The Good News – Expanded Infrastructure Bond Financing
President Trump's proposed infrastructure plan as described in the "Legislative Outline for Rebuilding Infrastructure" would expand the ability of governmental bodies to issue tax-exempt bonds to finance infrastructure projects having public-private partnerships and other private business involvement. The Trump Infrastructure plan has as a major goal reducing the proportion of Federal to State and local government funding of infrastructure projects from a high of 80 percent federal funding to 20 percent. In order to help State and local governments finance their increased share of the funding, among other things the proposal would expand the use of private activity bonds (PABs). (PABs are tax-exempt bonds or tax-exempt direct bank loans that finance facilities that are used by private businesses, for example, commercial airline terminals leased to commercial airlines, dock facilities servicing private shipping lines, privately owned solid waste disposal facilities, etc.). The proposals would create new benefits for PABs that finance "public infrastructure projects." As defined in the Trump Administration proposals, these public infrastructure projects would require the following: (i) either State or local government ownership or private ownership under arrangements in which rates charged for services or use of projects are subject to State or local governmental regulatory or contractual control or approval; and (ii) availability of the projects for general public use (e.g., public roads) or provision of services to the general public (e.g., water service).
- Some PABs require that the financed facilities be governmentally owned. The Trump proposal also creates a new safe harbor for determining governmental ownership of a project where it is leased to a private business that is more liberal that current law by among other things, permitting a longer lease of the facilities by private businesses. The lease term can be as long as 95 percent of the reasonably expected economic life of the project (current law imposes a more stringent 80 percent limit).
- The proposal also creates new categories of PABs for flood control and stormwater facilities, rural broadband service facilities and environmental remediation costs on Brownfield and superfund sites.
- The proposals would remove the state volume cap limitations (statewide annual limitations on the amount of PABs that can be issued based on state population) on these new public purpose infrastructure bonds in addition to the existing volume caps for clean water and drinking water projects and Department of Transportation volume caps (a $15 billion national limit that is assigned by the DoT) on qualified surface transportation facilities.
- The proposals would eliminate the alternative minimum tax (AMT) on PABs which would lower borrowing rates (the corporate AMT was eliminated for tax years beginning after Dec. 31, 2017 but the individual AMT continues in effect).
- In addition, there are liberalized remedial action provisions where private business use arises from leases for tax-exempt bonds where private business use is otherwise limited (non-private activity bonds).
The Bad News – Infrastructure Financed by Tribal Government-Issued Bonds Would Not Benefit
Unfortunately, most tribal bonds would not benefit from the Trump Infrastructure proposals. Under current law, most PABs issued by tribes can only be issued as "tribal economic development bonds" (TEDBs). (There is a small exception for financing some private manufacturing facilities that is never used.) TEDBs can be issued to finance the same projects as tax-exempt PABs with the additional limitations that the facilities are located on the reservation (in the case of Alaska tribes, land held by incorporated Native groups, regional corporations and village corporations under the Alaska Native Claims Settlement Act) and that gaming facilities cannot be financed. In addition, TEDBS can also be – and often are – issued to finance governmentally owned and used facilities that do not constitute an essential governmental function (e.g., a tribal golf course or hotel as opposed to public schools or police stations). However, TEDBS are subject to their own special one-time national volume cap of $2 billion established when TEBDS were first authorized in 2009 of which approximately $500 million remains to be allocated (as opposed to the annually recurring national volume cap (of which $37.55 billion was the allocation for 2018) for State and local government PABs). The President's Infrastructure proposals do not provide for a volume cap exception for tribal PABs issued to finance "public infrastructure projects." Therefore, unless the law is specifically changed to allow for this, the ability of tribes to finance these public infrastructure projects would be subject to the remaining $500 million volume cap which is rapidly being diminished.
The Takeaway – Tribes Need Parity with States to Benefit
The Trump Infrastructure proposals provide another example of how the lack of parity between the ability of tribes to issue tax-exempt bonds in the same manner as State and local governments severely limits the ability of tribes to utilize tax-exempt financing to leverage government funding of infrastructure projects. The Trump Infrastructure proposals contain many opportunities for tribes to finance needed infrastructure (such as rural broadband facilities that are either owned or managed by a private cable providers); however, without the loosening or expanding the volume cap on TEDBS to finance such facilities, such financing will not be available in any substantial manner. In addition, while an expansion on the volume cap for issuing TEDBs would be helpful, tribes will not be able to derive the full benefits of tax-exempt bond finance until they are (i) able to issue PABs under the same rules as States and (ii) able to issue "governmental" tribal bonds (that are not PABs) in the same manner as States without the restriction of such bonds to financing "essential governmental functions." The Infrastructure proposals are just that – proposals. In order to become effective they must be enacted into law by Congress. Now is the time for tribes to press their representatives and senators to enact the Infrastructure proposals into law in a manner so that tribes can equally benefit.