WASHINGTON - The Treasury Department issued a notice yesterday detailing the new $2 billion tribal economic development bond program, including how tribal governments should apply for the tax-exempt bonds and the types of projects that can be financed with them.
The new program, which was authorized by the American Recovery and Reinvestment Act in February, expands the kinds of projects that tribal governments can finance with tax-exempt debt.
Typically, Indian governments can only use tax-exempt financing for projects that fulfill an "essential governmental function." This restriction has led to a number of disputes between tribes and the Internal Revenue Service over whether such projects as golf courses and hotels meet that definition and can be bond-financed.
However, the economic development bonds are not subject to the restriction and tribes can use them for any economic development project a state or local government could finance with tax-exempt bonds, except gaming facilities or projects located outside a tribe's reservation. The bonds also could be used to refund previously issued bonds.
The Treasury's 29-page notice includes a sample application that tribal governments will have to submit to the IRS to request some of the bond authority. The five-page application must include a description and location of the project slated for bond financing, as well as the expected timeframe for its development, a reasonably detailed financing plan, and the amount of bonds requested.
The tribal government also must certify in the application that none of the bond proceeds will be used to finance any portion of a building where gaming occurs.
The notice establishes an interim safe harbor for determining if a bond-financed facility would be independent from a gaming facility. Such facilities would be considered separate if they have independent foundations, outer walls, and roofs. A facility could be connected to a gambling facility by doorways or other connections as long as those connections do not affect the structural independence of either building.
The notice does not go as far as the guidance that had been requested by the National Association of Bond Lawyers. NABL asked the Treasury in a March letter to clarify that tribal economic development bonds could be used to finance part of a gambling facility as long as no actual gaming occurred in that portion of the facility.
Thomas Vander Molen, a partner at Dorsey & Whitney LLP in Minneapolis, was appreciative of the notice and interim guidance, but said he would have liked a more flexible safe harbor.
"I think the notice does a reasonable job of implementing the statute and provides helpful guidance on some questions that have arisen," he said. "It is helpful that the notice ... provides a safe-harbor definition of what constitutes a separate building, although that definition is more restrictive than perhaps it could have been."
The IRS plans to distribute the $2 billion of bonds in two $1 billion tranches. A tribal government can apply for up to $30 million from the first tranche, thereby ensuring that a number of tribes will receive allocations. The IRS would like to carry that maximum amount into the second tranche, but could change the limit or remove it altogether depending on the circumstances, the notice stated.
Issuers seeking portions of the first tranche must submit their applications by Aug. 15, and be prepared to issue the bonds by Dec. 31, 2010. Issuers applying for portions of the second tranche must apply after Aug. 15 and by Jan. 1, 2010. Recipients of some of the second tranche must issue the bonds by Dec. 31, 2011.
If tribal governments are unable to issue their allocated bonds by those deadlines, they will forfeit their allocations back to the IRS, which will then redistribute it to other tribes.
"The concept of having two allocation periods, with separate deadlines, makes sense," Vander Molen said. "Some issuers may proceed quickly while others have more time to flesh out their projects and plans of finance."
The notice permits one tribal government to assign its allocation to another for a pooled bond issue. The proceeds can then be loaned to the government that originally received the allocation.
If tribal governments request less than $1 billion during the first application period, the surplus amount will roll over and be available during the second application period. If some of the bond authority remains unallocated after the second application period, the IRS may establish a new application process to handle the remaining bonds, the notice stated.
But if tribal governments request more than the available amount in either application period, every qualified project will receive a reduced allocation, as opposed to some projects receiving their full request and others receiving none.
"It is interesting that the IRS and Treasury will not attempt to pick and choose among eligible applicants," Vander Molen said.