposed criteria related to the inclusion of U.S. territories in the proposed new criteria and the proposed adjustment of the weights for three of the four factors used in their analysis.
ABLE accounts are taking hold though not at a blistering pace. ABLE, which stands for Achieving a Better Life Experience, is a tax-favored way to save for the needs of a person with a disability. They are built on the same legal framework as 529 college savings plans.
Deborah Goodkin, managing director of the Enable Savings Plan, likens the slow uptake of ABLE accounts to employees’ initial reluctance to sink their money into 401(k) plans in the early days of defined-contribution plans. According to data from the Investment Company Institute, 401(k)s were also slow out of the gate, and really started to gain critical mass in the mid-1990s, some 20 years after their initial introduction.
But that’s not to say that there hasn’t been growth in ABLE accounts. According to data from Strategic Insight, more than 13,000 accounts had been launched as of the end of September, with about $3,700 per account on average–more than $48 million invested in ABLE accounts nationally.
In January 2017, six states had rolled out plans. As of this writing, and three years since Congress passed the ABLE Act into law, more than 20 states have ABLE account plans that are open for enrollment. Some plans offer enrollment to out-of-state residents, too.
Goodkin is disheartened by the relatively slow growth in ABLE accounts because she believes they can solve a big problem that many people with disabilities and their families face: necessarily limited financial independence.
In order to be eligible for Supplemental Security Income (which pays monthly cash benefits to children and adults with disabilities) and Medicaid, a person with a disability cannot have resources exceeding a very low threshold: assets over a certain threshold, commonly $2,000 (for a single person) to $3,000 (for a couple) would be disqualifying. That excludes the home in which the individual lives, but it includes income he earns from working, money in a checking or savings account, or any investments in his name (including the cash value of a life insurance policy). While living with limited means could be feasible for a dependent child, it presents a larger problem for an adult who lives independently either by choice or by necessity–he is forced to have limited assets in his own name or else he risks being disqualified from receiving federal aid.
An ABLE account, however, allows an individual with a disability to have up to $100,000 in his own name and still qualify for means-tested federal programs (with limited exceptions). This means a person with a disability can get a job, save money, and live more independently. Many ABLE plans even have a debit card option.
Addressing the Reluctance
Goodkin believes more could be done to promote ABLE account awareness at a national level. She believes that families are reluctant to set up ABLE accounts because they fear it will jeopardize their SSI and Medicaid benefits.
“There is a fear among people living with disabilities that the federal government or state government is going to take away your benefits if you have money in an ABLE account,” Goodkin said. “There is also the fear that if they invest money, someone will take it away from them.”
Joanna Swanson, head of direct sales for the Enable Savings Plan of Nebraska, says she tries to encourage people to open the account with only a small amount of money, just to try it out.
“Dip your toe in the water. Start it and try it and see how it works. Test the SSI; see that you still get your benefits. After that, you can start moving forward and saving larger amounts,” she said.
As it is now, people with disabilities and their families have to spend down the assets so as not to exceed the public benefits threshold. That could mean spending money on items that aren’t really necessary purchases, whereas that money could be saved and invested for the future in an ABLE account.
The second common concern–that the money invested could be taken away–is not entirely unfounded. The ABLE account legislation does contain what is referred to as the Medicaid payback provision, wherein the state can file a claim after the ABLE account beneficiary passes on to recoup all or a portion of the funds left in the account equal to the amount the beneficiary received in Medicaid payments.
How ABLE Accounts Work
Contributions to ABLE accounts are made with aftertax dollars to a plan with a preset menu of investment choices. Earnings compound on a tax-free basis, and withdrawals to pay for qualified expenses are tax-free, too. The same federal law that established 529 plans provides the framework for ABLE accounts, and the two account types are alike in many ways.
There are some important differences between ABLE and 529 accounts, however.
For more information, read “ABLE Accounts: 10 Things You Should Know” from the ABLE Account National Resource Center.
Some plans allow enrollment by out-of-state residents; if your state doesn’t offer its own ABLE account, you can still set up an account. (It could pay to check into whether your home state has a program or has one in development, particularly if there is a state tax benefit for contributing.) This tool on the ABLE account NRC’s website allows you to compare the features and costs of different states’ ABLE programs.
How Could the ABLE Act Improve?
The National Association of State Treasurers recently outlined some legislative priorities that would broaden ABLE accounts’ reach and use. And a few of these priorities have recently been addressed. For one, rollovers from 529 college savings accounts into ABLE accounts (up to $15,000 per year) was included in the recently signed tax bill.
Another important recent change affecting ABLE accounts resulting from the new tax bill is a provision previously referred to as the ABLE to Work Act, which allows a person with a disability who has a job to save her own income in the ABLE account. An employed account beneficiary can now make contributions exceeding the $15,000 annual contribution limit, but only up to a certain threshold.
Other priorities still on the NAST’s wish list include increasing the age of onset from 26 to 46, which would expand eligibility to many more people with disabilities.
Another is allowing beneficiaries to open more than one ABLE account (as is allowable with 529s), and allowing married couples with disabilities to hold joint ABLE accounts with up to $30,000 in annual contributions and allowing an ABLE account to be rolled over to a disabled spouse.
Illinois State Treasurer Mike Frerichs, Co-Chair of NAST’s ABLE Committee, unveils proposal during Congressional briefing to improve and expand ABLE programs nationwide
WASHINGTON, D.C. – The National Association of State Treasurers (NAST) released the following statement today in response to the third anniversary of Congress passing the Achieving a Better Life Experience (ABLE) Act—landmark legislation that allows Americans to establish tax-free savings accounts for individuals with disabilities.
Over the past three years, state treasurers have worked diligently to implement, administer, and expand ABLE programs across the country to help individuals with disabilities and their families save for costly medical expenses,” said NAST’s ABLE Committee Co-Chair and Illinois State Treasurer Mike Frerichs. “Since Congress passed the legislation in 2014, 30 states have successfully launched ABLE Programs, which have changed the lives of thousands of families across the country. NAST looks forward to working with Congress to help increase access to these important investment accounts so more Americans can benefit from ABLE programs and begin saving for their future.”
Treasurer Frerichs participated in a Congressional briefing on Capitol Hill today to unveil the NAST ABLE Committee’s federal policy proposal, which outlines how Congress can increase the breadth and reach of ABLE accounts across the country. The briefing, hosted by the ABLE National Resource Center, featured a series of presentations and panel discussions from Members of Congress, ABLE administrators and a number of NAST corporate affiliate members.
The NAST ABLE Committee’s federal policy priorities are listed below and a fact sheet on ABLE program implementation can be found here. To learn more about NAST’s federal policy proposals, click here.
WASHINGTON, D.C. (TK) –The College Savings Plans Network (CSPN) announced its support of H.R. 4508, the Promoting Real Opportunity, Success and Prosperity through Education Reform (PROSPER) Act. The bill, recently introduced by Rep. Virginia Foxx (R-NC) and Rep. Brett Guthrie (R-KY), aims to make post-secondary education more affordable for families across America.
The Act will exclude 529 college savings plans from counting as assets when calculating student need in order to encourage families to save for higher education.
Treasurer Young Boozer, Chair of the College Savings Plans Network—the nation’s leading objective source of information on Section 529 College Savings Plans and Prepaid Tuition Plans—issued the following statement on the introduction of this critical piece of legislation:
As a result of rising costs of college tuition, Americans have accumulated an excess of over $1.3 trillion in student debt over the past 40 years. The way to offset or avoid student debt is by saving early and often in a 529 plan. We must encourage savings for college expenses. We should not discourage savings by penalizing those who do save when it comes to determining other support available. For this reason, we are proud to support the PROSPER Act, legislation that will enhance the treatment of 529 plans in the determination of federal financial aid. We thank Rep. Virginia Foxx (R-NC) and Rep. Brett Guthrie (R-KY), in moving it forward and for continuing Congress’ tradition of improving savings opportunities for post-secondary education through 529 college savings plans.”
Young Boozer, Alabama State Treasurer and Chair of the College Savings Plans Network has this to say.
“CSPN has been following the conversation in the Senate about the tax bill passed Saturday morning. We are interested in the expansion of eligible education expenses in 529 plans to include up to $10,000 in annual K-12 expenses and look forward to working with Congress on implementing these changes with respect to 529 plans. This will provide added flexibility to families looking to save money to pay for the education needs of their loved ones and we appreciate Congress’ interest in enhancing 529 plans. Additionally, on Friday December 1, the House introduced the PROSPER ACT, which would exclude 529 plans from the calculation of federal financial aid. We believe this is a critical step in making 529 plans the best way to save for post-secondary education and appreciate Congress beginning the process of removing this hurdle to families saving for their children’s future.”
WASHINGTON, D.C. – The National Association of State Treasurers (NAST) released the following statement today in response to the tax reform bill passed by the U.S. House of Representatives and its impact on infrastructure investments.
“State and local governments finance more than three-quarters of all U.S. infrastructure projects— primarily through tax-exempt municipal bonds— so NAST is pleased to see the House pass a tax reform bill that protects this important financial tool,” said NAST president and Oklahoma State Treasurer Ken Miller. “We are concerned, however, that changing the treatment of private activity bonds, advance refunding bonds, and tax credit bonds will have a negative impact on overall infrastructure spending. As the Senate finalizes their tax reform bill, we urge them to maintain the current treatment of these bonds to ensure the country is fully prepared to finance the Administration’s ambitious infrastructure plan in the year ahead.”
Earlier this month, NAST highlighted that the House tax reform bill preserved several other measures that state treasurers have worked diligently to advance, including popular retirement savings options and higher education benefits. To learn more, click here.
WASHINGTON, D.C. – The National Association of State Treasurers (NAST) released the following statement today in response to an amendment to the House tax reform bill, which would allow people to transfer funds from 529 college savings plans to Achieving a Better Life Experience (ABLE) accounts.
“Tax-free savings accounts such as 529 college savings plans and ABLE accounts help millions of Americans save for significant life expenses, so we applaud the House for streamlining these important financial tools,” said NAST President and Oklahoma State Treasurer Ken Miller. “Congress established ABLE accounts in 2014 to afford individuals living with disabilities the same saving opportunities that all Americans have through 529 college savings programs. Since then, state treasurers have worked diligently to implement, administer and expand ABLE accounts to ease financial strains for families across the country. We are pleased that this new amendment would allow Americans to seamlessly transfer funds from 529 plans to ABLE accounts, and we look forward to working with the House and Senate to ensure the final bill includes this beneficial measure.”
To learn more about NAST’s federal policy positions, click here.
WASHINGTON, D.C. – The National Association of State Treasurers (NAST) released the following statement today responding to specific sections of the tax reform bill introduced by the U.S. House of Representatives Committee on Ways and Means. The legislation proposes to keep municipal bonds tax-exempt, retain popular retirement savings options, and preserve higher education benefits such as 529 College Savings Plans.
“While we are still reviewing the details, the tax reform legislation released today appears to maintain several bipartisan-supported programs that state treasurers have worked tirelessly to advance,” said NAST President and Oklahoma State Treasurer Ken Miller. “Specifically, NAST is encouraged to see the Committee retain the tax-exempt status of municipal bonds. State and local governments have used this funding mechanism for more than a century as a low-cost, viable way to finance bridges, roads, schools, hospitals and other services that improve the quality of life for all Americans. We are reviewing the bill’s impact on other bonds, including private activity bonds, advance refunding bonds, and tax credit bonds. We are also glad to see the Committee preserve higher education benefits, such as 529 College Savings Plans, and popular retirement savings options that help Americans continue to save for their future. The maintenance of these important programs will directly benefit our constituents and strengthen our country’s economy for years to come.”
“For more than forty years, NAST has advocated for bipartisan measures that improve our nation’s infrastructure, help families save for college, and enhance state pension plans. We hope that the Committee recognizes the value of these initiatives and will actively support their continuation,” added Vermont State Treasurer and incoming NAST President Beth Pearce. “NAST looks forward to working with the House and Senate in the days and weeks ahead to ensure that the final bill protects these important measures.”
To learn more about NAST’s federal policy positions, click here.
The Boost Saving for College Act could entice more people to contribute to 529 plans.
Some proposed changes to tax legislation were recently introduced that could make 529 accounts more flexible. These changes could also help make college saving easier and more affordable for low- and middle-income households.
The Boost Saving for College Act, which was introduced by Sens. Richard Burr, R-N.C.; Bob Casey, D-Pa.; and Lisa Murkowski, R-Alaksa, would amend the Internal Revenue Code to modify the tax treatment of 529 plans. Here’s a look at how some of the proposed changes would work, and their implications for 529 account holders.
The Saver’s Credit
One proposed change is that 529 contributions would be eligible for the Saver’s Credit.
This proposed credit would go a long way toward helping lower- and middle-income households contribute to a 529 college savings plan, said the chair of the College Savings Plans Network, Alabama state Treasurer Young Boozer.
Currently, the Saver’s Credit works like this: You might be eligible for at least a partial credit if you earn less than $31,000 (less than $62,000 if you’re married filing jointly) and contribute to a tax-sheltered retirement account, such as an IRA, 401(k), 403(b), or 457(b). Aftertax contributions such as a Roth IRA or aftertax 401(k) also count, but rollover contributions are not eligible for the credit.
The amount of the credit is 50%, 20%, or 10% of your retirement plan or IRA contributions up to $2,000 ($4,000 if married filing jointly), depending on your adjusted gross income (reported on your Form 1040 or 1040A)….