DALLAS - Lafayette Parish, La., is the first local government in the United States to benefit from the new recovery zone economic development bonds, with a negotiated sale of $3.64 million of the taxable debt authorized by the American Recovery and Reinvestment Act.
The Lafayette bonds, priced earlier this month, are the first tranche from the recently enacted $10 billion federally subsidized borrowing program. Eligible local governments in areas affected by the recession can issue the taxable securities and receive a 45% rebate on interest costs from the U.S. Treasury.
The bonds, insured by Assured Guaranty Corp., are supported by revenues from the parish's sales tax dedicated to public improvements. The sales tax debt has an underlying rating of AA by Standard & Poor's. Moody's rates the parish's GO debt at Aa3.
Foley & Juddell LLP is bond counsel for Lafayette.
Morgan Keegan & Co. was underwriter on the sale, which priced July 7. The parish also sold $58 million of Build America Bonds.
"These [recovery zone economic development bonds] are like Build America Bonds, but with a 45% rebate instead of the 35% on the conventional BABs," said Buck Landry, managing director of Morgan Keegan's public finance offices in New Orleans and Baton Rouge. "We call them super-BABs."
Landry said the super-BABs will be popular because the issuer pays much less than the tax-exempt rate with the direct payment from the Treasury equal to 45% of each interest payment on the bonds. The credit goes directly to the issuer and cannot be applied to investors.
Proceeds must be devoted to infrastructure projects that promote economic development.
"You can't use the proceeds for refunding," Landry said. "It has to be bricks and mortar."
Landry said Lafayette became the first to use the new bonds because the parish was planning a sale of road debt authorized by voters in April.
"We had a good-rated deal and we were going to use BABs anyway," he said. "We decided then to throw in the super-BABs."
He said the new bond program provided the parish an opportunity to finance needed improvements, including better streets, an upgraded drainage system, and increased recreational areas
"The parish took advantage of a unique program that will benefit its residents," Landry said.
"With BABs, we're seeing interest rates that are 60 to 70 basis points better than the conventional tax-exempt offerings," he said. "With the super-BABs, the benefit is 10% better. You get more bang for your BABs buck."
"This is something that should be reauthorized every year," he said. "It would help economic recovery across the country."
The Lafayette recovery zone economic development bonds were priced to yield 7.230%, 267 basis points above Municipal Market Data's triple-A tax-exempt benchmark. This $3.6 million sale is the entire allocation for Lafayette Parish, Landry said. Provisions in the federal stimulus act require the bonds be issued before Jan. 1, 2011.
The $10 billion of recovery zone bonds authorized by the stimulus act is allocated to counties and parishes based on unemployment rate and other economic factors. Landry said some parishes in southern Louisiana, which have benefited from recovery efforts provided by Gulf Opportunity Zone bonds and other resources, did not qualify.
Louisiana was allocated $90 million of the recovery zone economic development bonds and $135 million of tax-exempt recovery zone facility bonds.
The city of Lafayette and Lafayette Parish are considered separate entities responsible for their own GO debt, but the governments and financial reporting were consolidated in fiscal 1996.