The American Recovery and Reinvestment Act: Bonding Opportunity Knocks for Indian Country
Indian Law Update 03/10/09 Luis A. Ochoa, Jeff Peelen
After weeks of contentious debate, Congress finally passed-and President Obama promptly signed-the $789 billion economic stimulus plan known as the American Recovery and Reinvestment Act of 2009 ("ARRA" or the "Recovery Act"). In an earlier Q&B Update, we traced the basic framework of this enormous and magnificently complex legislative edifice. Here, however, we will focus specifically on the opportunities that ARRA creates for housing, infrastructure, and economic development in Indian Country.
Newly Created Tax-exempt Bond Financing Opportunities for Tribal Governments
Among the most important impacts of ARRA on Indian Country is the extended authority conferred upon Indian tribal governments to issue tax-exempt or tax credit bonds. Under ARRA, Indian tribal governments may issue four discrete types of exempt or tax-credit bonds: (1) Tribal Economic Development Bonds, (2) Qualified School Construction Bonds, (3) Clean Renewable Energy Bonds, and (4) Qualified Energy Conservation Bonds.
Tribal Economic Development Bonds
The Recovery Act provides for the issuance of up to $2 billion in tax-exempt "tribal economic development bonds," a new category of tax-exempt bonds.
A Tribal Economic Development Bond is defined as any bond issued by an Indian tribal government with respect to which (1) the interest on the bond would be exempt from tax under Section 103 of the Internal Revenue Code ("IRC") if the bond were issued by a state or local government, and (2) the tribal government designates the bond as a "tribal economic development bond." Tribal Economic Development Bonds may be used to finance any economic development effort located on a reservation except any portion of a building in which class II or class III gaming is conducted or housed, or any other property actually used in the conduct of such gaming. Indian tribal governments and any instrumentalities of Indian tribal governments are treated as a state for purposes of the private activity bond rules, and the private activity volume cap does not apply.
The Recovery Act's Tribal Economic Development Bond authorization is significant in that it removes the "Essential Government Function" requirement that has historically restricted tribal bonding efforts. Under prior law, Indian tribal governments could issue tax-exempt bonds only if substantially all of the proceeds were used to advance a narrowly-drawn set of functions customarily performed by state and local governments with general taxing powers. The provisions in the Recovery Act related to the issuance of Tribal Economic Development Bonds, however, do not require that the issuing tribe meet the essential government functions test.
As a result, a number of tribal projects that previously could not have been financed with bond proceeds should now be eligible. A few examples include:
- A wide variety of hospitality projects, including hotels, convention centers, golf courses, and other resort amenities;
- Privately-owned industrial and manufacturing projects;
- Community centers, charter schools, and other public-private partnership projects that would not otherwise squarely fit within the "essential government function."
In addition, tribes may consider using Tribal Economic Development Bonds to refinance outstanding taxable debt.
Finally, tribes should be aware that ARRA requires the Secretary of the Treasury to study whether the "essential government function" restriction should be repealed permanently.
Qualified School Construction Bonds
ARRA authorizes up to $400 million ($200 million in calendar year 2009 and $200 million in calendar year 2010) of a new species of tax credit bond-the "qualified school construction bond"-for issuance by Indian tribal governments for use in supporting the construction, rehabilitation, and repair of schools funded by the Bureau of Indian Affairs. Under the Recovery Act, Qualified School Construction Bonds may be issued for the construction, rehabilitation, or repair of school facilities, or for the acquisition of land on which a school facility will be constructed.
A Qualified School Construction Bond is defined as a bond with respect to which (1) all of the available project proceeds are to be used for the construction, rehabilitation, or repair of a public school facility or for the acquisition of land on which such facility is to be constructed with part of the proceeds of such issue, (2) the bond is issued by a state or local government within the jurisdiction of which such school is located (Indian tribal governments will be treated as qualified issuers for the Indian school allocations), and (3) the issuer designates the bond as a "qualified school construction bond."
Clean Renewable Energy Bonds (CREBs)
ARRA makes an additional $1.6 billion available for Clean Renewable Energy Bonds to finance qualified renewable energy facilities that generate electricity from any of the following resources: wind, closed-loop biomass, open-loop biomass, geothermal or solar energy, small irrigation power, landfill gas, trash combustion, qualified hydropower, or marine and hydrokinetic renewable energy. Qualifying facilities must be owned by a public power provider, a governmental body (which includes Indian tribal governments), or a cooperative electric company. The Secretary of the Treasury is charged with allocating bonding authority among qualified issuers. Statutory guidelines, however, provide that up to one-third of the amount can be allocated to qualifying projects of governmental bodies, one-third can be allocated to qualifying projects of public power providers, and the remaining one-third can be allocated to qualifying projects of cooperative electric companies.
To meet the definition of a Clean Renewable Energy Bond, (1) all available project proceeds of the bond issue must be used for capital expenditures incurred by governmental bodies, public power providers, or cooperative electric companies for one or more qualified renewable energy facilities, (2) the bond must be issued by a public power provider, a cooperative electric company, a governmental body, a clean renewable energy bond lender, or a not-for-profit electric utility which has received a loan or loan guarantee under the Rural Electrification Act, and (3) the issuer must designate the bond as a "clean renewable energy bond."
Qualified Energy Conservation Bonds
Finally, ARRA authorizes $2.4 billion in Qualified Energy Conservation Bonds to finance projects for qualified conservation purposes. The Act calls for an allocation of bonding authority to be made to each state in proportion to its population, and for allocations to large local governments (defined as any municipality or county with a population of 100,000 or more) as well.1 Indian tribal governments may be treated as large local governments for purposes of this allocation. States and large local governments must allocate in such a way that at least 70% of the allocation gets used for bonds that are not private activity bonds.
A Qualified Energy Conservation Bond is defined as any bond issued as part of an issue if: (1) all of the available project proceeds of the issue are to be used for one or more qualified conservation purposes2; (2) the bond is issued by a state or local government (which includes an Indian tribal government); and (3) the issuer designates the bond as a "qualified energy conservation bond." A bond issued by an Indian tribal government can be treated as a "qualified energy conservation bond" only if the project proceeds of the issue are used for purposes for which Indian tribal governments could issue bonds, and if the interest on the bonds would be exempt from tax under Section 103 of the Internal Revenue Code if the bond were issued by a state or local government.
Pending Allocations by Departments of Treasury and Interior
As noted above, ARRA creates a significant role for the Secretary of the Treasury in allocating the authority for these new bonding opportunities. With respect to Tribal Economic Development Bonds, for example, the Act directs the Secretary, in consultation with the Secretary of the Interior, to determine how the $2 billion authorization will be allocated among Indian tribal governments. Likewise, the Secretary is charged with allocating the $1.6 billion in CREBs authorized by the Recovery Act.
The process for the Secretary's allocation has not yet been determined. It may be that allocations will be means-tested, keyed to tribal census counts or other demographic data, or made on the basis of project feasibility. No matter what the eventual basis for allocation, however, the process is likely to reflect the Recovery Act's general emphasis on speedy deployment. As a result, tribes are well-advised to begin planning immediately for the financing and logistics of potential bondable projects.
In the meantime, the National Congress of American Indians (NCAI) has been diligent in its efforts to keep tribes current on stimulus opportunities under ARRA. NCAI is maintaining a website, www.indiancountryworks.org, that aims to provide the most current information on pertinent application processes and deadlines.
OMB Implementation Guidelines for
Distribution of Recovery Act Funding
Among the hallmarks of ARRA are commitments to greater transparency and accountability. The legislation specifically provides that the Department of the Interior's Bureau of Indian Affairs, the Department of Health and Human Services' Indian Health Service, and the Department of Housing and Urban Development (each an "Agency") may distribute Recovery Act funds targeting Indian tribes through existing self-determination contracting authorities. However, existing agreements with these contracting authorities must by modified to "incorporate provisions to conform the agreement with the provisions of [the Recovery Act] regarding the timing for use of funds and transparency, oversight, reporting, and accountability." Specifics of how each Agency will incorporate these changes into the agreements will be disclosed in the individual Agency Recovery Act plans, due by May 1st.
In the meantime, the President specifically directed the Office of Management and Budget ("OMB") to prescribe guidelines targeting the Act's commitments to transparency and accountability. Accordingly, OMB released initial implementation guidelines for ARRA in a memorandum issued on February 18. While only initial guidelines, they provide insight into how the Recovery Act funds will ultimately be distributed. While the specifics of changes to the agreements with existing contracting authorities are not known at this time, the OMB memorandum does provide an indication of what shape such changes might take.
First, any award of Recovery Act funds will include mechanisms to track, monitor, and report on use of those funds. As Agencies are required under the Recovery Act to report much more detailed information on expenditures than they do in normal budget execution reporting, the contracting agencies will in turn be required to provide more detailed information to the Agencies, with special emphasis placed on any individual award over $500,000.
Further, oversight on any expenditure of Recovery Act funds will be bolstered beyond current standard practices. Tribes will still be required to have an annual audit of any Federal award, as required under the Single Audit Act of 1996 and OMB Circular A-133, which will be revised and periodically updated to address concerns specifically associated with Recovery Act funds. In addition to these annual audits, though, the Office of the Inspector General for each Department will identify high-risk expenditures to be targeted for priority audits, inspections, and investigations with faster turnaround reporting. Recovery Act funds will also be subject to oversight by the Recovery Act Accountability and Transparency Board (the "Board"). The Board will be responsible for coordinating and conducting oversight of all spending of Recovery Act funds to prevent waste, fraud and abuse. Once the Board is in place, it will likely generate additional reporting and auditing rules over time.
Finally, ARRA requires that Recovery Act funds be spent in a timely manner. To this end, Agencies must identify award methods that will allow recipients to commence expenditures as quickly as possible. However, such award methods must be "consistent with prudent management and statutory requirements," and the Recovery Act does not provide justification for non-competitive awards. To this end, the OMB memorandum counsels the Agencies to consider weighting selection criteria to favor applicants with "demonstrated ability to deliver programmatic results and accountability objectives included in the Recovery Act." OMB also recommends structuring awards to permit interim or partial payments to address contractor cash flow issues associated with a "tight credit market." In awarding grants, Agencies are advised to consider limiting competition for funds to only "high-performing" projects, as opposed to open competition. While existing grants may be continued or renewed with Recovery Act funds, due to the unique reporting requirements, supplements to existing agreements are not recommended. For awarding contracts, Agencies are directed to maximize the use of fixed price contracts using competitive bidding procedures.
We expect further guidance from OMB between mid-March and mid-April. In the near-term, OMB will convene a meeting with the Department of the Interior's Bureau of Indian Affairs, the Department of Health and Human Services' Indian Health Service, and the Department of Housing and Urban Development to discuss how to incorporate appropriate transparency and accountability provisions into tribal self-determination contracts. As noted above, details of such provisions will be included in the Agency-specific Recovery Plans, which are due no later than May 1st.
Quarles & Brady Can Help Tribes Seize Opportunities
Created by the Recovery Act
While some firms have focused only on representing reservation-based casino and gaming operations, Quarles & Brady has cultivated a broader vision and expertise. We work with tribes in nearly every area of applicable Indian and Indian-related law. We understand tribal law, federal statutes, federal and state agency regulations and case law that affects the day-to-day operations and long-term objectives of governments and businesses, both on and off the reservation. We believe in providing effective, comprehensive legal counsel that looks not only at short-term issues but also assists Indian tribes in creating the legal infrastructure which will enable them to achieve their long term goals.
As a result, our firm has deep experience in commercial transactions, real estate matters, and economic development in Indian Country. Our attorneys have represented tribes, tribal authorities and enterprises, banks and other financial institutions, and national and regional developers in connection with commercial development on Indian lands, including the planning, acquisition, development, financing, leasing, purchase and sale of commercial properties and business enterprises. Furthermore, our team includes Native American attorneys, whose unique perspective and knowledge enhances the capabilities of the entire team. Each of our Tribal Law attorneys has significant, long-term and direct personal and professional experience relating to Indian concerns and has years of experience as legal counsel to several tribes.
On the public finance front, Q&B boasts a national reputation unmatched by other firms with comparable Tribal Law practices. Our public finance lawyers have assisted clients with all types of financing structures, including income and equity participations, tax exempt financing, private placement bonds, and other forms of public finance. In annual surveys, Q&B has historically ranked with the top firms in the nation with respect to the number of transactions for which it has rendered approving bond counsel opinions. Indeed, over the last three years, it has rendered the sole approving bond counsel opinions on nearly 1700 traditional State and municipal issues totaling more than $7 billion in aggregate principal amount.
Contact Us to Discuss These Opportunities Further
ARRA represents historic legislation with ground-breaking opportunities for Indian tribal governments. To learn more about how we can help tribal governments turn these opportunities into projects, please contact one of the following Q&B lawyers:
Luis A. Ochoa
Indian Law Practice Group
Michael J. Ostermeyer
Real Estate Practice Group
Jeff D. Peelen
Public Finance Practice Group
1Any allocation to a large local governments will reduce the allocation to the state that includes that local government body, but amounts allocated to a large local government may be reallocated by the large local government to the state.
2A qualified conservation purpose is broadly defined to include any of the following:
- capital expenditures incurred for purposes of (i) reducing energy consumption in publicly owned buildings by at least 20 percent, (ii) implementing green community programs (including the use of loans, grants, or other repayment mechanisms to implement such programs), (iii) rural development involving the production of electricity from renewable energy resources, or (iv) any qualified facility (i.e. any facility that generates electricity from: wind, closed-loop biomass, open-loop biomass, geothermal or solar energy, small irrigation power, landfill gas, trash combustion, qualified hydropower, or marine and hydrokinetic renewable energy);
- expenditures with respect to research facilities, and research grants, to support research in (i) development of cellulosic ethanol or other nonfossil fuels, (ii) technologies for the capture and sequestration of carbon dioxide produced through the use of fossil fuels, (iii) increasing the efficiency of existing technologies for producing nonfossil fuels, (iv) automobile battery technologies and other technologies to reduce fossil fuel consumption in transportation, or (v) technologies to reduce energy use in buildings;
- mass commuting facilities and related facilities that reduce the consumption of energy, including expenditures to reduce pollution from vehicles used for mass commuting;
- demonstration projects designed to promote the commercialization of (i) green building technology, (ii) conversion of agricultural waste for use in the production of fuel or otherwise, (iii) advanced battery manufacturing technologies, (iv) technologies to reduce peak use of electricity, or (v) technologies for the capture and sequestration of carbon dioxide emitted from combusting fossil fuels in order to produce electricity; and
- public education campaigns to promote energy efficiency.