In the absence of congressional action, many tax laws affecting municipal bonds will change significantly at the end of this year. This Alert focuses on two of those possible changes: (1) of import to small issuers, the scheduled elimination of the 2001 increase to the small issuer exception to the arbitrage rebate requirement to accommodate certain public school project financings; and (2) of import to small issuers, pooled-financing and 501(c)(3) conduit borrowers, the scheduled expiration of the enhanced bank qualification provisions of the American Recovery and Reinvestment Act ("ARRA").
(1) Small Issuer Arbitrage Rebate Exception
Prior to 1998, bonds issued by a governmental issuer were not subject to the arbitrage rebate requirements if the issuer reasonably expected to issue not more than $5 million in aggregate face amount of tax-exempt bonds (other than private activity bonds) during the calendar year in which such issue was issued and if certain other criteria were satisfied. Legislation passed in 1997 increased the $5 million cap to $10 million, provided that the amount of bonds in excess of $5 million was used to finance public school construction, reconstruction, or rehabilitation expenditures ("public school projects"). Legislation passed in 2001 increased the $5 million cap to $15 million, provided that the amount of bonds in excess of $5 million was used to finance public school projects. That 2001 legislation is scheduled to expire at the end of this year.
If the 2001 legislation is allowed to expire, issuers may still be "small issuers" that may benefit from the arbitrage rebate exception as long as they do not issue more than $10 million of tax-exempt bonds in a calendar year, the amount of bonds in excess of $5 million is used to finance public school projects, and the other required criteria are met. These other criteria are: (a) the issuer must be a governmental unit with general taxing powers, (b) no bond that is part of the issue may be a private activity bond, and (c) 95 percent or more of the net proceeds of the issue are to be used for local governmental activities of the issuer (or of a governmental unit the jurisdiction of which is entirely within the jurisdiction of the issuer).
(2) Bank Qualification
The ARRA changed the requirements for a bond to be "bank qualified" - i.e., exempt from the disallowance of the "cost of carry" deduction for financial institution bondholders. Bank qualified bonds are attractive to financial institutions and generally bear lower interest rates than do similar non-bank qualified bonds. Prior to the ARRA, banks were restricted to deducting 80 percent of the cost of buying and carrying tax-exempt bonds sold by small issuers whose calendar year bond issuance was not more than $10 million. The ARRA increased the amount of bank qualified bonds available for financial institutions to purchase by (a) increasing the bank qualified issuer calendar year limitation from $10 million to $30 million and (b) allowing 501(c)(3) conduit and pooled-financing borrowers to be treated as the issuers (rather than the actual governmental issuers) for purposes of the bank qualification requirements. Both of these ARRA provisions are scheduled to expire at the end of this year.
The tax law, securities law, and regulatory landscape of municipal finance is changing dramatically. This Alert highlights only two of the possible significant changes. We look forward to providing further Alerts to keep you advised of additional changes. Please contact any of the attorneys listed on the side of this Alert to discuss how these changes might affect you.
On September 24, Day Pitney attorneys Judith Blank, Douglas Gillette, Glenn Rybacki and Namita Shah gave a presentation at the New England States Government Finance Officers Association (NESGFOA) 71st Annual Fall Conference in Mystic, CT.
Day Pitney Alert
Day Pitney Alert
Day Pitney Alert
Doug Gillette and Bill Goddard will be featured panelists during the UConn School of Law's Symposium on Municipal Distress on Friday, September 15.
On November 22, Connecticut Governor Dannel P. Malloy announced that he is appointing Jay Nolan to serve as his appointee on the state's recently created Municipal Accountability Review Board.
Doug Gillette was quoted in an article, "Assured Says It's Open to a Hartford Debt Restructuring," published in The Bond Buyer.
Day Pitney LLP has once again been recognized as Connecticut's number one bond counsel firm by volume, serving as bond counsel on issues in Connecticut totaling approximately $1.7 billion in 2016, according to The Bond Buyer, a daily newspaper serving the municipal bond industry.
Day Pitney Press Release
Hartford, Conn., May 26, 2016 - Day Pitney LLP represented the State of Connecticut as lead bond counsel and disclosure counsel in a general obligation refunding bond sale of $501.4 million. The sale resulted in saving of $75.5 million in debt service costs over the life of the refinanced bonds. The Nappier administration has an active debt refunding program which has saved taxpayers $1.1 billion to date.