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HomeMy WebLinkAboutResolution 1984-29 . . RESOLUTION NO. 84 - 29 A RESOLUTION APPROVING THE CONCEPT OF PUBLIC PROJECT INDUSTRIAL DEVELOP- MENT BONDS AND REQUESTING SUPPORT. RESOLVED, by the City Council of the City of Gilroy, that WHEREAS, the present definition of "Industrial Development Bonds" under the Internal Revenue Code encompases both bonds for private activities and for certain public projects; W1IEREAS, the effect of treating bonds for public projects as Industrial Development Bonds is to impede or prevent the effective undertaking and completion of public projects; v~lEREAS, several proposals have been suggested for amending the definition of "industrial development bond" to separately treat public project industrial development bonds; vJHEREAS, one such proposal has been made by tt.e l~unici;Jal Finance Officers Association, and is attached as Exhibit a to this resolution, together with explanatory comment; vlliEREAS, the concept of a public project industrial develop- ment bond, which is supported by the Municipal Finance Officers Association, is necessary to the undertaking and completion of essential projects by state and local government, freeing such projects from the usual industrial development bond restrictions; WHEREAS, the specific proposal to define the concept of a "Public Project Industrial Development Bond" that is attached to this resolution as Exhibit B provides a satisfactory and workable definition which will give needed flexibility to state and local government in the types of projects which may be undertaken, with- out affecting the legal relationship among public entities and persons who might otherwise be considered to be tax owners of projects; and RESOLUTION NO. 84 - 29 -1- . . WHEREAS, such flexibility is necessary for the accomplish- ment of state and local projects by state and local government without unnecessary intrusion by the national government; NOW, THEREFORE, IT IS DETERMINED AND ORDERED, as follows: 1. The concept of a public project industrial development bond, as supported by the ~1unicipal Finance Officers Association and attached hereto as Exhibit "A", is hereby approved. 2. The specific proposal attached hereto as Exhibit B, to define a "Public Project Industrial Development Bond" and state its incidents, is hereby approved. 3. A certified copy of this resolution shall be provided by the City Clerk to the Honorable Ed Zschau, Contressman, whose district includes this city, and to the Honorable Alan Cranston and Pete Wilson, senators from the State of California. 4. Congressman Zschau and Senators Cranston and Wilson are hereby requested to take all action necessary to obtain amendments to the Internal Revenue Code in support of the concept of a Public Project Industrial Development Bond and, if they deem appropriate, to support legislation which will define a Public Project Industrial Development Bond in accordance with the proposal attached hereto as Exhibit B. 5. Similar support by other California public agencies and associations is hereby requested, and the City Clerk is hereby directed to forward a copy of this resolution, together with an explanatory communication to other potentially-interested public agencies and to the League of California Cities. The League is hereby requested to notify other cities of the problem and to solicit support from them in a similar manner, and to request the aid of the National League of Cities in the obtaining of accomodative national legislation. * * * * * * * * RESOLUTION NO. 84 - 29 -2- . . PASSED AND ADOPTED at a meeting of the City Council of the City of Gilroy held on the 16th day of April, 1984, by the following vote: NOES: COUNCIL J:.1El1BERS: GAGE, KLOECKER, HUSSALLEM, PATE, VALDEZ and HUGEAN. COUNCIL HEHBERS: None AYES: ABSENT: COUNCIL l1EMBERS: ALBERT APPROVED: ATTEST: ~ 2IA~t~zf!q RESOLUTION NO. 84 - 29 -3- . . I, SUSANNE E. STEINMETZ, City Clerk of the City of Gilroy, do hereby certify that the attached Resolution No. 84-29 is an original resolution, duly adopted by the Council of the City of Gilroy at a regular meeting of said Council held on the 16th day of April , 19 ~, at which meeting a quorum was present. affixed the Official Seal of the City of Gilroy this day of April, 19 84 ~f IN WITNESS WHEREOF, I have hereunto set my hand and 17th (Seal) - .' . '. - '--' ~ EXPLANATION OF THE MFOA PROPOSAL TO CHANGE THE STATUS OF CERTAIN BONDS CURRENTLY CLASSIFIED AS INDUSTRIAL DEVELOPMENT BONDS MUNICIPAL FINANCE OFFICERS ASSOCIATION SUITE XO 1750 K STRfET. N.W, WASHING1DN. ex: 20006 202: 466-20\4 Introduction In an attempt to reduce the volume of tax-exempt industrial development bonds (lOBs) issued by state and local governments, the House Ways and Means Committee approved a list of proposed, restrictions in November 1983 which includes a contro- versial state-by-state volume cap. The cap proposal drew widespread criticism because, as drafted, . it does not distinguish between those lOBs issued to serve ~ public pur- pose and thosa that provide lower-cost financing for priva~e purposes, . it creates difficulties for jurisdictions in need of economic develop- ment financing and encourages those with lesser needs to use their por- tion of the cap, . it is of doubtful Constitutional validity, and . it imposes additional reporting and administrative requirements on state and local officials. At its recent meeting in December 1983, the MFOA Committee on Governmental Debt and Fiscal Policy reviewed proposals before Congress to restrict industrial development bonds and adopted a policy statement that recommended redefining the term "industrial development bond" to delete certain qualified public facilities from the present definition. This change permits bonds issued to provide those public facilities to be treated in the same manner as general obligation and cer- tain other public-purpose revenue bonds. The statement reads as follows: No restriction should exist on the issuance of bonds by state and local government, the interest on which is exempt from federal income taxation for projects where: (i) no private entity is considered the owner of the project for federal income tax purposes and no private entity is, there- fore, entitled to depreciation deductions or investment tax credit, (ii) the state or local government issuer retains or exercises substantial operational or functional control over the project, and (iii) the state or local government issuer has made, or reasonably expects to make, funds or other assets available to secure the payment of a significant part of the debt service on such bonds independent of any lease rentals or other amounts provided by a single private entity using or occupying a major portion of the facility. EXHIBIT "A" DRAFT E':<EC'J::'1: ,--=,F;...::) '30 '.C,-;7..... '.~!C:O---!CA'~ ~\iE~,~ . ,=h!C,~GO ill_'NOS 6C'~1 . J12 .:;n ~7CO . .~' '-' -' This proposal does not change the status or any bonds issued on a tax-exempt basis and does not impose new restrictions on tax-exempt bonds. The remainder or this memorandum provides an explanation or the MFOA proposal by giving background information on federal legislation governing IDBs, an explana- tion of the need for the change proposed by MFOA and some illustrations of the benefits of the proposal. A Quick Legislative History of lOBs The use of industrial development bonds began in 1936 when Mississippi autho- rized cities and counties to issue general-obligation bonds to construct industrial buildings for lease to private enterprises. Other states followed Mississippi's lead in order to stimulate economic development after World War II, and issued. bonds to attract business and jobs. Today, industrial development bonds are issued in all 50 states. The issuance of lOBs increased during the 1960s when the bonds were secured by revenues generated by the projects financed rather than the full faith and credit of the issuer. Alarmed by the rapidly growing volume of lOBs, the U.S. Treasury Department in 1967 ruled that the interest earned on lOBs was subject to taxation. The ruling was withdrawn in 1968 when Congress enacted the Revenue and Expenditure Control Act. The act, which continues to govern lOB usage, put into the law a definition of lOBs and attempted to clarify their tax-exempt status. Essentially, lOBs are securities issued by state and local governments where: . A major portion (25 percent) of the bond proceeds are used in business by a nonexempt entity. This is known as the trade or business test; and . A major portion (25 percent) of the debt service is secured by property used in or payments derived from a business regardless of whether the bonds are also obligations of the issuer. This is known as the security interest test. The 1968 legislation denied tax exemption for lOBs, excepting (a) those that finance certain types of facilities that have been designated as "exempt activities," (b) small-issue lOBs and (c) industrial parks. The exempt activities identified in the Internal Revenue Code are: . projects for residential rental property, . sports facilities, . convention or trade show facilities, . airports, docks, wharves, mass commuting facilities, parking facilities or storage or training facilities directly related to any of the fore- going, . sewage or solid waste disposal facilities or facilities for the local furnishing of electric energy or gas, . air or water pollution control facilities, . facilities for the furnishing of water, . qualified hydroelectric generating facilities, . qualified mass commuting vehicles, and . local district heating or cooling facilities. EXHIBIT "A" . -- .e Three ~ Unlike the small-issue industrial development bonds described below, there is no limitation on the size of issues for exempt-activity facilities, but substantially all (90 percent) of the bond proceeds must be used to provide for the exempt facil- ities. Currently, small-issue lOBs are those for unspecified purposes, but limited in amount t~ $1 or 10 million. An lOB issue is within the $1 million exemption if the sum of the proposed issue and outstanding lOBs used by a principal user for facil- ities in the same jurisdiction is no greater than $1 million.. If an issuer chooses to impose a $10 million limit, all capital expenditures on the proposed facility or any others in the same jurisdiction by the same borrower must be aggregated for a six-year period, beginning three years prior to the proposed issue. If the limit is exceeded, the bonds lose their tax-exempt status. Another important stipulation is that substantially all (90 percent) of the proceeds of the small issue must be used to acquire land and depreciable property. Objective of the MFOA Proposal The approach taken by the Congress in 1968 to restrict lOB usage suffers from a serious flaw that the MFOA is seeking to correct in its new proposal. The defini- tion of lDBs contained in the 1968 legislation includes not only bonds issued for private industrial development, but also bonds issued to finance any public facil- ity for public purposes if the facility is used by at least 25 percent non-exempt users and if the bonds are to be paid by a similar percentage of payments from such users. The definition mixed up two wholly different kinds of bonds. The first is the borrowing for low-cost, tax-exempt money for private facilities. The second category is bonds to finance public projects whose cost is charged to users in the form of rents and other user charges. Included in this category are bonds issued to finance public airports, public piers, public parking facilities, local public water wor~s and any other public facility failing the two 25 percent tests. The attached proposed legislative language amends the section of the tax code ~103(b) -- where lOBs are defined by exempting from that definition state and local bonds supported by payments from private users, but where the governmental entity retains some functional and financial relationship to the project. In order to establish when this type of relationship occurs, a three-part test has been suggested by MFOA that requires 1. the user not be the owner of the facility or facilities for income tax purposes, 2. the public issuer retain control over the facility or facilities, and 3. the public issuer be responsible for the debt service on the bonds indepen- dent of lease rentals from the facility or facilities. Under this proposal, to be excluded from the definition of lDBs, no taxpayer can take advantage of the investment tax credit or depreciate the property. There must be some functional involvement by the issuer in the project, most likely in the form of operational control through a lease or other agreement. A lease treated EXHIBIT "A" . '0 . -- . Four ....-/ " purely as a financins lease tor federal income tax purposes would probably not qualify for functional and financial control. Finally, the general credit or other revenues ot the issuer must be pledged for the repayment or the bonds. This last provision assures that the issuer is financially involved in the project because the debt is not secured by a single firm, but by the governmental entity issuing the bonds. Benefits of the MFOA Proposal The MFOA proposal described in this memorandum has several major benefits that deserve careful consideratiQn. Host important, it corrects a serious flaw in the tax code by clarifying the status of bonds issued to finance public facilities and secured by revenues from users of the facility. These bonds would no longer be erroneously tagged private-purpose industrial development bonds. In addition, the MFOA proposal would no longer allow these bonds to be subjected to restrictions intended to curb abuses related to the financing of private industrial facilities. A recent example illustrates this point.- The Tax Equity and Fiscal Responsibility Act of 1982 included new restrictions on industrial development bonds with no exception for public facilities. Included in the list of restricitons is a requirement for the public approval of a proposed faCility not only by the public issuer, but by any other political subdivision in which the facility financed is located. Failure to comply with this requirement results in the loss of tax exemption. Recently the public airport in Atlanta sought to issue debt for a runway ment where more than 25 percent of the project was financed by two airlines. U.S. Treasury Department ruled that the bonds would be "industrial develoment and would be taxable unless the municipality in which the airport was located approved the issuance. (Like many other cities, Atlanta's airport is located side its municipal boundaries). improve- The bonds" also O..lt- Using the criteria contained in the MFOA proposal, the issuance by the public airport in Atlanta would not be declared an industrial development bond, the project would not require approval from the second jurisdiction, and the tax-exempt status of these bonds would not be jeopardized. For more information concerning the MFOA proposal, please contact: Catherine L. Spain Director, Federal Liaison Center Municipal Finance Officers Association Suite 200 1750 K Street, N.W. Washington, D.C. 20006 (202) Q66-2014. -For a more detailed discussion of this example, see the brief amicus curiae prepared for the City of Baltimore and the National Institute of Municipal Law Officers by Daniel B. Goldberg and filed in the Supreme Court of the United States in connection with the State of South Carolina vs. Donald T. Regan. EXHIBIT "A" . ... ... . . - -../ (iii) the issuer of the obligation has made, or reasonably expects to make, assets or anticipated revenues available to secure or to pay a significant portion of the debt service on the issue of which such obligation forms a part; provided, however, if a major portion of any such facility or facilities is reasonably expected to be used or occupied ~1 one person or a related person (within the meaning of paragraph (6)(C)), other than an exempt person (within the meaning of paragraph (3)), then such assets or an- ticipated revenues shall be unrelated to the use or occupancy of said facility or facilities by such person. (b) The amendments made by subsection (a) shall apply with respect to obligations issued after the date of enactment of this Act. For more information, contact: Catherine L. Spain Director Federal Liaison Center Municipal Finance Officers Association 1750 K Street, N.W., Suite 200 Washington, D.C. 20006 202/466-2014 - 2 - EXHIBIT "A" '.. . . . - .....; [c:::CEiVED Be it enacted by the Senate and House of Represent- JAN 26 1984 atives of the United States of America in Congress assembled, that (a) subsection 103(b)(2) of the Internal Revenue Code of 1954 (relating to the definition of industrial de- velopment bonds) is amended as follows: (1) by designating as subparagraph (A) the language "For purposes of this subsection, the term 'industrial development bond' means __". , (2) by redesignating as clauses (i) and (ii) sub- paragraphs (A) and (B); (3) by redesignating as subclauses (I) and (II) clauses (i) and (ii); and (4) by adding the following new subparagraph:, "(B) EXCEPTION - Notwithstanding subparagraph (A), an obligation is not an industrial development bond if the following conditions are met: (i) no person other than an exempt per- son (within the meaning of paragraph (3)), is, for federal income tax purposes, the owner of the facility or facilities , provided with all or a major portion of the proceeds of the issue of which such obligation forms a part; and (ii) the issuer of the obligation has retained general supervisory or opera- tional control over said facility or facilities; and 01/16/84 EXHIBIT "A" DRAFt '- . . -- -...J Proposed Amendments to the IN'rERNAL RJsvISNoB CODB with respect to PUBLIC PROJEcr INDOSTRIAL DEVELOPMENT BONDS Amendment of Section 103 INTERES~ ON CERTAIN GOVERNMENTAL OBLlGATIOt'S. II II * * * (b) INDUSTRIAL DEVELOPMENT BONDS. * ." * * * (2) INDUSTRIAL DEVELOPMENT BOND. - For purposes of th's section, the term "industrial development bond" means any obligation - (A) which is issued as part of an issue all or a major portion of the proceeds of which are to be used directly or indirectly in any trade or business carried on by any person who is not an exempt person (within the meaning of paragraph (3)), [and] (B) the payment of the principal or interest on which (under the terms of such obligation or any underlying arrangement) is, in whole or in major part - (i) secured by any interest in property used or to be used in a trade or business or in payments in respect of such property, or (ii) to be derived from payments in respect of property, or borrowed money, used or to be used in a trade or business[.l, and (C) which is not a public project industrial development bond;- * * * * * (IS) PUBLIC PROJECT INDUSTRIAL DEVELOPMENT BOND. - (A) IN GENERAL. - For ~urposes of ~araaraPh (2) (Cr;-the term "pubITc-p(oJect industrlal eveloprnent bond" means any obligation which is issued as part of an issue with respect to which an election is made as provided ~ subparagraph ~ EXHIBIT "B" WILSON MORTON ASSAF & McELLIGOTT .- . . ........" -" Page Two (B) ELECTION. - The election referred to in sUbPa~raPh (A) ~'lY.- be made ~ the issuer ~the submiss on ~ the issuer to the secretart of a statement signea-~ ! duly authorized of iCTal that the issuer elects to have the issue treated as an issue of pu6TIC prOJect -in dustrraT development-bonds:- (e) SUBMISSION. - The statement referred to in subparagrapn (B) may be Siibmi tted to the Secretary on ~~ ~~i~~~ !!!~ !.2 t h ~~Y 0 f !b.~ ~!!~ ~~!.~!!.9.~~ !!!~~!.b. ~i! e r the close of the calendar quarter in which the ~~!f9.-~! io!! !~ !~~~~~9. ~~ ~! ~~~b. !~!~~ !i.!!!~ ~~ !!!~ Secretary may ~ ~~gulation prescribe, and sha!!. include the fol~0wing information: ill the name and address of the issuer, (ii) the date of the issue, the authorized princIPal amount, and the stated interest rate, term and face amount of each obligation which is part of the issue, and - iiii) ~ general description of any property to be fInanced from the proceeds or-the issue. (D) SUPPLEMENTAL SUBMISSIONS. - An issuer shall submit to the Secretary, at such time or times on or-- ~~~~~ g~~!!! !~ !b.~ !.2 t h .9.~y ~i ! h e ~!!.9. ~~! ~!!9.~~ !!!~!!!!! after the ~lose of the calendar quarter in which the ~~!..!.~~!l~!! L~ .!.~~ u e ~ ~!!.9. l!! ~~~!! !!!~!!~~E. ~~ !!!~ Secretary shall ~ regulation prescribe, ! statement which contains the following information: (i) ~ more specific description ~ any propertY finan~~ the proceeds of the lssue, (ii) each address or other description of the premIses at or with respect to which the - property financed ~ the proceeds of the issue is located or used, (iii) as refl,ected ~ ~~ai..!.ab..!.~ pub~ records an identiflcation of the persons ~ whose name the tit!.~ to the property and to the E~~!~~~ i.~ h e!.~ ~~.9. ~i !!!~ E~.!.!!~.!.E~!. ~~~~~ ~i the property and of the premises, EXH IB IT "B" WILSON MORTON ASSAF & McELLlGOrr . . --- - Page Three (iv) whether or not any obligation which is issued as part of sucn lSSue rema~ns undischargea- the payment of the principal ~ if terest ~ which (under the terms of such obligatitn or any underlying ar rangement) is, in whole ~ in part " l!l ,secured ~ any interest in ~ property or in the premises ~ in payments ~ respect of the property ~ premises, or (II) to be derived ~ ~ayments in respect of the property or E..: emlses, or borrowed money with respect !hereto, and ~ the ~~ing of the notice or notices specified ~ subparagraPh (E). ~ DUE NOTICE. - ill ~!; i s s ~~!. ~~~!! 9i.~~ !!~!.!. c e !~ !~ e persons identltrea pursuant to clause (ill) or subparagraph ill l!l of the proposed issuance and of the issuance or-public project industriar- development bonds, and (II) that pursuant to sections 48 (a) (lrrand 28'0F., certain credi ts and deductions may not be available ~ reason of the financing of property ~ the proceeds of such bonds. (i i) the not ice referred to in clause (i) shall be giv~in writing, ------ (I) ~ mail and ~ reasonable public ~ice, pr~-to the issuance or such bonoS; and (II) ~ mailL subsequent to the issuance of such bonds, at such time or times and in such manner as the secreEary-sfiaII ~ regUIatTOn-piescribe. EXHIBIT "B" WILSON MORTON ASSAF & McELLIGOTT ~ . . - ......, Page Four Amendment of Section 48. DEFINITIONS 7 SPECIAL RULES. (a) SECTION 38 PROPERTY. - . . . . . (ll) SPECIAL RULE FOR PROPERTY FINANCED BY PUBLIC PROJECTINDUSTRIAL DE~ELOPMENT BONDS. = PropertY which is financed ~ the proceeds of an obligation which is issued as part of an issue of pub.lic project industrial development bonds (within the meanlng of Section l03(b)(15)) the interest on which is exempt from tax under Section 103 shall not be treated as section 38 property nor ~ otherwise meeting the requirements of paragra~h l!l of this subsection ~~ !~.!!~ ~~ ~!!Y. ~~l;..!.s.~!.!.~ ~~ic~ i s !~~~ed ~~ ~ E~!.! ~i ~~~!! issue remains undlscharged the payment of the principal ~ interest ~ which (under the terms of such obligation or any underlYing arrangement) is, in whole or in part, (A) secured ~ ~ interest in the property or in the premises at or wit}lrespect to whlCO the property .!.!! ! ~~~!~~ ~E. ~~~~ ~!. i n E~Y. me.!! t sin r e ~~! 0 E !!!~ property ~ premises, ~ (B) to be derived from payments in respect of the propertY or premTse's, or borrowed money with respect thereto. Addition of Section 280F. SEC. 280F. CERTAIN DEDUCTIONS FOR PROPERTY FINANCED BY PUBLIC PROJECT INDUSTRIAL DEVELOPMENT BONDS (a) IN GENERAL. - No deduction shall be allowed with respect to property whiCh 1s, f inanced ~ Ene proceeO"SOf an obligation which is issued as part of an issue of public project industrial development bonds (within the meaning of Section . 103(b)(l5)) the interest ~ which ~ exempt from ~ under Section ~.l.!. ~ !~.9. as ~~Y. ~~!.!.9.at.!.~!! WhiC!! is is~~ed ~~ ~ ~!.! of ~~ch issue remains undischarge~the payment or-the principal or interest on which (under the terms of such obligation-or any underl~ arrangement) is, in whole or in part, (l) secured Qy any interest in the property or in the premises at or witnrespect to whiCll the propert~ IS IOcated or used or in payments in respect of the propertx or premises, or EXHIBIT liB" WILSON MORTON ASSAF 8: MCEU !GOTT .... . . .... ff" . . -- -...-; Page Five (2) to be derived from payments in respect of the propertY ~ premises, or-oorrowed money with respect thereto. (b) SUBSECTION (a) NOT TO APPLY. - Subsection (a) shall not be app1'"I'Cable in the case of (1) ordinary and necessary expenses ~!lowable under Sections l62 or 2l2, (2) interest on indebtedness allowable under Section l63, ill taxes allowable under Section l64, and (4) taxes and interest, but not depreciation, allowable under Section 2l6. ------ Prepared by: G. A. Laster February 21, 1984' EXHIBIT "B" WILSON MORTON ASSAF & McELLlGOTI