Financing Infrastructure, Alternative Energy and Other Public Facilities under the Federal Stimulus Act. Webinar Presentation August 26, 2009

Transcription

1 Financing Infrastructure, Alternative Energy and Other Public Facilities under the Federal Stimulus Act Webinar Presentation August 26, 2009

2 Agenda Introductions The Economic Crisis and Prospects for Reform: The Road Behind Us and the One Ahead Opportunities for Tax-Advantaged Financing under ARRA Additional Considerations: Buy American Provision and Davis-Bacon Act Q&A Daniel Carol McCoog Crowley Washington, Moderator D.C. Portland, OR 1

3 The Economic Crisis and Prospects for Reform: The Road Behind Us and The One Ahead Daniel Crowley Washington, D.C.

4 The Bailout Emergency Economic Stabilization Act (EESA, 10/3/08): $700B Troubled Asset Relief Program (TARP) Round 1: Bush Administration Initiatives Capital Purchase Program (CPP) Targeted Investment Program (TIP): Citigroup, BoA Automotive Industry Financing Program (AIFP) Round 2: Obama Administration Financial Stability Plan (2/10/09) Capital Assistance Program (CAP): Stress Test for top 19 banks Public-Private Investment Program (PPIP): Legacy Securities Program, Legacy Loans Program (?) Consumer and Business Lending Initiative (CBLI): TALF, SBA Homeowner Affordability and Stability Plan (HASP) 3

5 The Bailout (cont.) Federal Reserve Initiatives: $4-8T liquidity facilities Term Asset-Backed Securities Loan Facility (TALF) Extended for ABS, legacy CMBS to 03/31/10 and newly issued CMBS to 06/30/10 8/17/09: Announce no further additions expected to eligible TALF collateral TAF, TSLF, PDCF, AMLF, CPFF, MMIFF FDIC Initiatives: $1.2T guarantees Temporary Liquidity Guarantee Program (TLGP) 4

6 The Road to Recovery: Stimulus American Recovery and Reinvestment Act of 2009 (ARRA, 2/17/09): $787B Economic Stimulus Largest one-time domestic spending program in U.S. history Intended to stimulate economy and create/save 3.5 million jobs $575B Federal spending: Focus on education, health care, energy, and infrastructure projects $212B Tax incentives Focus on corporate, renewable energy, individuals (AMT patch) Bond provisions: Build America, Recovery zone New clean renewable energy, Qualified energy conservation Qualified school construction; Qualified zone academy Tribal economic development 5

7 The Road Ahead: Capital Markets Reform 6/17: Obama Administration releases Financial Regulatory Reform; A New Foundation: Rebuilding Financial Supervision and Regulation 6/30: Consumer Financial Protection Agency Act of 2009 ; 7/8: H.R /10: Investor Protection Act of Subtitles A-B, strengthening SEC investor protection authority 7/15: Private Fund Investment Advisers Registration Act of /16: Investor Protection Act of Subtitle D on say-onpay, compensation committee independence; 7/21: H.R. 3269; 7/31: House passes 6

8 The Road Ahead: Capital Markets Reform 7/21: Investor Protection Act of Subtitle C on credit rating agency reform 7/22: Systemic risk legislation (FSOC, Tier 1 FHC, securitization, non-bank loopholes, Office of National Insurance, FRA 13(3)) 7/23: Legislation to create National Bank Supervisor, enhanced clearing and settlement supervision, resolution authority 7/30: Frank/Peterson announcement on derivatives regulation; 8/11: Over-the-Counter Derivatives Markets Act of

9 The Road Ahead: Capital Markets Reform High level of coordination between the White House and Capitol Hill Flurry of activity to continue into next year Frank: House to vote on the regulatory reform proposals in September or October; Senate consideration expected after, with goal of President s signature before year end However, other priorities (health care, climate change) likely to slow timeline Certain reforms (insurance regulation, harmonization of securities and futures regulation) deferred Financial Crisis Inquiry Commission: Report due December,

10 Credit Rating Agency Reform Administration s proposed credit rating agency reform Strengthen SEC Regulation And Oversight: Mandatory registration Conflicts of Interest: Bar firms from consulting companies they rate Transparency: Require disclosure of fees, preliminary ratings, full ratings history, and risks measured in rating H.R. 2549, Municipal Bond Fairness Act (Capuano) Requires NRSROs to design ratings for debt securities based on risk Requires NRSROs to clearly define and consistently use rating symbols Provides that NRSROs can use additional credit factors in developing credit ratings, provided they are documented, disclosed, and rated to risk Requires SEC establish NRSRO performance measures 9

11 Refinancing of Variable Rate Municipal Debt H.R. 2551, Municipal Market Liquidity Enhancement Act of 2009 (Foster) Authorizes Fed to lend to SPVs to finance standby bond purchase agreements or liquidity puts Restricted to: Variable rate demand notes Variable rate demand notes issued to refund municipal auction rate securities Short-term cash management notes Amends tax code so bonds backed by Fed liquidity facility remain tax exempt 10

12 Other Municipal Bond-Related Reforms H.R. 2589, Municipal Bond Insurance Enhancement Act (Cleaver) H.R. 2550, Municipal Financial Advisors Regulation Act (Driehaus) Required use of GAAP for state/local governments? 11

13 The Road Ahead: The Quest for Revenue The mounting deficit... $700B TARP program $4-8T Fed liquidity facilities $1.2T FDIC guarantees $787B Stimulus Health care reform? Bush 2001 and 2003 tax cuts expiring in 2010 Probable policy outcome: Most significant tax debate in generations, with nearly $4 trillion in tax law provisions on the table Consideration of revenue raisers previously considered unpalatable Winners and losers 12

14 Opportunities for Tax-Advantaged Financing under ARRA Mac McCullough Portland, OR klgates.com Jennifer Córdova Portland, OR

15 The American Recovery and Reinvestment Act of 2009 ( ARRA ) Introduced new or enhanced financing tools Tools to make borrowing cheaper Tools to borrow for new types of projects Tools include: Build America Bonds ( BAB ) Recovery Zone Economic Development Bonds ( RZEDB ) Recovery Zone Facility Bonds ( RZFB ) Expansion of tax-exempt funding for manufacturing facilities Qualified School Construction Bonds ( QSCB ) Qualified Zone Academy Bonds ( QZAB ) New Clean Renewable Energy Bonds ( CREB ) Qualified Energy Conservation Bonds ( QECB ) 14

16 Taxable vs. Tax-Exempt vs. Tax Credit Bonds Taxable bonds bondholder receives interest interest is included in bondholder s taxable gross income Tax-exempt bonds bondholder receives interest interest is not included in bondholder s taxable gross income Tax credit bond bondholder does not receive interest on bond (or receives low rate of interest on bond) bondholder is entitled to a tax credit which leads to a direct reduction in the bondholder s federal tax liability 15

17 Taxable Bonds Build America Bonds Direct Payment Recovery Zone Economic Development Bonds 16

18 Build America Bonds Direct Payment This offers an issuer the ability to issue what would otherwise be tax-exempt governmental use bonds as taxable bonds Instead of a tax-exempt interest rate, issuers pay the bondholders a taxable rate but receive periodic subsidy payments from the IRS equal to 35% of the interest expense Cannot be issued with more than de minimis premium Uses of proceeds restricted 100% of sale and investment proceeds (minus up to 2% for costs of issuance and proceeds for a reasonably required reserve fund) must be used for new money capital projects No allocation needed may be issued through December 31, 2010 Build America Bonds may also be issued as tax credit bonds 17

19 Recovery Zone Economic Development Bonds ( RZEDB ) Available to finance projects to promote development and economic activity in areas of significant economic distress ( recovery zones ) Eligible projects include governmentally used projects such as capital expenditures in the recovery zone, public infrastructure and public facilities, and job training and educational programs Like BABs, RZEDBs are issued as taxable debt, but issuers receive a 45% interest subsidy instead of 35% Also like BABs, RZEDBs cannot be issued with more than de minimis premium and 100% of the of sale and investment proceeds (minus up to 2% for costs of issuance and proceeds for a reasonably required reserve fund) must be used for qualifying projects 18

20 RZEDBs Who Can Issue? Unlike BABs, issuers need an allocation to issue RZEDBs The national allocation of $10 billion was split among the states based on employment declines in 2008 Each state s allocation was further divided between municipalities with populations larger than 100,000 and counties based on their pro rata share of the employment declines within the state in 2008 Allocation can be used by counties and large municipalities directly, suballocated to eligible issuers within the recipient s jurisdictions for use, or waived and sent to the state for reallocation Projects must be within the jurisdiction of both the issuer of the RZEDB and the entity that provided the allocation Allocations must be used by December 31,

21 Designating a Recovery Zone A recovery zone may include: An area designated by the issuer as having significant poverty, unemployment, rate of home foreclosures or general distress; An Empowerment Zone or Renewal Community; or Certain distressed areas affected by military base closures Issuers have broad discretion in designating recovery zones (can be made in any reasonable manner so long as made in good faith) 20

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23 Tax-Exempt Bonds Recovery Zone Facility Bonds Private activity bonds for small manufacturing facilities 22

24 Recovery Zone Facility Bonds ( RZFB ) New category of tax-exempt bonds to finance privately owned and/or privately used projects that would have previously been financed on a taxable basis Eligible projects include depreciable property if: Such property was constructed, reconstructed, substantially renovated or acquired by purchase by the taxpayer after the recovery zone was designated; The original use of the property in the recovery zone commences with the taxpayer; and Substantially all of the use of such property is in the recovery zone in the active conduct of a qualified trade or business of the taxpayer A qualified trade or business is broadly defined to include any trade or business except residential rental property or certain other businesses such as private golf courses, massage parlors, hot tub facilities, suntan facilities, gambling facilities or liquor stores 23

25 RZFBS Allocations and Recovery Zones Like the Recovery Zone Economic Development Bonds, RZFBs can be issued only with an allocation There was a national allocation of $15 billion Entities that received an RZEDB allocation also received a RZFB allocation The same sub-allocation and waiver of allocation rules apply A recovery zone, as described above, must be designated and the same rules for designating a recovery zone for RZEDBs applies to RZFBs as well Deadline for issuing RZFBs is December 31,

26 Expansion of Tax-Exempt Financing for Manufacturing Facilities Tax-exempt financing is available for certain small manufacturing facilities ARRA expanded the types of manufacturing facilities that can be financed on a tax-exempt basis 25

27 What is a Manufacturing Facility? Before ARRA, only facilities used in the manufacturing or production of tangible personal property could be financed on a tax-exempt basis ARRA expanded the definition of manufacturing facility to also include facilities used in the manufacturing of intangible property (e.g. software, format, process, patent, copyright, design, intellectual property associated bio-tech and pharmaceuticals) 26

28 Related and Ancillary Facilities Prior to ARRA, only 25% of the bond proceeds could be used for costs of directly related and ancillary facilities (as opposed to the core manufacturing areas of the facility) ARRA removed this 25% restriction for bonds issued in 2009 and 2010 Now, tax-exempt financing can be used for facilities that are functionally related and subordinate to the manufacturing facility as long as those facilities are located on the same site as the manufacturing facility 27

29 Other Limitations Still Apply Principal amount of tax-exempt bond financing is limited to $10 million The sum of The principal amount of tax-exempt bond financing, plus All capital expenditures for the three years prior to the date of issuance of the bonds and the three years after the date of issuance, must be $20 million or less Less than 25% of principal amount of tax-exempt bonds may be used to finance land An allocation of the state private activity bond volume cap is still needed to issue the bonds and the public hearing and other requirements still apply 28

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31 Tax Credit Bonds Qualified School Construction Bonds Qualified Zone Academy Bonds New Clean Renewable Energy Bonds Qualified Energy Conservation Bonds 30

32 Tax Credit Bond Basics Any interest paid on the bond is taxable to the bondholder but the bondholder gets a tax credit to reduce its income tax liability A bondholder accrues 25% of the annual credit on each quarterly credit allowance date on which it holds the bond The annual credit is the product of the applicable credit rate and the outstanding face amount of the bond for certain tax credit bonds, bondholders receive 100% of the annual credit while for others, the tax credit is reduced The credit rate is set on the sale date of the bond 31

33 Tax Credit Bond Basics (Cont.) The maximum term of a tax credit bond is based on the maximum term set with respect to bonds issued in that month 100% of the bond proceeds, including investment proceeds (minus up to 2% for costs of issuance) must be used for qualifying purposes Each type of tax credit bond has a different qualifying purpose Issuer must: Have a binding commitment to spend 10% of the proceeds within 6 months Spend 100% within 3 years Use unspent proceeds after 3 years to redeem bonds unless an extension is secured 32

34 Tax Credit Bond Basics (Cont.) The arbitrage and rebate rules apply to tax credit bonds and, generally speaking, proceeds that are fully spent within the required 3 year period are deemed to comply with those arbitrage and rebate rules Permissible to have a sinking fund to repay the bond that can earn at a specified federal rate 33

35 The Market for Tax Credit Bonds Most tax credit bonds have been privately placed with investors The pool of interested investors is shallow due to the current lack of appetite for tax credits As the economy improves, there may be more interest in purchasing these bonds Anticipated guidance from the IRS regarding how the tax credits may be stripped from these bonds and sold separately may increase the marketability of, and interest in, tax credit bonds 34

36 Qualified School Construction Bonds These ARRA-created tax credit bonds can be used to construct, rehabilitate, and repair public schools, including land on which to construct a school facility and equipment to be used in the financed school facility Designed to permit issuers to issue at very low interest rates (bondholders receive 100% of the annual credit amount) Need an allocation certain larger districts received a direct allocation Can be issued by any state or local government for a proper project within the issuer s jurisdiction 35

37 Qualified Zone Academy Bonds ARRA expanded the availability of QZABs by increasing the national allocation from $400 million for 2009 and 2010 to $1.4 billion for each of those calendar years Need an allocation Designed to permit issuers to issue at very low interest rates (bondholders receive 100% of the annual credit amount) QZABs are different from QCSBs in several ways: QZABs may be used for rehabilitating or repairing the school facility, providing equipment, developing course materials for that facility, or training teachers or other school personnel in that facility; QZABs are restricted to use with respect to school facilities that are: Located in an Empowerment Zone or Enterprise Community; or At which at least 35% of the students are expected to be eligible for free or reduced-cost lunches QZABs require a private contribution 36

38 New Clean Renewable Energy Bonds CREBS are a type of tax credit bond available to finance qualified renewable energy facilities Qualified renewable energy facilities include solar, wind, geothermal, hydropower, biomass facilities and others Designed to permit issuers to issue at low interest rates (bondholders receive 70% of the annual credit amount) Need an allocation Additional $1.6 billion allocation made available under ARRA Allocations are awarded through an application process administered by the IRS 37

39 Qualified Energy Conservation Bonds ARRA authorized an additional $2.4 billion of QECBs These bonds are tax credit bonds that are available to finance qualified conservation purposes, including: (1) Capital expenditures for: Reducing energy consumption in publicly owned buildings by at least 20%; Implementing green community programs (including the uses of loans, grants, and other repayment mechanisms); Rural development involving the production of electricity from renewable energy resources; or Any facility eligible for the production tax credit under Section 45 of the Internal Revenue Code (CREBs projects). 38

40 QECBs Permissible Uses (Cont.) (2) Expenditures with respect to research facilities and research grants to support research in: Development of cellulosic ethanol or other nonfossil fuels; Technologies for the capture and sequestration of carbon dioxide produced through the use of fossil fuels; Increasing the efficiency of existing technologies for producing nonfossil fuels; Automotive battery technologies and other technologies to reduce fossil fuel consumption in transportation; or Technologies to reduce energy use in buildings. 39

41 QECBs Permissible Uses (Cont.) (3) Mass commuting facilities and related facilities that reduce consumption of energy, including expenditures to reduce pollution from vehicles used for mass commuting; (4) Demonstration projects designed to promote commercialization of Green building technology; Conversion of agricultural waste for use in the production of fuel or otherwise; Advanced battery manufacturing technologies; Technologies to reduce peak use of electricity; or Technologies for the capture and sequestration of carbon dioxide emitted from combusting fossil fuels in order to produce electricity 40

42 QECBs Permissible Uses (Cont.) (5) Public education campaigns to promote energy efficiency 41

43 Qualified Energy Conservation Bonds Designed to permit issuers to issue at low interest rates (bondholders receive 70% of the annual credit amount) Need an allocation Each state, large municipality, and large county received an allocation At least 70% of each state, large municipality or large county s allocation must be issued as governmental purpose bonds (bonds to finance loans and grants to property owners to implement green community programs are treated as governmental purpose bonds) 42

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45 Additional Considerations: The Buy American Provision and Davis-Bacon Act Sean Bamford Washington, D.C.

46 The Buy American Provision Requires, with some limited exceptions that all iron, steel, and manufactured goods used for construction, alternation, maintenance, or repair of a public building or public work must be manufactured in the US. For purpose of grants and loans funded with ARRA funds a manufactured good is considered a US end product if it is wholly grown, produced, or manufactured in the US or is substantially transformed in the US. If the cost of the project is greater than $7,443,000 than the recipient (subrecipient) may provide manufactured goods wholly grown, produced, manufactured or is substantially transformed in a designated country. 45

47 The Buy American Provision The Good News- The Buy American provision is in Division A of ARRA and the tax and bond provisions are in Division B of ARRA. ARRA- SEC. 4. REFERENCES. Except as expressly provided otherwise, any reference to this Act contained in any division of this Act shall be treated as referring only to the provisions of that division. Consequently, the Buy American provision does not apply to bond or tax provisions found in Division B of ARRA unless expressly provided. 46

48 Davis-Bacon Act Davis-Bacon requires that: Contractors/grantees (including subcontractors and subgrantees) pay mechanics and laborers a prevailing wage rate on federally funded construction projects performed in the United States that exceed $2,000. The Department of Labor determines the minimum wage ( prevailing wage rate ). Under Davis-Bacon Wages include the base hourly pay rates plus fringe benefits. 47

49 Application of the Davis-Bacon Act to ARRA Funded Bonds Under ARRA, Division B Sec. 1601Davis-Bacon applies to: any new clean renewable energy bond (as defined in section 54C of the Internal Revenue Code of 1986) issued after the date of the enactment of ARRA, any qualified energy conservation bond (as defined in section 54D of the Internal Revenue Code of 1986) issued after the date of the enactment of ARRA, any qualified zone academy bond (as defined in section 54E of the Internal Revenue Code of 1986) issued after the date of the enactment of ARRA, any qualified school construction bond (as defined in section 54F of the Internal Revenue Code of 1986), and any recovery zone economic development bond (as defined in section 1400U 2 of the Internal Revenue Code of 1986). 48

50 Q&A / Contact Information Today s Speakers: Carol McCoog carol.mccoog@klgates.com Dan Crowley dan.crowley@klgates.com Jennifer Cordova jennifer.cordova@klgates.com Mac McCullough edward.mccullough@klgates.com Sean Bamford sean.bamford@klgates.com ARRA Resource: 49