WASHINGTON — The Internal Revenue Service on Friday proposed to reallocate roughly 95% of the $2 billion of tribal economic development, or TED, bonds allocated to tribal governments since September 2009 that remains unissued for projects.
In its 10-page Announcement 2011-71, the IRS floated new allocation criteria and asked for public input in an effort to increase the likelihood that reallocation of the bonds would result in bond issuance.
It asked for public comments to be submitted on its proposal by Dec. 12.
The IRS also proposed extending by three months to March 31, 2012, the deadline under which tribal governments can issue bonds already allocated in each of the two separate $1 billion tranches. But the IRS said a tribal government must submit a request to the IRS for the three-month extension by Nov. 30.
“It seems to me that this notice shows the current method of allocation is fundamentally flawed. I think the IRS recognizes that if 95% of the proceeds are coming back for reallocation, the program is simply not being tapped,” said Townsend Hyatt, a partner at Orrick, Herrington & Sutcliffe LLP in Portland, Ore., who leads his firm’s Indian tribal finance practice.
“But I’m tremendously encouraged that the IRS is asking for input on how to make the allocation process more effective and make the program have more impact,” he said. “This release shows they’re open to new ideas.”
The American Recovery and Reinvestment Act created TEDs and authorized $2 billion of them to be issued in 2009 and 2010.
Unlike other tax-exempt bonds, with TEDs, tribal governments did not have to show they were being used for projects with “an essential governmental function” as long as the projects were on reservations and did not involve gambling.
Tribal governments have long complained they were held to a higher standard for bond issuance than state and local governments who have no such restriction on their bond issuances.
IRS allocated the $2 billion in two tranches.
It allocated the first $1 billion tranche in September 2009, saying no tribal government would get an allocation of greater than $30 million. Because it got more applications than bonds, it prorated the allocations so that no tribal government got more than about $22.5 million.
The bonds had to be issued by the end of 2010 or the allocation would be forfeited. But so few bonds were issued by that date, that the IRS announced an automatic six-month extension to June 30, 2011. It then allowed issuers to apply for another extension through the end of 2011.
The second $1 billion tranche was allocated in February 2010 and those bonds had to be used by the end of 2011 or else they would be forfeited.
Now the IRS is allowing tribal governments to apply for three-month extensions to issue the bonds by the end of March 2012. But formal applications must be submitted to the agency by Nov. 30 and they must contain specific information and documents.
Hyatt said the TED bond program failed to get off the ground for several reasons. First, he said, the program was created at a time was credit was especially tight across the country for all bonds. Second, many tribes misunderstood the program and thought it involved grants rather than bonds, he said.
In addition, the allocation process was engineered to spread the bonds around widely and some said the program was spread too thin. Finally, some allocations went to projects that were simply not shovel-ready.
In its announcement, the IRS proposed improvements to the allocation process and asked for comments on specific questions, such as what evidence should the IRS require from applicants to show they can obtain the expected security and sources of payment for the bonds.
The IRS also asked what evidence it should demand from applicants to ensure they are ready to issue bonds and use the proceeds.
