What Is Bond Refunding? A Guide for Public Finance Teams

Bond refunding is the municipal finance version of refinancing debt: an issuer sells new bonds and uses the proceeds to retire outstanding bonds, usually to lower interest cost, reshape future debt service, or change a covenant that no longer fits.

The decision, though, is rarely a coupon-to-coupon comparison. A refunding is worth doing only when the expected savings or other benefits clear your policy threshold after transaction costs, and the work continues well past closing through escrow, deferred accounting, and ACFR disclosure.

This guide is built for you, whether you work at a city, county, university, or authority. It walks through the three refunding paths (current, advance, and tender), how to evaluate whether a refunding is worth pursuing, what the 2017 Tax Cuts and Jobs Act changed, and how the transaction shows up under GASB after it closes.

What Is Bond Refunding?

Bond refunding is a refinancing transaction in which an issuer sells new bonds and uses the proceeds to retire existing debt. It allows an organization to replace an older bond issue with a new one that better fits its financial objectives.

The new bonds are known as refunding bonds, while the bonds being retired are called refunded bonds.

Public finance issuers typically pursue a refunding for one of three reasons:

• Reduce borrowing costs by replacing higher-interest debt with lower-interest debt.
• Restructure debt service by changing maturities, smoothing future payments, or aligning repayment with long-term financial plans.
• Modify debt terms by replacing obligations with provisions that better fit the issuer's current operational or financial needs.

Not every refunding is driven by interest-rate savings. In some cases, the primary benefit is greater budget flexibility, improved debt management, or a simpler capital structure.

A refunding issue uses proceeds to pay another issue. The timing of that payment determines whether the transaction is treated as a current refunding or an advance refunding for federal tax purposes.

The 2017 Tax Cuts and Jobs Act repealed the authority to issue tax-exempt advance refunding bonds after Dec. 31, 2017.

Since then, issuers have relied more heavily on current refundings, taxable advance refundings, tender offers, and hybrid strategies when they want to act before a call date.

Current, Advance, and Tender Refunding

The three main refunding paths are current refunding, advance refunding, and tender offers. Each path answers a different constraint.

Current Refunding

A current refunding occurs when the refunded bonds can be redeemed in the near term, typically within 90 days of the refunding transaction. The issuer sells new bonds and uses the proceeds to retire the outstanding debt shortly thereafter.

Advance Refunding

An advance refunding occurs when the refunded bonds cannot yet be called. Historically, issuers could sell tax-exempt refunding bonds and place the proceeds in an escrow account until the call date arrived. The escrow holds the refunding bond proceeds, typically invested in Treasury securities, and pays off the refunded bonds when they become callable.

That changed with the Tax Cuts and Jobs Act (TCJA) of 2017, which eliminated tax-exempt advance refundings for bonds issued after December 31, 2017. While taxable advance refundings remain possible, the higher borrowing cost can reduce or eliminate the expected savings.

Tender Refunding

A tender offer takes a different approach. Instead of waiting for a call date, the issuer offers to purchase outstanding bonds directly from bondholders before they become callable. Bondholders can choose whether to participate, and only the tendered bonds are retired.

Since the TCJA limited tax-exempt advance refundings, tender offers have become an increasingly important tool for issuers seeking savings or restructuring opportunities before a bond's call date.

The Refunding Analysis You Need

Before pursuing a refunding, you need to understand both the potential benefits and the trade-offs. This analysis includes reviewing refunding candidates, estimating savings, evaluating transaction costs, and assessing how the new debt structure is going to affect future debt service.

Step 1: Identify Refunding Candidates

Your first step is determining which bonds are eligible for a refunding and whether they offer a realistic opportunity for savings or restructuring.

Key factors include outstanding principal, coupon rates, call provisions, maturity schedules, debt service requirements, existing covenants, and any prior refunding activity.

High-coupon bonds, callable maturities, and debt issued during unfavorable rate environments are often the strongest candidates. In some cases, bonds with restrictive covenants can also be considered even when interest-rate savings are limited.

Accurate debt data is critical at this stage. Outstanding balances, call dates, allocations, and refunding history all affect the analysis and can influence which opportunities appear viable. A refunding monitor that tracks call dates, coupon levels, and prior refunding activity across the portfolio can help surface eligible candidates as conditions change.

Step 2: Define the Objective

Before modeling structures, define the outcome the refunding is supposed to produce. The answer should be specific enough to test.

A named objective keeps a transaction that begins as a savings refunding from becoming a budget-relief restructuring without anyone naming the shift.

Step 3: Model Multiple Structures

Your team and advisors should compare the old debt service schedule with the proposed refunding schedule, then compare several scenarios side by side:

• Level savings versus front-loaded savings.
• Different coupon structures.
• Different maturity lengths.
• Current refunding versus taxable advance refunding.
• Tender offer participation at different acceptance levels.
• Cash contribution versus fully bond-funded transaction.
• With and without specific covenant or reserve changes.

For tenders, the model should also show what happens if participation is lower than expected. Tender participation can vary widely, and many underwriters run numbers assuming partial participation. That uncertainty is not a reason to avoid tenders, but it is a reason to model the downside before committing staff time and transaction costs.

Step 4: Calculate Savings Carefully

Debt service savings appears in two forms: annual cash flow savings and present value savings.

Annual savings compares old and new debt service by fiscal year so you can see what changes in the budget.

Present value savings discounts future savings back to today’s dollars. It helps you compare refunding options with different timing and repayment patterns.

Your analysis should separate economic savings from budgetary savings, because a transaction can produce near-term budget relief while increasing total debt service later. If that tradeoff supports a broader financial objective, it may be justified, but it should be clearly understood before the transaction moves forward.

Step 5: Test the Decision Against Policy

Compare the transaction against your organization's debt policy and the reason you're pursuing the refunding in the first place.

Confirm the transaction clears your NPV savings threshold. If the goal is to restructure debt service or remove restrictive covenants, be clear about the benefit and why it matters.

By the time the recommendation reaches leadership, the answers should be straightforward:

• Why are you doing this?
• How much will it save, or what problem will it solve?
• What are the risks?
• What alternatives did you consider?
• How will it affect future debt service and reporting?

If those questions can be answered clearly, decision-makers are in a much better position to evaluate the transaction.

How the 2017 Tax Law Changed Refunding Options

The Tax Cuts and Jobs Act (TCJA) of 2017 significantly changed how municipal issuers approach refundings.

Before 2018, issuers could use tax-exempt advance refundings to lock in lower rates before a bond's call date. The proceeds from the new bonds were typically placed in an escrow account until the old bonds could be redeemed.

That option is no longer available for tax-exempt bonds issued after December 31, 2017.

As a result, issuers now have fewer ways to refinance debt before the call date. Their main options include:

• Waiting until the bonds enter the current refunding window.
• Using a taxable advance refunding if the savings justify the higher borrowing cost.
• Using available cash to retire debt.
• Using a tender offer to purchase bonds from investors before the call date.
• Combining multiple approaches as part of a broader refinancing strategy.

This shift is one of the reasons why tender offers have become more common. A tender offer can create an opportunity to refinance debt that is not yet callable. Unlike a traditional refunding, however, participation is voluntary. Bondholders can choose whether to sell their bonds, which means the issuer cannot know in advance exactly how many bonds will be retired.

Why Issuers Use Tender Offers

A tender offer allows an issuer to buy back bonds from investors before the bonds become callable.

Instead of waiting for the call date, the issuer invites bondholders to sell their bonds and sets the terms of the offer, including the pricing method, tender period, and settlement process. Investors can choose whether to participate, and only the bonds that are tendered and accepted are retired.

That flexibility makes tender offers attractive when a traditional current refunding is not yet available. An issuer may be able to refinance debt, reduce borrowing costs, or restructure part of its portfolio years before the call date.

The tradeoff to note here is uncertainty. Unlike a standard redemption, a tender offer depends on investor participation. Bondholders are not required to sell, and the issuer may not retire as many bonds as originally planned.

Tender offers also involve additional coordination among underwriters or dealer managers, municipal advisors, bond counsel, tender agents, and other financing participants. Because the issuer is both issuing and purchasing bonds, the economics and execution strategy require careful analysis before moving forward.

Issuers typically price a tender in one of three ways: setting a fixed savings-percentage target and inviting holders to tender at that price, running a modified Dutch auction in which bondholders submit prices and the issuer accepts those that meet the financing objective, or instructing the dealer manager to buy targeted bonds in the open market at or below a set price. The dealer manager runs the tender, and the tender agent coordinates with DTC to identify holders and process tenders.

New York City’s Tender Example

New York City announced the successful sale of approximately $1.56 billion of General Obligation Bonds in June 2023. During the tender process, the City received nearly 1,200 offers from bondholders totaling roughly $454 million, or about 40% of the outstanding principal of the relevant bonds.

The tender allowed the City to capture value from taxable bonds that had been issued to advance refund tax-exempt bonds. In DebtBook's earlier tender-offer analysis, the City acquired bonds at prices below the make-whole call floor price, then benefited from the shift from taxable to tax-exempt rates. The transaction produced roughly $26 million of future debt service savings.

The tender price, the participation rate, and the replacement bond structure all drive the outcome. If enough holders participate at prices that support the issuer’s target, the transaction can create savings or portfolio flexibility that a taxable advance refunding does not produce. If participation is thin or prices move against the issuer, the economics can change quickly.

How Refunding Gets Reported Under GASB

Refunding does not end when the transaction closes. The accounting team has to record the old debt, the new debt, any escrow activity, deferred refunding amounts, debt service changes, and financial statement disclosures accurately.

Economic Gain or Loss on Refunding

GASB Statement No. 7 requires disclosure of the economic gain or loss on advance refundings. This measure compares the present value of the old debt service requirements with the present value of the new debt service requirements, adjusted for any additional cash paid as part of the transaction.

For issuers, this helps quantify whether the refunding improved the economics of the debt portfolio.

Deferred Amounts From Refunding

For current and advance refundings that result in defeasance of debt reported by proprietary activities, GASB Statement No. 23 requires the difference between the reacquisition price and the net carrying amount of the old debt to be deferred and amortized as a component of interest expense over the shorter of the old debt’s remaining life or the new debt’s life.

GASB Statement No. 65 later changed financial statement classification for deferred amounts from refundings, moving them into deferred outflows of resources or deferred inflows of resources rather than assets or liabilities.

Updating Debt Records and Disclosures

A refunding typically requires finance teams to:

• Remove or defease refunded debt where appropriate.
• Record the refunding bonds and related debt service schedules.
• Calculate and track deferred amounts from the refunding.
• Update premium, discount, and issuance-cost balances.
• Update ACFR disclosures and long-term obligation reporting.

Preserving Refunding Lineage

One of the most overlooked parts of refunding reporting is maintaining the relationship between the old debt and the new debt.

Years after a transaction closes, auditors, advisors, finance staff, and leadership may still need to understand which bonds were refunded, which maturities were affected, and how the transaction changed debt service or allocations. Preserving that history makes future reporting, audits, and portfolio analysis much easier.

From Refunding Analysis to Reporting Using DebtBook

DebtBook does not provide refunding advice. You should work with your municipal advisors, bond counsel, and other financing professionals when evaluating a refunding opportunity.

DebtBook helps your team manage the data and reporting behind the decision. Before a transaction is executed, the Sizing feature lets you build and compare refunding scenarios using real portfolio data, evaluate potential savings and debt service impacts, and test alternative structures along with their effect on covenant coverage and project affordability.

After execution, DebtBook helps you maintain an accurate record of the transaction. Refunding Tracking preserves the relationship between refunded and refunding bonds down to the allocation level, so you can trace how a project’s debt structure has changed as individual issues were refunded. Debt Accounting handles the journal entries, premium and discount amortization, and deferred refunding amounts that GASB 23 and 65 require, and Automated Long-Term Obligation Disclosure generates your ACFR notes in a handful of clicks.

The result is a single source of truth that supports your refunding process from analysis through reporting.

Refunding Basics FAQ

What Is the Difference Between Refunding and Refinancing?

Refunding is a form of refinancing. In municipal finance, refunding refers to issuing new bonds to retire outstanding bonds. Refinancing is the broader term, while refunding is the public-finance transaction structure.

What Is a Refunded Bond?

A refunded bond is the old bond being paid off, redeemed, tendered, or defeased through the refunding transaction. The new bond issued to fund that payoff is the refunding bond.

What Is a Current Refunding?

A current refunding occurs when the refunded bonds are redeemed not more than 90 days after the refunding bond issuance. For many tax-exempt municipal refundings, this 90-day window determines whether the issuer can use tax-exempt refunding bonds.

What Is an Advance Refunding?

An advance refunding occurs when refunding bonds are issued more than 90 days before the refunded bonds are redeemed, with proceeds often placed in escrow until the redemption date. Since the TCJA, tax-exempt advance refunding bonds are generally no longer available for bonds issued after Dec. 31, 2017, so taxable advance refundings have become the main advance-refunding route.

Why Did the TCJA Matter for Bond Refunding?

The TCJA ended the authority to issue tax-exempt advance refunding bonds after Dec. 31, 2017. That removed a major tool issuers had used to refinance tax-exempt bonds before their call dates. Issuers now rely more on current refundings, taxable advance refundings, tender offers, cash defeasance, and hybrid strategies.

How Do Issuers Measure Refunding Savings?

Issuers compare old and new debt service schedules and calculate present value savings after transaction costs, premiums, escrow effects, and any issuer cash contribution. Many debt policies use NPV savings thresholds, such as a fixed percentage of refunded par or a minimum dollar amount, before a savings refunding can proceed.

Can a Refunding Increase Total Debt Service?

Yes. A refunding can reduce near-term budget pressure while increasing later-year payments or total debt service. That tradeoff can be acceptable in a restructuring, but it should be clear before approval.

How Is a Refunding Reported in the ACFR?

Refunding reporting depends on the transaction type and reporting basis, but it can include disclosure of economic gain or loss, deferred outflows or inflows from the difference between reacquisition price and net carrying amount, updated debt schedules, and long-term obligation disclosures.

Does DebtBook Advise Issuers on Whether to Refund Bonds?

No. DebtBook does not provide refunding advice or municipal advisory services. DebtBook helps issuer teams organize portfolio data, model financing scenarios, track refunding lineage, and support reporting after the transaction is executed.

Sources and Further Reading

• IRS: Advance Refunding Bond Limitations Under IRC Section 149(d)
• MSRB EMMA FAQs
• GFOA: Refunding Municipal Bonds
• GFOA: Tender Refunding of Municipal Bonds
• NYC Comptroller: Strong Results From Tender Offer
• GASB Statement No. 7 Summary
• GASB Statement No. 23 Summary
• DebtBook: New Issue Structuring With Sizing
• DebtBook: True Lineage Refunding Tracking
• DebtBook: Debt Accounting

Related Municipal Finance Reading

• DebtBook's Premium/Discount Amortization Methodology Explained
• Capital Financing Delay Tactics for Issuers Facing High Interest Rates
• A 'Game Changer' for the City of Memphis, TN

Disclaimer: DebtBook does not provide professional services or advice. DebtBook has prepared these materials for general informational and educational purposes, which means we have not tailored the information to your specific circumstances. Please consult your professional advisors before taking action based on any information in these materials. Any use of this information is solely at your own risk.