WASHINGTON — The Treasury Department today will announce the more than 50 tribal governments that have been allocated a total of $1 billion of tax-exempt economic development bonds to finance projects under a new program created by the stimulus law.
The announcement will be made by deputy Treasury secretary Neal Wolin and New Mexico Gov. Bill Richardson in Albuquerque at 1:00 p.m. Eastern Daylight Time. Four of the tribal communities that will receive allocations are in New Mexico.
The $1 billion is the first of two tranches of bond authority under the $2 billion program, which expands the types of projects tribal governments can finance with tax-exempt debt.
Under the program, tribal governments will be able to issue bonds for any economic development project, similarly to state or local governments, except gaming facilities or projects located outside a tribe’s reservation.
Bond lawyers said yesterday that they expect tribal governments will try and take advantage of these less restrictive tax-exempts and issue them to finance hotels, golf courses, and entertainment venues — projects that the Internal Revenue Service contends are not “essential governmental functions,” a requirement for traditional tax-exempt offerings by tribes. The bonds also can be used to refinance existing debt or for traditional private-activity bond purposes, like docks or wharves.
The Treasury notice outlining the program that was issued in June stated that tribes could each request a maximum of $30 million from this first $1 billion tranche.
But it noted that if qualified applicants requested more than the $1 billion total, each applicant would receive a reduced amount, as opposed to some governments receiving their full request and others receiving none.
Because the first tranche was over-subscribed, the Treasury decreased the maximum allocation that a tribe could receive to roughly $22.6 million, sources said.
However, bond lawyers specializing in tribal issues remain concerned about whether this first set of allocations will yield $1 billion of actual issuance, citing adverse market conditions and an application process that did not test the feasibility of projects before distributing allocations.
The application process did not require tribes to actually prove they could issue the bonds from the first tranche by Dec. 31, 2010, the lawyers said.
Although the IRS will recover any allocations not issued by then, it is possible that some tribal governments with ready-to-go projects received smaller amounts than they needed as a result of the Treasury’s efforts to accommodate other projects for which bonds may never be issued.
The five-page application that tribal governments had to submit required a “reasonably detailed” description of the project slated for bond financing, as well as the expected time frame for its development, a reasonably detailed financing plan, and the amount of bonds requested.
“There was not a merit evaluation of one project over another. What I think they did is simply set up a process where you applied and if you met the basic criteria, you were given an allocation,” said Townsend Hyatt, a partner with Orrick Herrington & Sutcliffe LLP. “I think the fact that the program is oversubscribed is encouraging, [but] I think the real question is going to be how many of these projects actually get done.”
“What we’re really afraid of is that there may have been just a whole lot of applications submitted that ... tie up allocation authority [with] people who may not have been ready yet,” said Mark Jarboe, a partner with Dorsey & Whitney LLP. “I don’t think there’s anybody in this field who then takes [the allocation announcement] as proof that this program works; what we’ll have to see is whether or not the bonds actually are sold.”
Jarboe also pointed out that if a significant chunk of the bond authority is used to refinance existing issues, the program may prove not especially stimulative. And even if issuers are ready to issue the bonds by the Treasury’s deadline, adverse market conditions could still make it difficult for the deals to be completed.
Hyatt said, “The market right now has, in many ways, never been worse for finding financing.”
Tribal governments were able to begin applying for the second tranche on Aug. 15. The deadline is Jan. 1, 2010. Recipients of some of the second tranche must issue the bonds by Dec. 31, 2011.