WASHINGTON — The Internal Revenue Service overhauled its tribal economic development bond allocation process and on Monday started soliciting applications for the reallocation of $1.8 billion of available bond volume cap for these bonds.

TED bonds, which were allocated to tribal governments beginning in September 2009, largely remain unissued for projects.

In its 20-page announcement, the IRS identified the available authority for issuing TEDs, application requirements, the five-page forms used to request volume cap allocations and the method that the Treasury Department and the IRS will use to allocate the volume cap.

The $1.8 billion includes amounts that were previously allocated and subsequently forfeited, the notice said.

Applications for TED bonds will be accepted by the IRS on an ongoing basis and must be submitted by an Indian tribal government.

Townsend Hyatt, a partner at Orrick, Herrington & Sutcliffe LLP in Portland, Ore., applauded the changes to the TED bond allocation process and described it as a major overhaul of the program.

"This looks to be a more rigorous application and allocation process than was used before," Hyatt said. "It should help winnow out overly ambitious projects that have little hope of getting financed. Indian country has a lot riding on the success of the TED program. If the program is successful, it strengthens Indian country's case for parity in tax-exempt borrowing generally as tribal governments and the Treasury have advocated."

The American Recovery and Reinvestment Act created TEDs and authorized $2 billion of them to be issued in 2009 and 2010 to promote economic development on tribal lands.

Unlike other tax-exempt bonds used by Indian tribal governments, TEDs did not have to be used for projects with "an essential governmental function" as long as the projects were on reservations and did not involve gaming.

However, experts said the program failed to gain momentum because many tribes misunderstood the program and it was created at a time when credit was tight nationwide for all bonds. As a result, a total of only $197.15 million of TED bonds have been issued by Indian tribal governments since the program's creation, the IRS said.

In this revised TED bond application process, applicants must describe in detail the project or projects to be financed with the proceeds of the TED bonds, including information regarding the type and use of the project and a certification that the project will qualify for these bonds, the notice said.

The application must also include the expected cost of the project, including the portion to be financed by the proposed bonds and any portion to be financed by other sources. The IRS reminded tribal governments that TED bonds must be used for projects on Indian reservation and not for gaming purposes.

The IRS said it will allocate an amount of available volume cap equal to the amount requested on a "first-come, first-served" basis by order of the application submission date. This will mean that tribes who are ready to move on eligible projects should do so quickly because they have a greater chance of getting a larger allocation to pay for their project, Hyatt said.

The new guidelines also allow for much larger dollar allocations to individual tribal issuers compared with the 2009 formula, which only allowed for a maximum of $30 million per tribe. They provide a formula that permits tribes to receive the greater of 20% of the available volume cap on the date of application or $100 million. Twenty percent of $1.8 billion would be $360.5 million — an enormous increase over what tribes could receive individually before, Hyatt said.

Larger projects can get done or refinanced using TED bonds that was possible before, Hyatt said. "Larger projects should mean greater interest and access to the tax-exempt bond market," he said.

Applicants have 180 days from the date of the allocation letter to issue the proposed TED bonds, otherwise they will be forfeited and will be available for reallocation. If an Indian tribal government is unable to issue the TED bonds within the 180-day period, they can reapply with the IRS for an allocation. This is a much shorter time period than the one- to two-year window previously used for the TED allocation process.

More stringent standards of readiness to issue the TEDs now apply to tribes, Hyatt said. The application must contain documentation from an independent third party knowledgeable in the marketability of tax-exempt bonds showing that the bonds are reasonably expected to be issued within 180 days. The application must also certify that bond counsel has been engaged in the process and will render an opinion on tax-exempt status.

Before submission of the application, all federal, state and local approvals for the project must be obtained or the tribe must certify that they will be in hand before 180 days.

The IRS said they estimate 143 respondents will respond to the notice. The agency said they will track available volume cap and provide updates periodically.

In December 2011, the Treasury Department issued a report urging Congress to put Indian tribal governments on par with states and localities so they could issue both governmental bonds without the "essential government function" restrictions and private-activity bonds.

Indian tribes have long complained that they are held to a higher standard for issuing bonds than state and local governments, which have no such restrictions on bond issuances.

The Native American Finance Officers Association is holding a day-long bond summit in New York Wednesday where John Cross 3d, the Treasury Department's associate tax legislative counsel, will speak about the new guidelines.

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