United States: Public Finance Alert - January 2009

Legislative Provision

House Bill (As passed on 1/28/09)

Senate Bill
(After committee markup on 1/27/09)

Temporary expansion of "qualified tax-exempt obligation" (QTEO) provisions.

Effective for bonds issued after 12/31/08, through 2010.

Increases the QTEO limit from $10 million to $30 million for tax-exempt bonds issued in 2009 and 2010 (new money or refunding).

[SAME.]

In applying the $30 million limit to qualified 501(c)(3) bonds issued during 2009 and 2010, the bonds are treated as though issued by the 501(c)(3) borrower, not by the actual issuer. Thus, each 501(c)(3) is subject to its own $30 million limitation and qualified 501(c)(3) bonds do not count against the issuer's limit.

[SAME.]

For pooled financings,¹ the limit is applied to the "qualified borrower"² (from the pool) rather than to the pool issuer.³

[SAME.]

Temporary extension of de minimis (2 percent) safe harbor to investment interest of financial institutions.

Effective for bonds issued after 12/31/08, through 2010.

Financial institutions are generally not allowed to deduct that portion of their interest expense that is allocable to tax-exempt interest received on bonds that are not QTEOs. The allocation is generally made by multiplying the bank's interest expense by the ratio of tax-exempt bonds (other than QTEOs) to total assets of the bank. Under the proposal, a financial institution can exclude from the numerator of that fraction tax-exempt obligations owned by the financial institution issued during 2009 and 2010, up to a limit of 2 percent of the financial institution's assets.

[SAME.]

However, tax-exempt obligations excluded from the numerator under the above are treated as "financial institution preference items," and any interest deduction attributable to them is reduced by 20 percent in the case of financial institutions that are banks.⁴

[SAME.]

Current or advance refunding bonds are treated as having been issued on the date of the original refunded bond.

[SAME.]

Temporary relief from AMT.

Effective for bonds issued after 12/31/08, through 2010.

Interest on tax-exempt private activity bonds issued in 2009 and 2010 is not subject to the alternative minimum tax. Interest on all tax-exempt bonds issued in 2009 and 2010 is not included in the corporate AMT adjustment based on adjusted current earnings. For these purposes, refunding bonds are treated as issued on the date the original (new money) bonds were issued.

[SAME.]

Qualified School⁵ Construction Bonds ¹²

Effective for bonds issued after 12/31/08, through 2010.

Qualified School Construction Bonds (QSCBs) are treated as "qualified tax credit bonds" under Code Section 54A.

[SAME.]

The credit rate on QSCBs is set by the Treasury Secretary at a rate that is 50 percent of the rate that would permit issuance of such bonds without discount or interest cost to the issuer.

The credit rate on QSCBs is set by the Treasury Secretary at a rate that is 100 percent of the rate that would permit issuance of such bonds without discount or interest cost to the issuer.

The maturity of QSCBs is the term that the Treasury Secretary estimates will result in the present value of the obligation to repay the principal on such bonds being equal to 50 percent of the face amount of such bonds, using as a discount rate the average annual interest rate of tax-exempt obligations having a term of 10 years or more that are issued during the month the QSCBs are issued.

[SAME.]

General Requirements:

(1) 100 percent of the available project proceeds (sale proceeds and investment earnings on sale proceeds less up to 2 percent of issuance costs) must be used for the "construction, rehabilitation or repair of a public school facility or for the acquisition of land on which such a bond-financed facility is to be constructed."

(2) QSCBs must be issued by a State or local government within which the school is or will be located.

(3) The issuer must designate the bonds as QSCBs.

[SAME.]

National limitation – $11 billion may be issued in each of 2009 and 2010.⁶

(1) States⁷ get 60 percent of the $11 billion issuance authority ($6.6 billion). $6.6 billion is allocated among the States based on their populations of children 5 through 17 (irrespective of economic status). This $6.6 billion of issuance authority may be reduced by allocations to US possessions (other than Puerto Rico) based on a State's population below the poverty line. States that do not use all of their allocations can carry them forward to the next calendar year. Thus, QSCBs could be available in 2009 and 2010, and also in 2011 and beyond for any issuance authority carried forward from 2010. Each State is free to suballocate this issuance authority to political subdivisions to the extent and in the manner it chooses.

(2) The remaining 40 percent of issuance authority ($4.4 billion) is allocated among "large local educational agencies."⁸ It is made in proportion to the respective amounts each agency received for Basic Grants under subpart 2 of Part A of Title I of the Elementary and Secondary Education Act of 1965 for the most recent fiscal year ending before the year of allocation.⁹ If a large, local educational agency has issuance authority left over at the end of a calendar year, it may "suballocate" the remaining issuance authority to its State. Under this allocation, described specifically in the footnotes, between 100 and 125 large local educational agencies would receive this 40-percent allocation.

(3) The Treasury Secretary must adjust States' allocations to ensure that any allocations under (1 above) plus the allocations to any "large local educational agencies" in the State are greater than a floor amount, equal to: 1.68 x [minimum "percentage" from 20 U.S.C. 6333]¹⁰

National limitation –

$5 billion may be issued in each of 2009 and 2010.¹¹

(1) [SAME, except with respect to amount of issuance authority.]

(2) The Senate Finance Committee's markup omits this provision. Presumably, this means that the States will receive the issuance authority otherwise granted to large local educational agencies.

The three-year spending rule applicable to other qualified tax credit bonds applies (i.e., must spend all proceeds within three years or use unspent proceeds to redeem bonds within 90 days.¹³

[SAME.]

The special arbitrage rules applicable to other tax credit bonds apply. ¹⁴

[SAME.]

The credits may be stripped i.e., assigned by the bondholder to another party) from the bonds.

[SAME.]

Qualified Zone Academy Bonds

Effective for bonds issued after 12/31/08 and before 1/1/11

Authorizes the issuance of up to $1.4 billion of qualified zone academy bonds in each of 2009 and 2010. Current law permits $400 million in 2009, and none thereafter (except possible carryover).

[SAME.]

The credits may be stripped from the bonds.

[SAME.]

"Taxable Bond" Option for Governmental Issuers

Effective for all bonds, new money or refunding, issued after enactment.

General – Allows governmental issuers to irrevocably elect, at or before issuance, to treat bonds that would be tax exempt and would not be private activity bonds as taxable bonds that provide a tax credit to holders equal to 35 percent of the interest payable. Credits accrue as of the date of the interest payments. Credits can be used to offset regular tax or AMT liability. Unused credits can be carried forward to future taxable years. To be eligible for election, bonds must not have more than a de minimis amount of OIP.¹⁵

[Referred to as "Build America Bonds"] [SAME.]

Interest on a taxable governmental bond and the related credit are includible in gross income to the holder for Federal tax purposes. The bill provides that until a State requires otherwise, the interest and credit on any taxable governmental bond is treated as exempt from federal income tax for purposes of State income tax laws.

[SAME.]

Yield on taxable governmental bonds is determined without regard to the credit for arbitrage purposes.

[SAME.]

The credits may be stripped from the bonds

[SAME.]

Special Rule Allowing Credit to the Issuer rather than the Holder. This election is available only for bonds of which 100 percent of "available project proceeds" (sale proceeds and investment earnings on sale proceeds less up to 2-percent issuance costs) are spent for capital expenditures.

The special issuer-credit taxable bond option is applicable to bonds issued after the date of enactment of the provision and before 1/1/11. The credit is available for the full term of bonds issued before 1/1/11; it does not terminate on 1/1/11 for bonds issued before that date.

[SAME.]

The IRS pays the amount of the credit to the issuer. The payment by the Treasury Secretary is to be made contemporaneously with the interest payment made by the issuer, and may be made either in advance or as reimbursement. In lieu of payment to the issuer, the payment may be made to a person making interest payments on behalf of the issuer. For purposes of the arbitrage rules, the yield on a qualified bond is reduced by the amount of the credit/payment.

[SAME.]

Clean Renewable Energy Bonds or CREBs

Effective for bonds issued after the date of enactment

The proposal authorizes issuance of up to an additional $1.6 billion of CREBs.

[SAME.]

The credits may be stripped from the bonds.

[SAME.]

Qualified Energy Conservation Bonds

Effective for bonds issued after the date of enactment.

(1) The proposal expands the present-law qualified energy conservation bond program by authorizing issuance of an additional $2.4 billion of qualified energy conservation bonds, expanding the limitation from $800 million to $3.2 billion.

(2) Bonds can be issued to fund loans and grants for green community programs without causing such bonds to be treated as private activity bonds for purposes of the private activity bond restrictions in the qualified energy conservation bond rules.

(1) [SAME.]

(2) [NO PROVISION.]

The credits may be stripped from the bonds.

[SAME.]

Expanded Small-issue IDBs

Effective for bonds issued after the date of enactment, but before 1/1/2011.

[NO PROVISION]

Expands the definition of "manufacturing facilities" in the small-issue IDB provisions¹⁶ to include any facility that is used in the manufacturing, creation or production of tangible property or intangible property (meaning any patent, copyright, formula, process, design, know-how, format or other similar item).¹⁷

Facilities that are functionally related and subordinate to the manufacturing facility are treated as a manufacturing facility and any amount of the net proceeds (rather than the current law 25 percent) of the bonds can be used to finance such subordinate facilities.

Exempt Facility Bonds for High-Speed Intercity Rail Facilities

Effective for bonds issued after the date of enactment.

[NO PROVISION]

Provision modifies definition of "high-speed" train to include trains that are reasonably expected to attain a top speed of 150 mph, rather than "operating" at speeds above 150 mph between stops.

Recovery Zone Economic Development Bonds (RZEDBs) and Recovery Zone Facility Bonds

Effective for bonds issued after the date of enactment and before 1/1/11.

Authorizes both Recovery Zone Economic Development Bonds ($10 billion limit) and Recovery Zone Facility Bonds ($15 billion limit).

[SAME.]

The Treasury Secretary allocates the Recovery Zone Bond issuance authority among the States in the proportion that each State's 2008 employment decline¹⁸ bears to the aggregate 2008 employment declines for all States.

Each State is then required to suballocate issuance authority among counties and large municipalities based on proportional employment decline. When calculating county employment decline, the decline in any large municipality located in that county is ignored.

Each State is guaranteed at least 1 percent of total issuance authority. Then, the remaining authority is allocated as in the House proposal. [OTHERWISE, SAME.]

After receiving a suballocation from the State, the local government issuer designates one or more areas as recovery zones. To qualify as a recovery zone, an area must have: (i) significant poverty, unemployment or rate of home foreclosures; (ii) be designated as an empowerment zone or renewal community; or (iii) be an area of "general distress."¹⁹

Lacks the "general distress area" zone designation option for the issuer.

Recovery Zone Economic Development Bonds (RZEDBs) (taxable, "issuer-credit" governmental bonds)

RZEDBs are taxable governmental bonds issued as part of an issue, if:

(1) 100 percent of available project proceeds are to be used for one or more qualified economic development purposes; and

(2) Such bonds are designated by the issuer as RZEDBs.

"Qualified economic development purpose" means: Promoting development or other economic activity in a recovery zone including: (i) capital expenditures paid or incurred with respect to property located in such zone; and (ii) expenditures for public infrastructure and construction of public facilities located in such zone.

[SAME.]

Entitles the issuer of RZEDBs to receive an advance tax credit equal to 55 percent of the interest payable on an interest payment date.

Entitles the issuer of RZEDBs to receive an advance tax credit equal to 40 percent of the interest payable on an interest payment date.

The credit may be stripped from the bonds.

[SAME.]

Recovery Zone Facility Bonds ²⁰

New category of exempt facility bonds which are tax-exempt private activity bonds.

[SAME.]

Although the legislation is not specific, presumably recovery zone facility bonds can be issued only by a county or large municipality after receiving a mandatory suballocation from the State.

[SAME.]

"Recovery zone property" is defined as depreciable property²¹, if:

(1) Such property was purchased after the date the recovery zone was designated;

(2) The original use of the property commences with the user;

(3) Substantially all of the use of the property is within the recovery zone; and

(4) The bond-financed property is used in the active conduct of a qualified business.²²

[SAME.]

Recovery Zone Facility Bonds are private activity bonds, so all the private activity bond rules apply, except:

(1) Recovery Zone Facility Bonds do not count against the aggregate annual State private activity bond volume limits; and²³

(2) The restriction on acquisition of existing property does not apply.²⁴

[SAME.]

Tribal Economic Development Bonds (TEDBs)

Effective for bonds issued after the date of enactment.

National limitation of $2 billion, allocated by the Treasury Secretary after consultation with the Secretary of the Interior.

[SAME.]

TEDBs are treated as issued by a State, but volume cap under Code Section 146 does not apply.

[SAME.]

TEDBs are any bonds:

(1) Issued by an Indian tribal government;

(2) That would be tax-exempt if issued by a State but would be taxable under Code Section 7871(c); and

(3) That are designated by the Indian tribal government as a TEDB.

[GENERALLY SAME.]

Cannot be used for casinos, and can only be used for property on the issuer's reservation.

[SAME.]

Extension of "Prevailing Wage" Requirement to Projects Financed by Qualified Tax Credit Bonds

Effective for bonds issued after the date of enactment.

Subchapter IV of Chapter 31 of Title 40 of the United States Code (prevailing wage requirements) applies to projects financed with the proceeds of (i) CREBs, (ii) QECBs, (iii) QZABs, (iv) QSCBs, and (v) RZEDBs.

[SAME.]

Expansion of New Markets Tax Credit Program

Effective for calendar years 2008 and 2009.

[NO PROVISION]

Increases the maximum amount of "qualified equity investments" from $3.5 billion to $5 billion each year. The additional amount for 2008 must be allocated to qualified CDEs that submitted an allocation application for 2008 and either:

(1) Did not receive an allocation for 2008, or

(2) Received an allocation for 2008 in an amount less than requested.

The proposal also provides alternative minimum tax relief for equity investment allocations subject to the 2009 annual limitation.

Delay of Onset of Withholding on Payments to Government Contractors

Effective on the date of enactment.

Delays for an additional year (from 12/31/10 to 12/31/11) the onset of a provision requiring that government payors under certain programs withhold 3 percent of the payment.

[SAME.]

Provision

House Bill Credit Rate

Senate Bill Credit Rate

CREBs

70 percent

70 percent

Qualified Energy Conservation Bonds

70 percent

70 percent

Recovery Zone Economic Development Bonds

55 percent

40 percent

Qualified School Construction Bonds

50 percent

100 percent

Qualified Zone Academy Bonds

100 percent

100 percent

Build America Bonds (Taxable Governmental Bonds)

35 percent

35 percent²⁵

Provisions Effective Until 1/1/2011

Provisions Effective Indefinitely

Extension of de minimis (2-percent) safe harbor to investment interest of financial institutions.

Taxable Governmental Bonds

Modifications to "qualified small issuer" exception from disallowance of investment interest deduction for financial institutions.

Clean Renewable Energy Bonds

Temporary modification of alternative minimum tax limitations on tax-exempt bonds.

Qualified Energy Conservation Bonds

Qualified School Construction Bonds.

Exempt Facility Bonds for High-Speed Intercity Rail Facilities

Qualified Zone Academy Bonds.

Tribal Economic Development Bonds

Expanded Small-Issue IDBs

Extension of "Prevailing Wage" Requirement to Projects Financed by Qualified Tax Credit Bonds

Recovery Zone Bonds.

Taxable bond option for governmental issuers, where the issuer makes an irrevocable election to take the tax credit, instead of the holder taking such credit.