American Recovery and Reinvestment Act - Impact on Public Finance
The new year, new President and struggling economy are the catalyst for some temporary changes to the world of public finance. The American Recovery and Reinvestment Act of 2009 (the “Recovery Act”) recently signed into law by the President provides some additional opportunities for bond and governmental financings in 2009 and 2010.
Improved Marketability
The Recovery Act has modified the law to allow for an increase in bond purchasers to the market including financial institutions.
Current law allows corporations with outstanding debt to invest in tax-exempt bonds and deduct 100% of the interest cost of their own debt if their tax-exempt holdings do not exceed 2% of their assets. This provision did not apply to banks. The Recovery Act permits this de minimis deduction for banks during 2009 and 2010 at 80% deductibility levels.
The Recovery Act allows for a temporary elimination of the alternative minimum tax for interest income generated from all tax-exempt bonds during tax years 2009 and 2010. Previously, the individual alternative minimum tax applied to private activity bonds except housing and 501(c)(3) bonds, and corporate alternative minimum tax applies to all private activity bonds except housing. The new law eliminates both the corporate or individual alternative minimum tax on tax-exempt bonds issued in 2009 and 2010.
The changes in alternative minimum tax and deductions should increase the demand for tax-exempt bonds from financial institutions.
Bank Qualified Bonds
Current law permits banks to realize a tax deduction on certain costs related to the purchase of certain tax-exempt bonds held in their own portfolio for issuers that do not issue more than $10 million of tax-exempt bonds each year.
The Recovery Act allows for an increase in the $10 million limit to $30 million, and the limit will be based on the underlying borrower’s project and not the issuing capacity of the issuer.
Build America Bonds/Taxable Bond Options for Governmental Bonds
The Recovery Act will allow for governmental issuers to issue taxable general obligation debt during 2009 and 2010 and either receive a cash credit
from the federal government or allow bondholders to receive a tax credit. For taxable general obligation bonds issued in 2011 and beyond, the federal government would provide tax-credits to purchasers of those bonds.
Recovery Zone Bonds
The Recovery Act has created new tax-exempt private activity bonds and tax-exempt tax credit bonds to benefit states which have experienced a significant decline in employment opportunities. The tax credit will be 45% of the bond
interest. Reductions in employment from 2007 to 2008 would be considered. States must reallocate the allocation they have received among their counties with a similar reduction in employment. Each state shall receive at least 0.9%
of the national recovery zone economic development bond limitation.
Tribal Economic Development Bonds
The new law allows a maximum of $2 billion in tax-exempt bonds to be issued by Indian tribal governments for the purpose of encouraging economic development within Indian reservations.
Previously, tribal governments could only use tribal economic development bond proceeds for essential governmental purposes. This change in permitted use will allow for a significant number of private activity projects within tribal
communities. The tribal governments are however restricted from using the bonds for any facility in which gaming is conducted or for any property related to gaming.
Small Issue Industrial Development Bonds (“IDB”)
The Recovery Act has changed the tax rules regarding Small Issue IDBs so that the tax-exempt bonds can be issued during 2009 and 2010 to finance facilities
that manufacture intangible property (i.e. software and other intellectual property) in addition to manufacturing facilities that produce tangible personal property. This modification will once again provide an opportunity for various
financings that could not ordinarily benefit from tax-exempt bonds.
Tax Credit Bonds for Schools
The Recovery Act will make available up to $22 billion in tax credit bonds for the construction, rehabilitation and repair of public school facilities as well as for the acquisition of land for those public school facilities. States
and certain possessions of the United States will receive allocations. Up to $400 million will be specifically allocated to Indian schools funded by the Bureau of Indian Affairs and 40% of the allocation will go to the country’s
large school districts.
Modifications have also been made to Qualified Zone Academy Bonds which provide tax credits for projects that refinance existing schools. The new law allows for qualifying state and local governments to issue an additional $1.4 billion for these school renovations.
Energy Bonds
The Recovery Act increases the allocation available for Clean Renewable Energy Bonds (“CREBs”) and for Qualified Energy Conservation Bonds. CREBs are issued by state and local governments and provide tax credits to
finance renewable energy projects. Qualified Energy Conservation Bonds are issued by state and local governments for projects which allow for energy improvement in public buildings, for green community projects including energy efficiency
improvements in buildings and for renewable energy development. For both CREBs and Qualified Energy Conservation Bonds, the bondholders receive a federal tax credit and the issuer benefits with interest-free financing.
Please contact one of our Public Finance attorneys to discuss how you can take advantage of these bond financing opportunities.