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Embracing a More Advanced Approach to Municipal Debt Refunding Lineage

Municipal debt is a complex area that public finance teams frequently struggle to effectively manage. Municipalities, states, universities, and other debt issuing entities depend on treasurers, chief finance officers (CFOs), debt managers, and finance directors to responsibly and strategically manage debt, adhering to budgets and following relevant public policies while still looking for opportunities to lower the overall cost of capital to the organization. Having the right technology in place can make a tremendous difference in carefully tracking debt history, particularly when it comes to bond refinancings.

What Drives Refundings?

Refunding, also known as bond refinancing, is a common practice for debt issuers whereby the issuer sells new bonds to replace old bonds and ideally realize debt service savings. 

Refinancings generally fall into one of two categories: current or advance. When refunded bonds are redeemed either after their call date or within the period 90 days before their call date, this is known as a current refunding. 

Why do municipalities refund outstanding bonds? Some common reasons include:

  • To lock in cash flow savings.
  • To modify a provision in an outstanding bond indenture.
  • To restructure and gain timely access to cash.
  • To remove restrictive covenants that are outdated or difficult to comply with.

Municipalities used to benefit from a tax law that allowed refunding bonds for both current and advance refundings of tax-exempt debt to also be tax-exempt, enabling issuers to maintain tax-exempt status even if the refunding bonds were delivered more than 90 days before current bonds’ call date. That changed with the Tax Cuts and Jobs Act, which retained the tax-exempt status of current municipal bonds but eliminated the ability for issuers to refund tax-exempt debt on a tax-exempt advance basis. 

Tracking the history of debt refinanced over time is crucial to keep accurate records and promote accountability and analysis. It could become even more important if the laws surrounding tax exemption change again.

Challenges Surrounding Refunding Lineage Practices

Despite the importance of tracking debt lineage, municipalities can be hindered by common challenges, such as:

  • Difficulty in tracking outstanding debt and how the associated debt service is allocated after refunding.
  • Accurately tracking principal and interest charges.
  • Navigating complexity arising from multiple refundings and partial refunds.
  • Managing a complicated history of many refundings.
  • Accounting for tender offers and cash defeasances.
  • Transferring historical bond data and knowledge from tenured teammates to new or promoted teammates.

Debt tracking can be complex, so municipalities need precise methods to ensure they accurately track refunding lineage along with other financial transactions. Spreadsheet based systems were once standard practice in public finance. Now, more teams are finding that these manual systems are a risky foundation for operations in a world where precision is of the utmost importance.

An emerging challenge posed by relying on manual systems for tracking debt lineage is that a significant portion of the public finance industry is over the age of 55, which means many are nearing retirement. This can lead to a substantial gap in institutional knowledge. New employees are thrust into an environment where they must decipher legacy spreadsheet systems without adequate guidance or documentation. This situation is not only time-consuming but also significantly hinders operational efficiency. Inaccuracies in data or calculations when tracking debt can result in missed opportunities for savings or, worse, costly mistakes in financial projections and decisions.

Benefits of Enhanced Refunding Lineage Tracking 

If your municipality’s current approach to refunding lineage tracking isn’t cutting it, it may be time to embrace a more sophisticated solution. As mentioned above, spreadsheets or other manual methods are time-consuming and notoriously prone to error.

By embracing an effective software solution, you can see serious benefits, including enhanced clarity and convenience when it comes to your financial data.

One major advantage is the ability to easily see the full lineage back to its origin with a new money issuance and determine when, if, and on what basis outstanding debt can be refunded on a future date.

You can also see which specific maturities were refunded by each refunding issuance. For example, with DebtBook, once allocations are loaded into the app, you can see how these change over time with each refund.

Key Features to Look for in Refunding Lineage Software

Not all software solutions will provide the same level of sophistication when it comes to debt refunding tracking. Here are a few key features to look for when comparing solutions:

    • Accurate lineage tracking, including the classification of each refunding transaction (i.e., taxable advance, tax-exempt current, tax-exempt advance).
    • Accurate debt service schedules, both before and after refunding transactions occurred.
    • Tracking of redeemed and defeased maturities (i.e., those that have been refunded, but the call date has not yet passed, so they cannot be considered redeemed). 
    • Premium and discount reduction calculations for each refunding transaction, if applicable. 

Plus, you’ll want to find a user-friendly solution that allows your public finance team to access current data wherever and whenever they need so you can seamlessly manage your municipal debt.


Elevate Your Approach to Municipal Debt Management

Navigating the intricate landscape of municipal debt requires a strategic and modern approach from public finance teams. The practice of bond refinancing plays a crucial role in managing debt service savings and calls for careful tracking practices to accurately trace debt refunding lineage. In a landscape in which precision is paramount, upgrading to effective software solutions not only streamlines processes, but also ensures better accountability and analysis in the ever-evolving world of municipal finance.

Choose the best debt management solution for your municipality with help from our “Debt Management Checklist”!

Maintain Your Debt with Ease

Here’s your chance to experience efficient continuing disclosure agreement management, reporting, and more, all in one easy-to-use tool. First, explore our checklist for what to look for in debt management software. Then, schedule a demo to see DebtBook in action and discover what this powerful debt management software can do for you.

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