WASHINGTON — The Treasury Department is urging Congress to put Indian tribal governments on a par with states and localities so they can issue both governmental bonds without the “essential governmental function” restriction and private-activity bonds.

The department also says tribes should be able to use gambling revenues to repay or provide security for tax-exempt municipal bonds, even though it recommends they be prohibited from using munis to finance gaming facilities.

In addition, Treasury officials propose that municipal bonds be used to finance projects located on reservations together with projects that are either nearby,  “have a substantial connection” to the reservation, or provide goods and services to reservation residents.

The Treasury made the recommendations in a report it sent to Congress in December, saying they would “help Indian tribal governments to access the capital markets more effectively and efficiently.”

The report was mandated by the American Recovery and Reinvestment Act of 2009, which required Treasury to study the impact of the tribal economic development bond program and send recommendations to Congress by February 2010.

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

That legislation temporarily removed the requirement that tribal bonds only be used to finance projects with an “essential governmental function” like schools or sewer system projects, but said they had to be on reservations and not involve gambling.

Tribal governments have long complained they are held to a higher standard for bond issuance than state and local governments, which have no such restriction on their bond issuances.

In its recommendation on PABs, the Treasury said tribal governments should be able to issue them “for the same types of projects and activities as are allowed for state and local governments ... subject to the same volume cap exceptions.” 

The report recommended Congress consider all tribal governments as a 51st state so that its PAB volume cap would be the greater of the national Indian tribal population figure multiplied by a per capita figure, which is currently $95, or the minimum small population state amount, which is currently $284.56 million.

Indian tribal governments issued a total of $415.52 million of TEDs during 2009 and 2010, comprising less than 3% of the total $2 billion ARRA authorization for TEDs, according to the Treasury. The agency pointed to credit challenges facing tribal governments as the primary reason for the lack of issuance.

“A more flexible framework for tax-exempt bonds financing cannot ameliorate the significant credit challenges facing Indian tribal governments that impede their access to the tax-exempt bond market,” the report said.

It recommended Congress explore ways to improve market access for tribal governments, such as through possible reserve fund programs or credit enhancement facilities or other measures “subject to prudent fiscal controls.”

Townsend Hyatt, a partner at Orrick, Herrington & Sutcliffe LLP in Portland, Ore., said he is encouraged by the report and can’t remember a time when the Treasury Department came out with such strong recommendations to Congress on the issue.

“This would not be a significant drain on Treasury and it would really help put the tribes on equal footing as states,” he said.

Hyatt agreed with Treasury that access to capital has been difficult for tribes, but said a major problem was the way the Treasury allocated the full $2 billion for tribal economic development bonds.

“One thing we learned with the TED projects was that too many projects received allocation which were not viable,” he said.

“You had so many people trying to reserve a spot in line regardless of how shovel-ready it was. The tribes just sat on the allocations for extended periods of times and never used them,” according to Hyatt.

Leslie Wheelock, director of economic policy with the National Congress of American Indians, said the report is “very favorable” for tribes.

“Removing the 'essential governmental function’ requirement takes away a lot of uncertainty that tribes have,” according to Wheelock. “We have been looking for low cost or no cost changes in legislation and regulation that positively affect the economic development on Indian reservations.”

While the report may be favorable for tribes, there may be little appetite to change current law on Capitol Hill, especially in an election year.

“I don’t foresee this getting enacted,” said a Senate Republican aide, pointing out that there are few legislation vehicles for such recommendations. “It’s not getting any attention at all.”

However, Senate Finance Committee chairman Max Baucus, D-Mont., has many Indian tribes in his state, sources said, but his aides could not be reached for comment.

Wayne Shammel, general counsel of the Cow Creek Tribe in Southwest Oregon, said he is “guardedly optimistic” that Congress will enact Treasury’s recommendations.

“The political pressure on the congressmen is stacked against the tribes,” Shammel said. “Most of the tribe populations amount to a medium-size municipality. It all comes down to votes.”

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