October 23, 2009

If I Were King!

Posted at 13:14 by: James A. Shanahan | E-mail | Permalink | Comments (1)

IF I WERE KING! Has a nice ring to it, doesn’t it. But where did the title to my new Blog originate and why? The first question is easy to answer. I made it up. For the last thirty years, I have served as bond counsel on hundreds (maybe even a thousand) municipal bond transactions. During the initial planning meeting for each financing when I would explain the statutory process that has to be followed to sell the bonds and how the bonds would ultimately be marketed, there would often come a moment where I would utter that phrase. In fact, the phrase has been used so often that friends and colleagues had the expression emblazoned on a tee-shirt shared by attendees at a birthday celebration for me.

It was usually uttered in response to a question from the client, “Why is the law written this way?” or sometimes proclaimed as a testament to my own frustration as to how the law was written. It is usually the lead in to how I would change things if I were in charge; in other words, If I were King. For example, in addressing a statutory provision that exempts only two of the ninety-two counties in Indiana from a certain feature of the circuit breaker legislation, it would not be uncommon for me to open with the following statement, “If I were King, this exemption would be applicable to all counties.”

Why King? Why not Governor or President? Well, it might have something to do with the fact that my middle name is Arthur or that my Grandfather’s first name was Arthur and my Grandmother’s name was Elizabeth. Something royal in that lineage. More basically, to do things the way I think they should be done, I have to be above the compromises inherent in the political process. I like the approach, “So let it be written, so let it be done!” A Governor’s will is subject to being bent or molded by the legislative process for reasons that have nothing to do with the substance of the Governor’s proposal. More often than not, a Governor with a legislative objective must often accept additional provisions in the bill which purports to accomplish his or her objective. To get the good provisions, the Governor must also accept the not so good, the bad, the unintended or the unthought through provisions. And a Governor has to often think about whether he or she is a Republican or a Democrat and how the legislative objective squares with principles espoused by that party. Forget about it. I have publicly proclaimed my “If I were King” phrase when Republicans were in power so that everyone thought I was a Democrat only to do it again when Democrats were in power so that everyone thought I was a Republican. I want to be able to make changes that need to be made without restriction by a political party or by special interest groups of one sort or another. I want to be above it all. In other words, I want to be like a King.

Which brings me to the topic of today’s blog: one of the bonding provisions contained in the American Recovery and Reinvestment Act of 2009. Specifically, let’s address the volume allocation of the Recovery Zone Bonds, bonds designed to be “a source for State and local government borrowing at lower borrowing costs to promote job creation and economic recovery in areas particularly affected by employment declines,” according to Notice 2009-50 published by the IRS. In its wisdom, Congress has allocated $10 Billion nationally for Recovery Zone Economic Development Bonds and $15 Billion for Recovery Zone Facility Bonds. Whether you know or care what these bonds are for, it sounds like a lot of money. Unfortunately, as part of the political process, the volume was suballocated to cities of over a 100,000 people and counties on the basis of their decline in employment from December 2007 to December 2008. Again, sounds good—until you look at the actual allocations.

In Indiana, for example, 43 counties received a volume allocation of less than $2 million for Recovery Zone Facility Bonds. These bonds are issued by the county and the proceeds loaned to a private business to construct or expand a business so that the private business can borrow at tax exempt rates rather than taxable rates, a savings of 1.5% - 2% per year in the interest rate. The aggregate total for these 43 counties is $48,379,000. This is $48 million of volume that will go unused in the counties to which it was originally allocated because the costs associated with doing a private bond deal of less than $2 million are usually too great to make the deal economically feasible, especially in the absence of bank participation. Why aren’t banks participating? Well, that’s the subject of a future blog. Suffice it to say for this blog, banks that are not making money are not interested in buying tax exempt bonds, regardless of the risk or return.

So what happens to that volume? It goes away at the end of 2010, or it can be waived prior to the end of 2010. If waived, the volume goes back to the State for redistribution to other large cities or counties. And how exactly does that waiver and redistribution benefit the waiving counties that received volume because they had employment declines? It does not. It will benefit only the counties to whom the volume is redistributed, but only then if they can come up with deals to use that volume.

If I were King, I would set up a program so that counties who cannot use their volume can deal directly with counties who can use the volume. In exchange for waiving its volume, a waiving county would receive from the beneficiary of the county to whom the volume was reallocated, cash in an amount equal to one year’s worth of the interest savings the beneficiary will experience by issuing tax exempt rather than taxable bonds for its project. In this fashion, the beneficiary wins because after the first year, it will experience lower borrowing costs for the duration of the bonds. The waiving county wins because they get something out of the Recovery Act that can be spent to benefit the taxpayers of the waiving county. The county where the beneficiary resides wins because the facility gets built or expanded in that county thereby increasing the tax base and providing job opportunities. And the State wins because any time any of its counties wins, that is a win for the State. Here, on these facts, it is a double win for the State because two counties come out ahead.

That’s my opinion; I welcome yours. Over the coming months and years, I hope this blog becomes a great source of information and just plain old exchange of thoughts and opinions that enlighten and amuse! Join me!