In this week’s Monday Muni Minutes: Private Radar on Muni Bonds, plus AZ Issuer’s IRS Audit Challenge, P3 Magic in the Heartland, CA Bond Accountability Task Force…and more
Enjoy and have a great week! Deb
CURRENT EVENTS
On the Radar: Who Gets Access to Tax Exempt Bonds?
With all the recent focus on what is or is not considered private activity for purposes of bond issuance, Dennis Zimmerman from the American Tax Policy Institute is raising serious questions 
about “non-governmental debt.”
Stadiums or other professional sports complex bonds are a common example where tax-exempt private activity bonds cannot be used…therefore, governments typically pass voter-approved measures to issue governmental bonds so debt service is not paid from the facility revenues…thereby dodging the private payments test bullet.
Under President Obama’s 2016 budget, the private payments test would be eliminated, thereby making the bonds taxable PABs if more than 10% of the proceeds are used by private parties. One test – not two.
Tax-exempt industrial development bonds, commonly used by manufacturers, are also at risk. Zimmerman believes that tax exempt bonds should only be used for projects with general public use.
Several officials from all areas of government continue to emphasize how critical continued access to municipal bond financing is for “health and well-being” at both the state and local levels.
Tennessee Treasurer David Lillard called bonds “the backbone of state and local infrastructure projects and their financing,” while Rep. Randy Hultgren, R-IL, said that many state and local governments are facing fiscal challenges that make it harder for them to finance infrastructure and “municipal bonds are a lifeline to local governments”.
House leadership is being urged to support the muni exemption. State treasurers and other muni finance officers are being urged to ask their members of Congress to do so as well.
[Editor’s Note: How many states have stadiums on the docket for bonds? Just in the Bond Buyer, I count four: GA, WI, MO and CO. We see that PABs are still a big factor, but focus is also zooming in on industrial development bonds – which could revitalize local economies with manufacturing jobs. I encourage you to contact your legislator, as you feel is appropriate.]
Arizona Issuer’s Bonds to Be Challenged by IRS
The Scottsdale Municipal Property Corporation (MPC), which can issue bonds on behalf of the City of Scottsdale, AZ, just had its schedule rearranged a bit…
Actually…quite a lot.
$65 million of its 2013 bonds, currently under audit, are expected to receive a “notice of proposed issue” from the IRS regarding bond allocations to “challenge the allocation of a portion of the proceeds of the bonds to refinance the initial lease term of the existing municipal Scottsdale Fashion Square Partnership Parking Garage Lease Agreement.”
The city entered into a 50-year lease agreement in 1998, for use of the Nordstrom’s Garage. Total rent was to be $31.375 million, payable in installments over the first 30 years – with annual interest at 9.14% on the unpaid balance.
Ouch – at least by today’s rate standards.
In December 2012, the city exercised its prepayment option under the lease, and after negotiation, agreed to pay $31 million plus provide two development fee credits to Scottsdale Fashion Square for $1.25 million each, usable within 5 and 10 years respectively.
So what is Scottsdale’s position?
In its EMMA Notice filed last week, “The city disagrees with the positions of the IRS” and “continues to discuss this matter with the IRS, and will respond to any further notices from the IRS as necessary,”
[Editor’s Note: Remember in our “Solving the Compliance Puzzle” series and our video trainings when we talked about how important it is to scrutinize leases when tax-exempt bonds are involved? Leases have been and will continue to be a lucrative hot-button audit item for the IRS – as this case clearly shows. What are your experiences?]
OUT & ABOUT
Conferences: The Bond Buyer’s Midwest Municipal Market Symposium
June 30, 2015, InterContinental Chicago Magnificent Mile, Chicago, IL
Resources:
There are some really neat tools on this site. There are also some informative articles you can read…
On-Demand Post Issuance Compliance Training for Issuers
“Compliance Basics” – a Free, 3-part video training, plus the Monday Muni Minutes
On-Demand Webinar
Resource: On Demand Replay of Continuing Disclosure after MCDC
Slides: Final Slide Deck for Continuing Disclosure after MCDC
NEW: Downloadable White Paper: Jargon Watch
Ever wonder what a Black Swan is or Break the Buck means? Find out here.
A Couple of Muni Market Minute Updates
(Quick news bits on topics we’ve covered in earlier MMM editions!)
The California Bond Accountability Task Force Appointed
On March 26th, California Treasurer John Chiang appointed 12 people to the CA Bond Accountability Task Force. This task force was created in response to the $1.3 million conduit issuer embezzlement that occurred in the Bay Area in January.
Chiang’s action was swift and decisive. “Like any public resource, the $700 billion that California and its localities have borrowed in the past 10 years alone must be safeguarded from waste and mismanagement. Importantly, it’s also time to empower taxpayers who pay for these borrowings through higher taxes and assessments to hold their leaders accountable for project delivery.”
Their first meeting is scheduled for April 8th. You can learn more in this press release.
Editor Note: [When the Bay Area embezzlement first hit the news, I knew things were going to change. California has over 4,000 municipalities and special districts which rely on tax-exempt funding and they will do what is necessary to protect trustworthy access to the capital markets. I actually hope to see more states follow in California’s footsteps and develop task forces of their own.]
Pot Hole Dilemma Hits Home…States Defer Road Repairs as HTF Funding Concerns Continue
$779.7 million in projects in four states have been stopped and another $1.8 billion from nine more states could follow suit if the HTF funding expires on May 31st, about 62 days from now.
American Road & Transportation Builders Association President Peter Ruane stated “The continued uncertainty with the Highway Trust Fund has real world, negative impacts as state governments begin cutting back on their construction plans because they don’t know if the funding will be there to pay the bills a few months from now,”
“This, in turn, prevents private sector companies from hiring workers and making major capital investments,” he said. Ruane shared that 52% of state highway and bridge work is reimbursed by the HTF. He also expects more states to delay projects as the actual HTF funding deadline gets closer.
Arkansas highway director Scott Bennett brought the impact of the situation even closer to home. “If you stop and think about the economic impact this has, not only on construction jobs but the lost commerce that results in each local area because construction isn’t taking place, then you begin to understand the trickledown effect,” he said.
Editor Note: [Although we read from last week’s edition that the HTF will likely be funded “through construction season”, the local skittishness due to lack of a long-term plan is quickly trickling down to the states…I would love to hear your comments on this.]
Editor Commentary: Coasties Look Out: PA and OH “Rockin’ It” Near the Heartland with P3 Deals
On March 18th, Pennsylvania issued $800 million to fund the Rapid Bridge Replacement Project, a precedent-setting, public private partnership to replace 558 bridges throughout their state over the next three years.
All with tax-exempt private activity bonds…
The really interesting thing about this P3 is that it took on a big, ugly problem and put economies of scale savings right at the heart of the deal. As
Ross Moskowitz, a former executive director of the NY City Industrial Development Agency said, “Take bridges – you have similar classes of bridges for what’s needed,” he said. “You probably have a similarity of types of bridges with the same character, structural design and deficiencies. You could do a mass production, putting them all together as one P3 contracting, allowing respondents to bid with greater efficiencies.”
Call it what you like, but that combination of innovative planning, healthy competition and simply being in the market at the right time is looks like it will provide PA with $25 million in interest savings benefit.
That is a hefty chunk of change…not being spent!
Not to rest comfy in their savings, PA is also requesting qualifications for its next P3 idea…funding, building and operating 37 compressed natural gas fueling facilities for their public transit buses.
Look for more on that neat little project in a few months…
This week, their neighbor to the west in the heartland, Ohio, will launch its first P3 deal, aimed at selling $230 million in tax exempt PABs to finance a major road project through the Appalachians.
It will pay for roughly 50% of the 4-lane, 16-mile stretch of highway and includes 22 bridges and five interchanges. A Transportation Infrastructure Finance and Innovation Act, or TIFIA, loan will finance the remaining $221 million needed, at an expected interest rate of 1.38%.
It will bring much-needed development to one of the State’s poorest areas. Ohio hopes to utilize more P3’s for transportation projects going forward.
One interesting point to note on the Ohio P3 is that it is an availability-payment model, a rare, but increasingly popular model for governments.
Moody’s, in a commentary late last fall said three things regarding the P3 surge:
- The US was late to the P3 game, but
- The US, due to the magnitude of its infrastructure, could become the largest P3 market in the world
- The US can benefit from “lessons learned” in Europe, Canada and Mexico
Both states readily admit that they overcame serious challenges to make these P3’s work…
In PA, they had to overcome a change in governorship mid-way through the process along with serious contractor distrust as several earlier P3 attempts fizzled and burned.
Ohio had to address hefty milestone payments, P3 renewals every two years to comply with statutory long-term commitment restrictions, plus lien structures and bondholder protections.
Clearly P3s are providing innovative solutions… with several states quickly following suit.
Other P3 projects expected in 2015 include managed lanes, bridge replacement and toll concession deals in Texas, the Indianapolis Consolidated Justice Complex in Indiana and Interstate 70 work in Colorado.
For now, we will definitely need to keep an eye on our land-locked friends in or near the heartland…
They may not have access to the ocean at their borders, but they sure are making waves by addressing their particular transportation and infrastructure problems with innovation…and tapping into public private partnerships.
In closing, It’s ALMOST Ready! PIC Essentials – the 10-Step Compliance Framework needs just a few more finishing touches before being available as an evergreen, on-demand video series program – Look for it – hopefully later this week! Stay tuned…
We truly believe these issuer-focused, relevant and (hopefully) somewhat fun virtual trainings will help you improve your post issuance compliance programs – in a cost and time effective way.
After all, time is money, right?
We hope you found this week’s edition of the Monday Muni Minutes valuable and informative.
As always, your comments are welcome…
To your compliance success,
Debbie
The greatest compliment you can pay us is to share this newsletter with your issuer friends….
P.S. Remember, invite your issuer friends to join us on Issuer 2 Issuer and to get their free online training, PIC Basics!
P.P.S Want a one-click way to get faster information? If you are on LinkedIn, you can get access to breaking muni news articles as well as interesting compliance tips and resources, posted by us during the week. Join our private Group Page, and follow us on our Company Page.