Stimulus Act - Great News for Bonds
The American Recovery and Reinvestment Act of 2009 effective February 17, 2009 offers sweeping new changes in the municipal bond arena. Most of the changes apply only to bonds issued in 2009 and 2010. Many of the provisions are complex so it is impossible to accurately summarize the details of each item. Frost Brown Todd will be embarking upon a series of seminars to more adequately explain the provisions of the Recovery Act. We will be contacting you soon with information with respect to dates and locations for these seminars.
Some of these beneficial changes are:
- Temporary Repeal of AMT for Private Activity Bonds - Private activity bonds issued during 2009 and 2010 will no longer be subject to the Alternative Minimum Tax (AMT). Of significant note is that private activity bonds issued from 2004 to 2008 may be refunded during 2009 and 2010 as non-AMT bonds.
- Taxable Bond Options - An option is provided in the Recovery Act which permits a municipal issuer to issue bonds (other than private activity bonds) with a tax credit to the holder equal to 35% of the interest on the bonds. The tax credits may also be stripped from the bonds under the rules currently applicable to tax credit bonds such as low income housing tax credit bonds (LIHTC). This provision sunsets on January 1, 2011.
- Direct Subsidy - An alternative option under this provision is for an issuer to issue bonds and receive a direct payment from the federal government in the amount of the above-mentioned credit, in lieu of the credit being provided to the bond holders. Both types of bonds under the bill are called "Build America Bonds." This provision will also sunset on January 1, 2011.
- Recovery Zone Bonds - The Act earmarks $10 billion for recovery zone economic development bonds in 2009 and 2010 to finance economic development in certain designated recovery zones. These bonds will again be issued as taxable bonds. However, the federal government will reimburse the issuer 45% of the interest paid thus making the true cost of the interest paid lower than even that paid on tax-exempt bonds. "Recovery zones" will be determined based on factors such as poverty, unemployment, etc. Of a particular note to communities in Kentucky around Ft. Campbell and Ft. Knox is that a recovery zone may also be an area affected by military realignment.
- Recovery Zone Facility Bonds - $15 billion of the Recovery Act has been set aside for projects for for-profit entities which heretofore would not have been financeable with tax-exempt bonds. We view these as "no holds barred" bonds in that any active business will qualify with no capital expenditure limitation and no requirement that the project be manufacturing. Certain activities which have historically never been financed with tax-exempt bonds (such as gambling facilities) will still be excluded. Volume cap will not be required for this type of bond but the counties and municipalities and/or states will allocate the amounts based on their "recovery zone" criteria.
- Changes in Rules for Manufacturing Bonds - The existing rule that certain private activity bonds may only be used for manufacturing has been expanded enlarging the definition of manufacturing to include "intangible property." This should open up manufacturing bonds to research and development activities including facilities for software companies and companies specializing in "processes" not processing. The second liberalization is that the prior law provided that no more than 25% of proceeds can be used for non-integral manufacturing activities. This meant that an existing manufacturing facility would be prohibited from financing its warehouse or other distribution facility. This rule has been eliminated and as long as the facilities are functionally related and subordinate and the facilities are on the same site as the manufacturing facility, they may be financed.
- Bank Qualified Bonds - Extreme changes in the rules for financial institutions have been enacted in the expansion of "bank qualified bonds." Under previous law financial institutions, essentially, could not deduct their interest carrying costs for purchasing or carrying tax-exempt bonds unless they were "bank qualified." Bank qualified bonds were limited to bonds issued by issuers (such as cities and counties) that could certify that they did not anticipate issuing more than $10 million in bonds in that calendar year. This limit has been raised to $30 million but of much more significance is the fact that the $10 million limit no longer applies to the "issuer" (that is the city or county) but applies to either the government entity actually using the proceeds of the bonds or the 501(c)(3) organization utilizing the proceeds of the bonds. In essence, therefore, any project for a nonprofit or government activity that does not anticipate issuing more than $30 million in bonds for its own organization or government is now eligible for bank qualification.
- Tax Credit Bonds for School Construction – A new type of school tax credit bond has been created to finance the construction, rehabilitation of public school facilities or the acquisition of land. There is an $11 billion limit. The bonds must be issued in 2009 or 2010.
- Increased Limits on Certain Bonds – Qualified Zone Academy Bonds allocation for 2009 and 2010 has been increased by $1.4 billion – Clean Renewable Energy Bonds and Qualified Energy Conservation Bonds have been increased $1.6 billion and $2.4 billion respectively.
- Prevailing Wage – The Recovery Act requires that projects financed under the provisions of the Clean Renewable Energy Bonds, Qualified Energy Conservation Bonds, Qualified Zone Academy Bonds, Qualified School Construction Bonds, and Recovery Zone Economic Development Bonds be subject to the Davis Bacon Act, that is, workers building the projects must be paid prevailing wage.