The Internal Revenue Service (the "IRS") and The U.S. Department of the Treasury (the "Treasury") proposed regulations on September 28, 2017 to update and streamline the public approval requirement applicable to tax-exempt private activity bonds issued by State and local governments (the "Proposed Regulations") as imposed under the Tax Equity and Fiscal Responsibility Act of 1982 ("TEFRA Notice"). Issuers must comport with the TEFRA Notice requirement (see section 147(f)) when issuing all types of tax-exempt private activity bonds, as defined in section 141(e).

Issuers can opt to immediately use the Proposed Regulations between the proposal date and the effective date, which still must be determined with respect to any new issuance for which public approval occurs after September 27, 2017. Otherwise the Proposed Regulations are prospectively effective upon being made final. Public Comments are being accepted on the Proposed Regulations for 90 days.

The Proposed Regulations:

The Proposed Regulations provide greater flexibility to State and local governments with respect to the public approval process to reduce administrative burdens associated with the public approval requirement. The Proposed Regulations recognize advances in technology and electronic communication that may facilitate more streamlined procedures for providing public notice of a public hearing. The Proposed Regulations are not expected to have a significant economic effect on governmental units because the Proposed Regulations generally would streamline and simply existing notice requirements.

Below is a brief summary of how the Proposed Regulations differ from existing regulations.

  1. Host Approval.  Existing regulations generally require that both the governmental unit that issues the bonds (the "Issuer") and a governmental unit with the jurisdiction over the location of the finance project approve an issue of private activity bonds (the "Host").The Proposed Regulations provide that Host approval is not necessary for mortgage revenue bonds (defined as qualified mortgage bonds, qualified veterans' mortgage bonds), qualified student loan bonds, or qualified 501(c)(3) bonds used to finance working capital expenditures.
  2. Permitted Method of Public Notice.  The Proposed Regulations expand the permitted methods of notifying the public to include postings on a governmental unit's public website, or alternative methods permitted under a general State law for public notices for public hearings of a governmental unit. The Proposed Regulation retains the 14-day notice period.
  3. Content of Reasonable Public Notice.  Existing regulations require a level of specificity of information for the public approval process that has proven to be unduly limiting and burdensome in certain respects. The Proposed Regulations would mitigate the required level of specificity.
  4. Deviations from the Information in the Reasonable Public Notice and the Actual Project. Under the existing regulations, omissions or mistakes made in the public notice process may affect the validity of the public approval. The Proposed Regulations provide greater flexibility in fixing such omissions or mistakes, for example:
    • Deviations from the size of a proposed bond issue for a proposed project in an amount greater than 10% would be considered a substantial deviation.
    • If there is a deviation between the initial owner or principal user of the project and the actual initial owner or principal user of the project, the deviation is defined as insubstantial if the parties are related on the issue date. 
    • The Proposed Regulations would allow supplemental post-issuance public approvals to cure certain substantial deviations that result from unexpected events or unforeseen changes in circumstances that occur after the issuance of the bonds.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.