Illinois Enacts Legislation to Facilitate Reallocation of Recovery Zone Bonds
Public Finance Update 08/05/10
The American Recovery and Reinvestment Act of 2009 ("ARRA") authorized the issuance of Recovery Zone Facility Bonds ("RZFBs") and Recovery Zone Economic Development Bonds ("RZEDBs") (collectively, "RZBs") to assist economic development in areas designated by municipalities as recovery zones.
RZFBs are issued by a governmental conduit issuers for the benefit of private, for-profit business entities in a recovery zone; they provide tax-exempt financing for a broad range of capital projects, including commercial facilities. In an RZFB financing, the governmental issuer lends the proceeds of the bonds to the private business borrower, and the private business borrower is solely responsible for repayment of the bonds.
RZEDBs are issued by government issuers for governmental projects in a recovery zone. They are a form of taxable financing, but issuers of such bonds receive direct payment subsidies from the federal government equal to 45 percent of interest on the bonds.
RZB Allocations under ARRA
ARRA provided RZB allocations on a state-by-state basis. Each state was then required to reallocate its allocation among counties and municipalities with populations of 100,000 or more, proportionate to their decline in employment. Illinois received more than $1 billion of RZFB allocation authority and approximately $667 million of RZEDB allocation authority. Of those amounts, the City of Chicago received approximately $199 million of RZFB authority and $133 million of RZEDB authority.
Generally, municipalities that received larger allocations - such as the City of Chicago, Cook County, Lake County, DuPage County, and Will County - have found the issuance of RZBs feasible for financing authorized projects, while municipalities that received smaller allocations have not. Absent action by Congress, RZBs must be issued no later than December 31, 2010, which in the case of municipalities with smaller allocations and no plans for use, could result in the loss of funds for Illinois projects.
ARRA permits municipalities to waive their RZB allocations, but thus far few have done so. Treasury guidance regarding RZBs permits states to reallocate RZB authority, and various states have passed legislation to create processes for reallocating RZBs that will remain unused by the deadline for issuance. Our February 2010 update regarding Wisconsin reallocation legislation may be found here.
Illinois Waiver and Reallocation Legislation
The Illinois legislature has taken steps to address reallocation of its RZBs by enacting Public Act 096-1020, effective
July 12, 2010. The new law authorized two different methods by which municipalities can reallocate their RZBs.
- The first option permits a municipality to voluntarily waive its allocation, in whole or in part, to the Illinois Finance Authority (the "Authority") and specifically designate the municipality that will receive its RZBs. In order to waive the municipality's RZB allocation to the Authority, the municipality must take official action by resolution or ordinance to authorize the waiver, and it also must designate the recipient of the RZB allocation. The recipient is required to issue the RZBs on or before August 16, 2010; otherwise, the RZB allocation is deemed waived to the Authority for reallocation to other authorized projects.
- The second reallocation option permits a municipality to enter into an agreement with the Authority to waive, in whole or in part, its RZB allocation. As part of the waiver agreement, the Authority will have the ability to use the waived allocation to issue RZBs for qualifying projects or to reallocate the waived allocation to another municipality for a qualifying project. The Authority may pay reasonable costs and fees (as determined by the Authority) to the municipality in connection with its waiver.
Pursuant to the legislation, the Authority also has the authority to designate the entire state or areas within the state as recovery zones. Additionally, the Authority has the authority to issue RZBs for any project authorized to be financed under ARRA.
If you have questions about this Illinois legislation, please call any of our Illinois Quarles & Brady Public Finance lawyers.