These changes in favor of more equitable access to debt issuances haven’t been at the top of the list of the muni industry’s priorities, but have certainly been a long-time coming. The total value of the cap is to be determined as the language of the bill is finalized. Removing the essential governmental function test would allow tribes to issue tax exempt bonds just as states can, but instead of having a volume cap on individual tribes as it works for individual states, there will be a national volume cap, similar to the $2 billion cap for economic development bonds, on how much tribes issue nationally. But Congress limited that to $2 billion volume cap nationally, and now almost all that volume cap is gone,” Hyatt said.
“In other words, we can do through 10 bonds what we could otherwise not do, as an essential governmental function. Since the introduction of tribal economic development bonds in 2010, tribes have been able to issue these bonds as an exception to the essential governmental function test, with a $2 billion volume cap.
State and local issuers have no such provision attached to their bonds. The essential government function test essentially means that in order for a tribal bond to be tax-exempt, it must not finance any function not customarily performed by state and local governments.
This becomes more complex when dealing with individual tribes, of which there are roughly 550 currently active in the US. “The tax code says that tax exemption is really primarily for the benefit of governments and to the extent that there are private parties involved, they want to greatly limit their ability to use or benefit from tax exemption,” Hyatt added.įor states, this is the function of a volume cap, which limits the number of private activity bonds issued each year based on a state’s population. Most tribal debt issuances are done through commercial loans, but market participants agree that this development will boost issuance volume.īut some of the specifics still need to be worked out as to what this will actually mean for individual tribes.
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