Navajo Nation to Offer Bonds

Bloomberg Businessweek article here. An excerpt

The largest American Indian tribe, the Navajo Nation, plans to issue its first bonds in a $120 million offering that would be the biggest sale of nongaming tribal debt in at least a decade. The tribe intends to use the money to create thousands of jobs and stimulate the economy on its reservation in America’s Southwest. Despite the Navajo Nation’s energy revenue, more than 37 percent of the reservation’s 170,000 residents lived below the federal poverty level in 2009. “I am concerned with the time when we won’t have revenues from our natural resources,” said Katherine Benally, head of the Navajo Nation Council’s resources and development committee, while taking a break from a council budget session in Window Rock, Ariz. “We need to be ready for that.”

and

The Navajo bonds will be sold to institutional investors in a private placement as soon as yearend and will likely include both taxable and tax-exempt debt, says Goe, the bond counsel. The Navajos intend to seek investors willing to settle disputes in tribal courts, a first for a bond issue, Goe says. Clarkson says the requirement “would be a reaffirmation of the legitimacy of tribal courts—this time from the financial market.” Yet it may also make the issue harder to sell. Lyle Fitterer, who helps oversee $26 billion of municipal bonds at Wells Capital Management in Menomonee Falls, Wis., says the tribal-court stipulation “is one more hurdle in terms of investing in a deal like this” and could lead to the Navajos paying higher rates.

IRS Chief Counsel Issues Memorandum re: Tribal Tax-Exempt Bonds

AM2009-014

An excerpt:

This memorandum addresses the interaction between tribal economic development bonds under
§7871(f) of the Internal Revenue Code (“Tribal Economic Development Bonds”) and build America
bonds under § 54AA (“Build America Bonds”). This memorandum should not be used or cited as
precedent.

ISSUE
Can an Indian tribal government that has received an allocation of volume cap pursuant to §7871(f)
(1) of the Internal Revenue Code (the “Code”) to issue Tribal Economic Development Bonds elect
under § 54AA(d)(1)(C) to issue those bonds as Build America Bonds instead of issuing the bonds as
tax-exempt bonds under §103?

CONCLUSION
An Indian tribal government that has received an allocation of volume cap pursuant to §7871(f)(1) to
issue Tribal Economic Development Bonds can elect under §54AA(d)(1)(C) to issue such bonds as
Build America Bonds instead of issuing the bonds as tax-exempt bonds under §103.

Thanks to J.W. for this!

Tribal Tax Exempt Bonds Allocation Notice

notice-09-0051 (pdf)

This Notice solicits applications for allocations of the $2 billion national bond volume limitation authority (“volume cap”) to issue tribal economic development bonds (“Tribal Economic Development Bonds”) under new § 7871(f) of the Internal Revenue Code (the “Code”).  This Notice also provides related guidance on the following:  (1) eligibility requirements that a project must meet to be considered for a volume cap allocation, (2) application requirements, deadlines, and forms for requests for volume cap allocations, (3) the method that the Internal Revenue Service (“IRS”) and the Department of the Treasury (“Treasury”) will use to allocate the volume cap, and (4) certain interim guidance in this area.

Economic Stimulus Bill Expands Tribal Tax Exempt Bonding

The version of the American Recovery and Reinvestment Tax Act of 2009 (Stimulus Package) passed by the Senate on Tuesday contains language that comes closer to putting tribes on par with state and local governments for the purpose of issuing tax exempt bonds. This has long been a sore spot for tribes, as the IRS has interpreted existing law to prohibit tribes from issuing tax exempt bonds in the same manner as state and local governments.

The Internal Revenue Code allows tribes to issue tax exempt bonds for an “essential government function,” which is defined as a function that is customarily performed by a state or local unit of government with general taxing powers. The IRS has seized upon the word “customarily” to prohibit tribes from issuing tax exempt bonds from certain projects, such as golf courses, hotels, and other revenue-generating facilities – even where there are cases of states and cities issuing tax exempt bonds for the exact same types of projects. According to the IRS, the fact that states and cities sometimes issue tax exempt bonds for these types of projects does not mean that they are functions that they customarily perform.

The Stimulus Package addresses this issue by amending the Internal Revenue Code to allow tribes to issue “Tribal Economic Development Bonds.” (Note: The language of this amendment closely mirrors that of the Tribal Tax Exempt Bond Parity Act, which was introduced in the last Congress by Senators Max Baucus (D-MT) and Gordon Smith (R-OR).)

The amendment defines a “Tribal Economic Development Bond” as a bond issued by a tribe where the interest would be exempt from taxation if issued by a state or local government.

This amendment comes with three important caveats:

1.) The bonds cannot be used to finance any portion of a building in which Class II and Class III gaming is conducted, or any property used in the conduct of gaming;

2.) The bonds must be used to finance facilities located on the reservation; and,

3.) There is a national cap on the total value of Tribal Economic Development Bonds at $2 Billion, which must be allocated among tribal governments in the manner deemed appropriate by the Secretaries of Treasury and Interior.

While this amendment isn’t perfect, it is a significant and important step toward increasing access to the debt market for tribes and putting tribes on par with state and local governments. I hope that the Stimulus Package Conference Committee retains this amendment, and that the Secretaries engage tribal leaders in meaningful consultation when allocating the national cap among the tribes.

Please check back later for updates on the Stimulus Package and its Indian Country provisions.