Tribal Bond Provisions Included in the Economic Stimulus Package
February 9, 2009
Telly J. Meier- Washington
Kathleen Nilles - Washington
H.R. 1, the American Recovery and Reinvestment Act of 2009, contains four provisions that expand the authority of Indian tribal governments to issue tax-exempt or tax credit bonds:
1) tribal economic development bonds
2) qualified school construction bonds
3) clean renewable energy bonds
4) qualified energy conservation bonds
Collectively, these four provisions represent a significant achievement for Indian Country. The provisions re-confirm the governmental status of tribes and open the door to future expansions of their bond-issuing authority. Whether these provisions will be sufficient to thaw the credit markets, however, remains to be seen.
After the tax portion of the bill was approved by the Ways and Means Committee on January 22, 2009, H.R. 1 passed the House on January 28, 2009 (the “House Bill”). The Senate’s version of the Act (the “Senate Amendment”) was marked up by the Senate Finance Committee on January, 27, 2009 and is being debated on the Senate floor as of the date of this alert. President Obama and Democratic leaders in the House and Senate expect the Act to be signed into law by mid-February.
The following is an overview of the four bond provisions mentioned above.
1) Tribal Economic Development Bonds
Specific Provisions
House: H.R. 1 (Section 1532).
Senate: Amendment to H.R. 1 (Section 1402).
Description of Provision
Under current law, Indian tribal governments are limited in their ability to issue tax-exempt bonds. Under Internal Revenue Code (“Code”) Section 7871(c), tribal governments are authorized to issue tax-exempt bonds only if substantially all of the proceeds are used for essential governmental functions. The term “essential governmental function” does not include any function that is not customarily performed by state and local governments. Code Section 7871(c) further prohibits tribal governments from issuing any tax-exempt private activity bonds with the exception of certain bonds for manufacturing facilities.
The new provision would allow tribal governments to issue economic development bonds without satisfying the essential governmental function test. The provision is intended to stimulate economic development on tribal lands. However, the provision contains a national bond limitation of $2 billion that will be allocated as the Secretary of the Treasury determines appropriate, in consultation with the Secretary of the Interior. Depending on how the allocation is done, the provision’s effectiveness as a stimulus to the economy could be limited.
Definition of a Tribal Economic Development Bond
Both bills define a “tribal economic development bond” as any bond issued by an Indian tribal government which:
(1) would not be tax-exempt under the existing rules (as contained in Code Section 7871(c)) applicable to tribal government bonds, but would be exempt if issued by a state or local government; and (2) is designated by the Indian tribal government as a “tribal economic development bond.”
Exceptions
In both bills, the term “tribal economic development bond” does not include any bond used to finance: (1) a gaming facility or gaming business property; or (2) any facility located outside the Indian reservation (as defined in Code Section 168(j)(6), which defines the term “reservation” for purposes of accelerated depreciation on Indian lands).
Treasury Study
Both versions of the provision require the Treasury Department to conduct a study on the effects of tribal economic development bonds and report back to Congress no later than one year after the date of enactment. According to the Joint Committee on Taxation’s description of the Senate’s markup documents, the study may include recommendations on whether the essential governmental function and passive activity bond restrictions set forth in Code Section 7871 should be eliminated. Thus, the Treasury report could be used as a basis for subsequent Congressional action to permanently eliminate the restrictions.
Difference in the Provisions and Preference
The Senate Amendment is the same as the House Bill, except that it deletes the requirement that an economic development bond must fail the present law “essential governmental function” test. It also clarifies that an Indian tribal government and a tribal instrumentality will be treated as a state government for private activity bond rules.
The Senate Amendment is preferable because of the two technical corrections it makes to the House Bill. In addition, to make sure that the national volume cap is allocated appropriately, the conference report should direct the Secretary of the Treasury to consider factors such as the following: (1) whether the project to be financed will create on-reservation jobs; (2) whether the project will help the Indian tribal government attract private industry to the reservation; (3) whether the project is likely to be built or placed into service within the next three years; (4) whether the necessary approvals for the issuance of debt have been secured from the tribe’s general membership and/or legislative body; and (5) whether a financing commitment has been obtained from a lender or underwriter.
2) Qualified School Construction Bonds
Specific Provisions
House: H.R. 1 (Section 1511).
Senate: Amendment to H.R. 1 (Section 1521).
Description of Provision
The House Bill and Senate Amendment create a new category of tax-credit bonds1 that may be issued by state and local governments for the construction, rehabilitation, or repair of public school facilities, or for the acquisition of land on which a public school facility will be constructed. This provision also contains a special authorization for the issuance of $400 million of qualified school construction bonds by Indian tribal governments for schools funded by the Bureau of Indian Affairs over the next two years.
Definition of a Qualified School Construction Bond
The term “qualified school construction bond” means: (1) a bond in which 100 percent of the available project proceeds are used for the construction, rehabilitation, or repair of a public school facility or for the acquisition of land on which such facility is to be constructed with part of the proceeds; (2) issued by a state or local government within the jurisdiction of which the school is located, except that Indian tribal governments (as defined in Code Section 7701(a)(40)) shall be treated as qualified issuers for the Indian school allocations; and (3) designated by the issuer as a bond for the purposes of this provision.
Difference in the Provisions and Preference
While both the House Bill and the Senate Amendment set aside the same amount that may be used by Indian tribal governments for constructing or renovating BIA-funded schools, the House Bill provides for the allocation of at least $10 billion more in total bond financing for public schools generally, which will benefit schools located on or near reservations that are not BIA-funded. Thus, the House Bill is preferable.
3) Clean Renewable Energy Bonds
Specific Provisions
House: H.R. 1 (Section 1611)
Senate: Amendment to H.R. 1 (Section 1111).
Description of Provision
The House Bill and the Senate Amendment raise the national limitation for clean renewable energy bonds (CREBs) to finance facilities that generate electricity from the following resources: wind, closed-loop biomass, geothermal, small irrigation, hydropower, landfill gas, marine renewable, and trash combustion facilities. The authorization will be subdivided into thirds: one-third will be available for qualifying projects of state, local and tribal governments; one-third will be available for qualifying projects of public power providers; and one-third will be available for qualifying projects of electric
cooperatives.
Definition of a Clean Renewable Energy Bond
The term “clean renewable energy bond” means any bond issued as part of an issue if: (1) 100 percent of the available project proceeds of such issue are to be used for capital expenditures incurred by governmental bodies, public providers, or cooperative electric companies for one or more qualified renewable energy facilities; (2) the bond is issued by a qualified issuer; and (3) the issuer designates the bond as a clean renewable energy bond.
Definition of a Qualified Renewable Energy Facility
A qualified renewable energy facility means a facility: (1) that qualifies for the tax credit under Code Section 45 (other than Indian coal and refined coal production facilities), without regard to the placed-in-service date requirements of that section; and (2) that is owned by a public power provider, governmental body (including an Indian tribe), or cooperative electric company.
Difference in the Provisions and Preference
The House Bill and the Senate Amendment are the same.
4) Qualified Energy Conservation Bonds
Specific Provisions
House: H.R. 1 (Section 1612).
Senate: Amendment to H.R. 1 (Section 1112).
Description of the Provision
The House Bill and the Senate Amendment provide for qualified energy conservation bonds used to fund qualified conservation purposes, such as reducing energy consumption, facilities or grants that support research, mass commuting facilities, education campaigns that promote energy efficiency and certain demonstration projects.
Allocations of qualified energy conservation bonds will be made to the states with sub-allocations to large local governments. Allocations will be made to the states according to their respective populations, reduced by any sub-allocations to large local governments within the states. Sub-allocations to large local governments shall be an amount of the national qualified energy conservation bond limitation that bears the same ratio to the amount of such limitation that otherwise would be allocated to the state in which such large local government is located as the population of such large local government bears to the population of such state. The term large local government means any municipality or county if such municipality or county has a population of 100,000 or more. Indian tribal governments are treated as large local governments for these purposes.
Definition of a Qualified Energy Conservation Bond
The term “qualified energy conservation bond” means any bond issued as part of an issue if: (1) 100 percent of the available project proceeds of the issue are to used for one or more qualified conservation purposes; (2) the bond issued by a state or local government (including an Indian tribe); and (3) the issuer designates the bond as a qualified energy conservation bond.
Definition of a Qualified Conservation Purpose
The term “qualified conservation purpose means:
1) capital expenditures incurred for purposes of reducing energy consumption in publicly owned buildings by at least 20 percent, implementing green community programs, rural development involving the production of electricity from renewable energy resources, or any facility eligible for the production tax credit under Code Section 45 (other than Indian coal and refined coal production facilities)
2) expenditures with respect to facilities or grants that support research in (i) development of cellulosic ethanol or other nonfossil fuels, (ii) technologies for the capture and sequestration of carbon dioxide produced through the use of fossil fuels, (iii) increasing the efficiency of existing technologies for producing nonfossil fuels, (iv) automobile battery technologies and other technologies to reduce fossil fuel consumption in transportation, and (v) technologies to reduce energy use in buildings
3) mass commuting facilities and related facilities that reduce the consumption of energy, including expenditures to reduce pollution from vehicles used for mass commuting
4) demonstration projects designed to promote the commercialization of (i) green building technology, (ii) conversion of agricultural waste for use in the production fuel or otherwise, (iii) advanced battery manufacturing technologies and (iv) technologies for the capture and sequestration of carbon dioxide emitted from combusting fossil fuels in order to produce electricity
5) public education campaigns to promote energy efficiency (other than movies, concerts and other events held primarily for entertainment purposes)
Difference in the Provisions and Preference
The Senate Amendment clarifies that Indian tribal governments will be treated as large local governments regardless of population, while the House Bill could be interpreted as reserving this status to tribes that have populations in excess of 100,000. Thus, the Senate Amendment is preferable.
Summary
H.R. 1 expands the ability of Indian tribal governments to issue tax-exempt and tax credit bonds. This expansion of authority is a positive development for Indian Country. Assuming H.R. 1 is signed into law, Indian tribal governments would be able to use the bond proceeds for projects that would create jobs, construct and repair schools, and enhance energy efficiency and conservation. In addition, Treasury Department report required in the tribal economic development bonds provision may be crucial in permanently eliminating the current restrictions on Indian tribal government bonds, which would allow Indian Country to achieve parity with state and local governments.
For more information, contact:
Kathleen M. Nilles
202.457.1815
kathleen.nilles@hklaw.com
Telly J. Meier
202.419.2549
telly.meier@hklaw.com
toll free: 1.888.688.8500
About Our Indian Law Practice
1 Generally, tax-credit bonds provide the bondholders/investors with a tax credit in lieu of interest, resulting in an interest-free loan to the issuer/borrower. However, tax-credit bonds are only “interest free” if the holder believes that the tax credit is sufficient to compensate for the borrower’s use of money and the risk that it will not be repaid the underlying principal.
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