When the first version of the bill that would eventually become the Tax and Jobs Act of 2017 emerged, bond professionals were alarmed. The original House bill took several shots at tax-exempt bonds, most notably eliminating the ability to issue “private activity bonds” on a tax-exempt basis. These bonds are generally issued by municipal authorities to finance projects on behalf of hospitals and other health care providers, colleges and universities, as well as to finance low-income housing projects, among others. While this segment of the tax-exempt market is dwarfed by the much larger market for bonds issued by states, towns and municipalities, it is nonetheless an extremely important tool for nonprofits.

Issuers and beneficiaries of private activity bonds were given a reprieve as the ability to issue private activity bonds on a tax-exempt basis survived the Tax Act. However, institutions are beginning to realize that it was not a complete win for this segment of the market. What most market participants did not initially account for was the negative effect the reduction in the federal corporate income tax rate would have on the borrowing cost of many small nonprofits.