WASHINGTON – Two lawyers specializing in Indian tribal financing agree that tribal governments need to be put on a par with state and local governments for tax-exempt bonds, but they differ on whether Congress will pass legislation that would establish that parity.
Kathleen Nilles, a partner at Holland & Knight in Washington, spoke recently to The Bond Buyer about legislation pending in the House that would expand the ways in which Indian tribes can issue tax-exempt bonds and access capital.
Nilles, who represents the National Congress of American Indians on tax-exempt legislative initiatives and formerly served as tax counsel to the House Ways and Means Committee, said that although it is hard to determine the likelihood of an Indian tribal tax bill being signed into law, 2017 may be its best chance of success.
"If there was ever a chance for a bill to be successful, I think it would be during the time of tax reform," she said.
The Tribal Tax and Investment Reform Act of 2016 (H.R. 4943), introduced by Rep. Ron Kind, D-Wis., in April, would amend the tax code to remove the special status for tribal governments and instead establish a national volume cap for their tax-exempt bonds based on a tribe's national population, similar to the cap that exists for state governments.
Indian tribal governments have historically faced disadvantages in accessing capital because of the restrictions on the tax-exempt bonds they can issue. Tribes have called for a repeal of the restrictions, which allow them to only issue governmental bonds if the proceeds are used for an "essential governmental function" such as schools, streets or sewers. They also cannot issue private activity bonds like state and local governments.
Many lawmakers and muni market participants have pegged the post-election year as one for long-awaited tax reform legislation, including House Republicans who introduced their blueprint for tax reform in June.
While Nilles said this could be a shot for the tribal bill to succeed, Townsend Hyatt, a partner at Orrick, Herrington & Sutcliffe LLP in Portland, Ore., disagreed.
"I'm afraid H.R. 4943 has little chance of passage," Hyatt said. "It's essentially the same legislation that's been recycled over several legislative sessions, and it has never made it out of committee."
Although variations of the Tribal Tax and Investment Reform Act have been introduced numerous times in Congress, Nilles, who helped lawmakers draft the bill in the House, remained cautiously optimistic. She said she is hoping to get additional sponsors to the bill and will push to have a similar bill introduced in the Senate.
Kind's bipartisan bill, co-sponsored by Rep. Lynn Jenkins, R-Kan., was referred to the House Ways and Means Committee and the House Education and the Workforce Committee in April. Jenkins is also on the Ways and Means Committee.
TED BONDS
Indian tribal governments can issue bonds with fewer restrictions now under a law passed in 2009. The American Recovery and Reinvestment Act created Tribal Economic Development (TED) bonds, which can be used for the same projects that can be financed with tax-exempt bonds, including water treatment facilities, qualified residential rental projects and sewage facilities.
TED bonds are not subject to the "essential governmental function" restriction like other tribal bonds. However, TED bonds cannot be used to finance casinos or projects that are not located on a tribe's reservation.
ARRA permitted tribal governments to issue up to $2 billion of TEDs. The maximum allocation amount is equal to the greater of $100 million or 20% of the total unallocated volume cap, according to Treasury.
The Internal Revenue Service recently published a notice that said, as of Aug. 1, the published volume cap limit is $191.51 million and the amount of available cap is $957.54 million.
Although there is a sizable amount of cap left for TED bonds, Nilles said the location restriction deters many tribes from taking advantage of them.
Projects financed with TED bonds have to be on land a tribe owns and within the tribe's historical boundaries, but not trust land. The Kind bill would remove this location restriction, Nilles said.
Nilles said that because of their special status, a tribal government's most valuable asset is its land because it cannot be mortgaged. Many of the economic development and infrastructure projects for which Indian tribal governments are seeking financing would have significant spill-over benefits for local non-Indian communities as well, she added.
"Although there is no short term danger of exhaustion [of TED bonds] and the allocation can always be extended, we thought this would be a good time while there's actually still money in the program to have a permanent fix," Nilles said. "There was also a sense that when interest rates are low that it would be less expensive."
There have been other issues with TED bonds. Treasury initially split up the allocation authority equally among tribal governments, which led many of them to think the allocations were for free loans. As a result, many tribes never used their allocations and forfeited them back, said Nilles. Treasury revamped the program, which required tribes to show they had a commitment from a bank or a tax opinion from a lawyer before allocating funds.
OTHER BARRIERS
Hyatt said tribes face four major barriers tribes face when trying to access the tax-exempt market, besides the lack of parity under the federal tax code. They are: the lack of parity under federal securities laws, the lack of a property tax base to fund certain government projects, the credit rating of tribal debt, and sovereign immunity.
State and local governments have an exemption created under the Securities Act of 1933 which allows access to the bond market through public offerings. Tribal governments, which don't have this exemption, must use commercial bank loans or private placements as their main borrowing methods. Hyatt said bank loans and private placements have shorter maturities. Commercial banks offer maturities of 5-10 years where as private securities offerings run 8-15 years bond the maturities of publicly offered bonds are 15-30 years.
"This means state and local governments are able to finance large, expensive capital improvements over a period of time more closely matching the useful life of the assets with less bite on the current budget," he said.
Because tribal governments rely primarily on federal funds and on economic enterprise revenues to pay for infrastructure, Hyatt said this also puts them at a disadvantage with investors.
"The absence of a more conventional tax base means that [general obligation] financing in Indian country must rely on the tribe's overall balance sheet, and tax exempt investors are not as accustomed to this," he said.
Most tribal debt is unrated, which can make many deals, especially smaller ones, more difficult to complete, he said.
Hyatt added that buyers of tribal debt often have to factor in issues not common to ordinary muni deals, such as legal issues relating to enforcement of contracts, procedures for resolving disputes and the creation of security interests. That makes for more heavily negotiated terms, he said.
