The National Association of Bond Lawyers is urging the Treasury Department to clarify that muni issuers can issue a substantially lower amount of private-activity bonds than they originally proposed without having to re-obtain approval from the public.

The group made the request in a eight-page letter sent to the Treasury last week in response to changes that Treasury proposed to its rules requiring public approval for projects financed by private-activity bond.

The letter came as some bond lawyers have raised concerns about one of the "safe harbors" Treasury proposed that would help issuers comply with a provision in the existing rules that require an issuer to go through the public approval again if there is a "substantial deviation" from an initially-approved project.

Market participants have complained in the past that the Treasury has not defined what constitutes a "substantial" change.

In response to the complaints, Treasury proposed two safe harbors, one of which would define a "substantial" deviation as a change of more than 5% in the amount of bonds issued from the approved amount.

Richard A. Newman, a partner with Arent Fox LLP, told Treasury in a letter last week that the harbor would be "almost impossible" to comply with due to fluctuating costs.

Another lawyer raised the question of whether the 5% difference would apply in cases of over- or under-issuance of bonds. An IRS official said the 5% difference would apply in either case.

But in its letter, NABL urged the Treasury to clarify that the 5% deviation would only apply to an over-issuance.

Issuers are required to obtain approval for the maximum amount of bonds needed for the project, said Frederic J. Ballard Jr., a partner at Ballard Spahr Andrews & Ingersoll LLP who chaired the NABL group that wrote the letter. As a result, issuers might overshoot the actual amount needed, which could lead to an unintended violation of the safe harbor.

"Because we're required to state a maximum, the inevitable result of that is that issuers are going to look on the potential high side of project component costs, and so their total is going to tend to be generally on the high side of the range of expectations," Ballard said. "To suggest that there's a deviation from the approval if the actual bond issue tends to be smaller creates a problem that we didn't think Congress intended, and we're not completely sure that the Treasury intended it."

In its letter, NABL also recommended that the Treasury consider it to be an insubstantial deviation if an issuer removes one or more projects originally approved for a multipurpose issue, redirects proceeds to different purposes under a multipurpose issue, redirects proceeds from approved facilities to working capital conducted by approved facilities, or redirects an "insubstantial" amount of proceeds from an approved facility to one that has not been approved.

In addition, NABL asked that once the regulations are finalized, the Treasury allow issuers who have already issued bonds to use them on an elective basis, so they could take advantage of a rule change that allows post-issuance corrections due to unexpected circumstances.

NABL also recommended the Treasury roll its existing regulations and proposed regulations into a single document when finalized to make things simpler for issuers and bond counsel.

The Treasury said when it released the proposed regulations that it intended for issuers to continue to use the previous regulations so long as they were consistent with the new, finalized rules. But NABL noted that final regulations will include unaddressed areas of the 1983 regulations "so that bond issuers and bond counsel are not faced with the need to review two sets of regulations on the same subject and decide to what extent they are consistent with each other."

The group also offered several other technical suggestions to improve the proposed rule changes. However, they emphasized their comments should not diminish their overall appreciation for the proposed changes to regulations, which have not been updated since 1983.

NABL praised the proposed rules, which aim to streamline and modernize the process issuers must go through to obtain public approval for bond-financed projects, as providing "flexibility and practicality ... in complying with the public approval requirement." The group emphasized that its comments should not "obscure the basic appreciation of NABL" for the overall document.

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