The new tax-advantaged bond programs in the 2009 Stimulus Act (P.L. 111-5) appeared out of nowhere (or, in the case of direct pay bonds, almost out of nowhere), and left many in the tax-exempt bond community swimming in new concepts for several months. Once everyone finally worked through the new questions (just what was a “permitted sinking fund yield,” anyway?), and once Congress made the direct pay provisions applicable to all of the tax-advantaged bond programs, the race was on to beat the December 31, 2010 deadline. For some of the programs that didn’t expire – such as qualified energy conservation bonds – the volume cap was too dispersed, and so no one in particular had an incentive to deeply study the new rules. The consequence: there is still, over 4 years later, plenty of QECB volume cap sitting around.
If Congress acts to expand tax-advantaged bond financing programs, the new programs should either be easy to understand, or such a good deal that everyone will have the incentive to learn the confusing rules.
Ever since most of the more popular tax-advantaged bond programs expired at the end of 2010, the President’s budget and numerous pieces of Congressional legislation have floated the idea of reviving them to provide sorely needed improvements to the nation’s infrastructure. But none of these proposals have amounted to anything, and it seems that the only thing that can ever make it into legislation that will actually be enacted is an annual token extension of QZABs. The lesson of the Stimulus Act – of the sizzling demand for Build America Bonds and many of the other direct pay bond programs, and the lukewarm reception for others – is that new tax-advantaged bond financing programs must be easy to understand, or else they must have such a compellingly good subsidy that market participants are encouraged to work through the confusion. If they are not, even if they are enacted, then new programs won’t be put to good use.
The main way that Congress can give a new tax-advantaged bond financing program a subsidy that is compellingly generous is through a direct pay bond program with a subsidy designed to be more generous than the subsidy that is inherent in tax-exempt bonds. Congress did so with Build America Bonds, with their 35% subsidy, for example. But the reality is that sequestration may have tarnished direct pay bonds for a long time. Many issuers felt burned when direct payments became the target of sequestration despite repeated assurances that the subsidy couldn’t – or at least wouldn’t – be reduced.
QPIBs aren’t deeply subsidized like Build America Bonds were, but they give the tax-advantaged bond community something maybe just as valuable – clarity, and benefits that are easy to understand and hard to take away without a repeal.
Because Congress can’t really enact a compellingly generous subsidy without resorting to the disfavored direct pay feature, any future tax-exempt bond programs should be easy for the tax-exempt bond community to understand if Congress wants them to be used. The President’s FY2016 budget contains just such a mercifully simple proposal – “qualified public infrastructure bonds,” or because we demand acronyms for everything, “QPIBs.”
QPIBs are part of the President’s Build America Investment Initiative, with the stated goal that the Administration is “committed to leveraging private sector investment to further expand infrastructure investment.” They are designed to encourage “public-private partnerships,” or “P3s” by giving certain classes of exempt facility bonds that meet a governmental ownership and general public use requirement two benefits that usually only governmental bonds can receive – an exemption from the volume cap requirements, and non-AMT status. (For more on the P3 aspects, see our previous post.) Under current law, projects that involve a P3 often can’t be financed with tax-exempt bonds because the private involvement will cause the bonds to be private activity bonds that cannot be issued on a tax-exempt basis.
QPIBs sound like just another example of an alphabet-soup program from the Stimulus Act. But what sets QPIBs apart from other recent proposals is that QPIBs are nothing more than a remix of current rules that the tax-exempt bond community has been dealing with for years. No “available project proceeds” requirement, no “permitted sinking fund yield,” no limits on the amount of premium, and no need to worry about sequestration.
QPIBs: Governmental ownership + General Public Use = No Volume Cap, No Alternative Minimum Tax on Interest.
The governmental ownership requirement for QPIBs looks like it will be identical to the one that already exists for certain exempt facilities in the Code in Section 142(b). QPIB status is open to 8 existing types of exempt facility bonds: airports, docks/wharves, mass commuting facilities, solid waste disposal facilities, sewage facilities, water furnishing facilities, and highway/surface transfer facilities. 3 of these 8 categories – airports, docks/wharves, and mass commuting facilities – are already subject to the governmental ownership requirement. These facilities are halfway to QPIB status right from the start.
As in the current requirement in the Code, the governmental ownership requirement for QPIBs would be satisfied even if the private developer has a lease or concession arrangement with respect to the bond-financed space so long as the developer doesn’t take any action that would be inconsistent with the notion that the governmental issuer has retained economic ownership of the bond-financed property. In particular, the lessee or concessionaire would have to irrevocably elect not to claim depreciation or investment tax credits for the bond-financed property (because those are tax benefits that belong to the owner of property), the term of the lease or concession could not last more than 80% of the useful life of the property (because this way the governmental issuer still gets something of value back at the end of the lease, not an essentially used-up asset with less than 20% of its useful life left), and the lessee or concessionaire could not have the option to purchase the property at less than fair market value at the end of the lease term (because if it could, it would suggest that the “rent” paid up to that point was really an installment purchase price).
While we haven’t seen legislative language yet, there is plenty of existing law on when a particular facility is “available for use by the general public,” and presumably the legislation would borrow these rules. It should, anyway. (In this regard, see PLR 201507002, just released, regarding governmental bonds and exempt facility bonds for water furnishing facilities – with QPIBs, rulings like this would be unnecessary.)
If these requirements are met, then a bond can be issued as a QPIB. And that brings with it two benefits – an exemption from volume cap, and an exemption from the alternative minimum tax on interest on the bonds. While in the present climate volume cap is not as big of an issue as it sometimes is over the years, the exemption from AMT would be a huge motivating benefit (see an analysis here, for example). Investors will accept lower interest rates, sometimes substantially lower interest rates, on bonds that are not subject to AMT, and that means lower borrowing costs for issuers and borrowers. Further evidence of the likely enthusiasm for QPIBs is the widespread enthusiasm that greeted the temporary AMT holiday that the Stimulus Act extended to all exempt facility bonds.
The primary issue for QPIBs at this stage is their unfortunate entanglement with the other more controversial provisions of the President’s budget.
Of course, the problem here is that, like a Bang & Olufsen sound system on a ’92 Daihatsu Charade, the QPIB proposal is yoked to the President’s budget, which contains many other parts that stand virtually no chance of being enacted. QPIBs should enjoy bipartisan support – what must be done now is to remove them, both physically and politically, from the budget and the broader tax reform debate, and attach them to a better vehicle. If Congress agrees with the president’s goal of encouraging P3s, and it seems to, then QPIBs are a significant step in the right direction.