Some Indian tribal governments have emphasized that, for credit and market access
reasons, gaming revenues represent an important source of revenues. The Treasury Department
points out that, although gaming projects themselves are ineligible to be financed with proceeds
of Tribal Economic Development Bonds, Indian tribal governments may pledge gaming
revenues to secure tax-exempt bonds used to finance eligible types of projects under the existing
Tribal Economic Development Bond provision and under the recommended tax framework using
the two-pronged private business restrictions standard applicable to State and local governments
under Section 141. Thus, if an Indian tribal government issues tax-exempt Governmental Bonds
to finance a project for Indian tribal governmental use (as contrasted with private business use),
it could pledge gaming revenues to secure that financing. Such a pledge of gaming revenues
would be similar to a pledge by a State or local government of lottery revenues to secure tax-
exempt bonds. In each case, the pledged revenues constitute governmental sources of payment
(as contrasted with revenues derived from private business use) under Section 141. Similarly, if
an Indian tribal government derived gaming revenues from its own governmental ownership and
operation of a gaming facility, it could pledge those gaming revenues to secure tax-exempt
Governmental Bond financing for a subsidized privately-used economic development project
based on the absence of private payments from the gaming facility.

2. Recommendation to Retain Existing Gaming Facility Restriction.

For policy reasons, the Treasury Department generally concurs with the existing targeting
restriction for Tribal Economic Development Bonds under Section 7871(f)(3)(B)(i) which
prohibits financing of projects used for certain types of gaming.

E. Credit Challenges Facing Indian Tribal Governments.

The Treasury Department emphasizes that a more flexible tax framework for tax-exempt
bond financing cannot ameliorate the significant credit challenges facing Indian tribal
governments that impede access to the tax-exempt bond market. Set forth below are certain
reasons that contribute to these credit challenges.

In contrast to State and local governments which have tax-based revenue sources, Indian
tribal governments generally lack tax-based sources of revenues from income taxes or property
taxes. In this regard, tribal lands held in trust by the Federal Government are not subject to
property taxes. In addition, States and local governments exercise concurrent jurisdiction over
Indian reservation for taxing purposes.

Some Indian tribal governments also lack collateral to pledge as security for financings in
part because tribal lands held in trust by the Federal Government cannot be mortgaged. Indian
tribal governments also face uncertainties regarding creditors’ rights for lenders due to various
special aspects of Indian tribal laws.

In addition, the recent recession and problems in the financial markets more generally

contributed to the limited use of Tribal Economic Development Bonds. During the recent
recession, investor appetite for risk decreased significantly, making it more difficult for most

14


Cc. Private Activity Bonds.

In addition to tax-exempt Governmental Bonds, State and local governments also are
eligible to issue tax-exempt Private Activity Bonds under Section 141(e) and related provisions
(with permitted private business use and other private involvement) to finance certain specified
types of projects and activities, including the following: (1) airports, (2) docks and wharves, (3)
mass commuting facilities, (4) facilities for the furnishing of water, (5) sewage facilities, (6)
solid waste disposal facilities, (7) qualified low-income residential rental multifamily housing
projects, (8) facilities for the local furnishing of electric energy or gas, (9) local district heating
or cooling facilities, (10) qualified hazardous waste facilities, (11) high-speed intercity rail
facilities, (12) environmental enhancements of hydroelectric generating facilities, (13) qualified
public educational facilities, (14) qualified green buildings and sustainable design projects, (15)
qualified highway or surface freight transfer facilities, (16) qualified mortgage bonds or qualified
veterans mortgage bonds for certain single-family housing mortgage loans, (17) qualified small
issue bonds for certain manufacturing facilities, (18) qualified student loan bonds, (19) qualified
redevelopment bonds, and (20) qualified Section 501(c)(3) bonds for exempt charitable and
educational activities of Section 501(c)(3) nonprofit organizations.

Private Activity Bonds are subject to the same general rules applicable to Governmental
Bonds, including the arbitrage investment limitations, registration and information reporting
requirements, the Federal guarantee prohibition, restrictions on unduly long spending periods,
and pooled financing bond limitations. In addition, most Private Activity Bonds are also subject
to a number of additional rules and restrictions, including a bond volume cap as described below,
a prohibition on advance refundings, an alternative minimum tax preference, existing property
financing restrictions, restrictions on financing land acquisitions, and prohibitions against
financing certain types of facilities (including skyboxes or other private luxury boxes in
stadiums, health clubs, facilities primarily used for gambling, or liquor stores).

Subject to certain exceptions, Section 146 imposes annual State bond volume caps on
most types of tax-exempt Private Activity Bonds, based on measures of State population, with
minimum allocations for smaller, less-populous States and adjustments for inflation, and with
three-year carry forward periods for unused allocations. For 2012, taking into account inflation
adjustments,'’ each State’s private activity bond volume cap is equal to the greater of: (1) $95
multiplied by the State population; or (2) $284,560,000. Exceptions to the State private activity
bond volume caps apply to certain governmentally-owned projects (including airports, docks and
wharves, environmental enhancements of hydroelectric generating facilities, high-speed intercity
rail facilities, and solid waste disposal facilities), qualified veterans mortgage bonds, and
qualified Section 501(c)(3) bonds.

For Indian tribal governments, outside the limited authorization for Tribal Economic
Development Bonds, Section 7871(c)(2) generally prohibits Indian tribal governments from
issuing Private Activity Bonds for any of the above-described types of projects or purposes for
which State and local governments may issue Private Activity Bonds. A limited restrictive
exception under Section 7871(c)(3)(B) allows Indian tribal governments to issue Private Activity

" See Note 7 Supra.


Allocation Schedule of 1st Tranche of Tribal Economic Development Bonds

Name of Applicantissuer State Type of Project

Agua Caliente Band of Cahuilla indians CA Refinancing

Apsaalooke Nation—Crow Tribe of Indians MT Commercial Facility and Land
Acquisition

Blackfeet Tribe of the Blackfeet Indian Reservation MT Refinancing and Acquisition of
Tourism Facility

‘Cabazon Band of Mission Indians CA Refinancing

Cedar Band of Paiute Indians of Utah UT Retail Facility

Chemehuewi indian Tribe of the Chamehuevi Reservation CA Tourism Facility and Marina

Confederated Tribes of Coos, Lower Umpqua and Slusiaw Indians OR Water Infrastructure

Confederated Tribes of Coos, Lower Umpqua and Siuslaw Indians OR Refinancing

Confederated Tribes of the Umatilla Indian Reservation OR Tourism Facility Expansion

Confederated Tribes of the Warm Springs Reservation of Oregon OR Water Infrastructure and Tourism
Facility improvements.

Delaware Tribe of indians OK Acquisition of Businesses and
Airpark.

Ek Valley Rancherta, California CA Tourism Facility

Fort Sill Apache Tribe of Oklahoma OK Tourism Facility Expansion

Hopland Band of Pomo Indians of the Hopland Rancheria, California CA Tourism Facity

fone Band of Miwok Indians CA Tourism Facitty

Kaw Nation OK Water infrastructure

Kickapoo Traditional Tribe of Texas TX Refinancing and Tourism Facility

La Jolla Band of Luiseno Mission Indians CA Tourism Facility

Lac Vieux Desert Band of Lake Superior Chippewa Indians MI Refinancing and Building
ConstructionRemodeling

Lummi Nation WA — Environmental and
Transportation Infrastructure

Menominee Indian Tribe of Wisconsin Wi Tourism Faalty and Convention
Center Expansion

Mille Lacs Band of Ojibwe MN Education Facility

Mille Lacs Band of Ojibwe MN Education Facility

Oneida Nation of New York NY — Refinancing

Oneida Tribe of Indians of Wisconsin WL Retail Facilty improvements

Oneida Tribe of Indians of Wisconsin W__ Recreational Facility
Improvements and Refinancing

Oneida Tribe of Indians of Wisconsin W__ Refinancing

Pascua Yaqui Tribe of Arizona AZ Tourism Facility

Pauma Band of Luiseno Mission Indians “CA Tourism Facility

Pawnee Nation of Oklahoma OK Tourism Facility

Pit River Tribe CA Retail Faciity

Poarch Band of Creek Indians AL Refinancing

Ponca Tribe of Indians of Oklahoma OK Tourism Facitty

Pueblo of Acoma NM — Manufacturing Facility

Pueblo of Isleta NM Tourism Facility

Quechan Indian Tribe CA Refinancing

Sac & Fox Tribe of the Mississipp! in lowa 1A Refinancing

Salt River Pima-Maricopa Indian Community AZ — Recreational Faclity

San Pasqual Band of Mission Indians CA Tourism Facility

Santa Clara Pueblo NM Toursm Facilty Expansion and
Refinancing

Santee Sioux Tribe of Nebraska NE Health Faciity

Sault Ste. Marie Tribe of Chippewa Indians MI Refinancing

TEDEs Allocation

$13,162,968.27
$6,419,391.58

$22,565,088.46

$22,565,088.46
$10,530,374.62
$15,795,561.92

$1,504,339,.23

$8,574,733,62
$22,565,088.46
$22,565,088.46

$22,565,088.46

$22,565,088.46
$22,565,088.46
$22,561,504.38
$22,565,088.46
$22,565,088.46
$22,565,088.48
$22,565,088.46

$7,521,696.15

$22,565,088.46
$22,565,088.46

$6,279,393.17
$2,632,593,65
$22,565,088.46
$902,603.54
$9,402,120.19

$4,889,102.50
$22,565,088.48
$22,565,088.48
$22,565,088.46

$9,760,848.08
$22,565,088.46
$22,565,088.46

$8,273,865.77
$22,565,088.46
$22,565,088.46
$22,565,088.46
$22,565,086.48
$22,565,088.46
$22,565,088.46

$13,539,053.08
$8,161,040.33


Ne
DEPARTMENT OF THE TREASURY

WASHINGTON, D.C. 20220

al

S

®

December 19, 2011

The Honorable Sander Levin

Ranking Member, Committee on Ways and Means
U.S. House of Representatives

Washington, DC 20515

Dear Representative Levin:

As mandated by Section 1402(b) of Title I of Division B of the American Recovery and
Reinvestment Act of 2009 (“ARRA”), the Department of the Treasury has conducted a study of
the effects of the Tribal Economic Development Bond provision in Section 7871(f) of the
Internal Revenue Code. Section 1402(b) of ARRA directs the Secretary of the Treasury, or the
Secretary’s designee, to conduct a study of the effects of this tax-exempt bond provision and to
report to Congress on the results of this study, including recommendations regarding this tax-
exempt bond provision.

Enclosed is our Report and Recommendations to Congress regarding the Tribal Economic
Development Bond provision under Section 7871. An identical letter is addressed to
Representative Dave Camp.

Sincerely,

Exm QS We Webir—

Emily S. McMahon
Acting Assistant Secretary (Tax Policy)

Enclosure


institutions to issue debt. In general, smaller issuers with weaker credit, infrequent issuers, and
issuers of less traditional debt experienced problems in the capital markets more acutely. These
credit constraints affected many Indian tribal governments. Most Indian tribal governments do
not issue bonds frequently. Limited historical issuances and performance can reduce investor
appetite for new issuances. Thus financial market uncertainties likely drove up interest rates and
at times limited access to credit at almost any interest rate, making projects more expensive and
potentially unaffordable.

Indian tribal governments also face greater transaction costs for accessing the tax-exempt
bond market than State or local governments for securities law regulatory reasons. State or local
governments have an exemption from the securities law registration requirements for public
offerings of their securities under Section 3(a)(2) of the Federal Securities Act of 1933. Indian
tribal governments have no comparable exemption. Thus, they either must register their
securities with the Securities and Exchange Commission or raise funds in private placements in
more limited markets.

Some Indian tribal governments have sought Federal guarantees of Indian tribal tax-
exempt bond financings. Subject to certain exceptions for housing programs and certain other
programs, however, Section 149(b) generally prohibits Federal guarantees of tax-exempt bonds.
A policy reason underlying this prohibition is a concern that such Federal guarantees have the
potential to produce securities that are more attractive than benchmark U.S. Treasury securities
(in that Federally-guaranteed tax-exempt bonds have the full faith and credit backing of the
Federal Government as security and they produce more attractive tax-exempt income). In
addition, the potential Federal revenue cost of any such guarantee is a significant concern. The
Federal Government has a budget policy against Federal guarantees of tax-exempt bonds.””

The Treasury Department recommends that Congress examine the difficult issue of credit
challenges facing Indian tribal governments and explore possible ways to improve bond market
access for Indian tribal governments, such as possible reserve fund programs, credit
enhancement facilities, or other measures, subject to prudent fiscal controls.

IV. Conclusion.

The Treasury Department believes that the recommendations contained in this report will
help Indian tribal governments to access the capital markets more effectively and efficiently. In
this regard, the Treasury Department would be willing to provide technical assistance to
Congress in developing a better framework for Indian tribal governmental tax-exempt bond
financing modeled after the Tribal Economic Development Bond program.

2 See Note 8 Supra.
1S


Allocation Schedule of 2nd Tranche of Tribal Economic Development Bonds

Name of Applicantissuer

Navajo Nation of Arizona, New Mexico & Utah

Ohkay Owingeh

Oneida Tribe of indians of Wisconsin
Otoe Missouria Tribe of Indians of Oklahoma

Pascua Yaqul Tribe of Arizona
Pauma Band of Luiseno Mission Indians
Pawnee Nation of Oklahoma

Pinoleville Pomo Nation, Califomia

Pit River Tribe

Poarch Band of Creek indians

Pueblo of Acoma

Quechan indian Tribe

Rosebud Sioux Tribe

Round Valley indian Tribes
‘Sac & Fax Tribe of the Mississippl in lowa

‘Santa Ynez Band of Chumash Mission Indians of the Santa Ynez
Reservation, California

Seminole Tribe of Florida

‘Skokomish Indian Tribe

‘Southem Uta Indian Tribe

‘Spokane Tribe of indians

‘Stockbridge-Munsee Community

Tohono O'odham Nation

Torres Martinez Desert Cahuilla Indian Tribe

Tule River Indian Tribe

Tuolumne Band of Me-Wuk Indians of the Tuolumne Rancheria
United Keetoowah Band of Cherokee Indians
Ute Indian Tribe of the Uintah and Ouray Reservation

Ute Mountain Ute Tribe

Viejas Band of Kumeyaay Indians
Yankton Sioux Tribe

‘Yurok Tribe of the Yurok Reservation, Caiifomia

Total of 66 Disclosed Applicants

Total of 10 Non-Disclosed Applicants

Total of 78 Applicants

Sate Type of Project TEDBs Allocation
Electric, Gas, Water '30,000,000.00
Infrastructure, Renewable Energy
Facilities, and Retail Facilities

NM Refinancing, Recreational, 22,913,488.65
Governmental, and Commercial
Facilities

Wi Refinancing and Tourtsm 6,154,692.68
Facilities

OK — Ranewable Energy and Water 18 224,360.85
Infrastructure Facilities

AZ Retail Facility 10,934,616.39

CA Tourism Facilites 8,177,238.37

OK — Tourism Facilities 2,7098,930.18

CA Tourism Facilities 10,932,879.61

CA Tourism and Retail Facilities 7.289,744,26

AL Refinancing 24,776,122.55

NM Renewable Energy Facilities 6,926,257.05

CA Refinancing 7,120,225.63,

SO Manufacturing, Reta, §,472,775.50
Commercial, and Housing
Facilites

CA Renewable Energy Facilities 10,934,616 39

1A Retail, Commercial, and Tourism 6,187,170.43
Facility

CA Tourism, Community, and (24,776,122.55

Housing Facities
FL Parking Facility 14,821,840,27

WA Refinancing 1,822,436.05

CO Refinancing 18,779,138.25

WA Tourism Facilities 10,934,616.39

WI Museum Facility 3,644,872,12

AZ — Retail and Commercial Facilitk 1,822,436.05

CA Governmental Facilities 2,770,102.80

CA Commercial, Tourism, and 10,934,816.39
Housing Facilities

CA Tourism Faciitios 14,579,488.53

OK — Water Infrastructure Facility 15,596,026.16

UT — Refinancing and Housing 30,000,000.00
Facilities

CO Tourism Facilities 6,143,079.87

CA Tourtsm Facilities 4,009,359.34

SD Retail, Farming, Renewable 10,934,616.39
Energy, Tourism, and
Govemmental Faciities

CA Retail, Tourism, and 10,934,616.38
Manufacturing Facilities

ear 277 002.26

183,242,015.14

MERTEN TEAL

Note: This list contains the allocations awarded to those applicants that provided disclosure consent. The 10 non-disclosed applicants did

nat provide a disclosure cansent with their applications.

B-4


Appendix B
to U.S. Treasury Department Report on Tribal Economic Development Bonds

Results of $2 Billion Bond Allocation Process

[Chart Attached]


The scope of Private Activity Bond eligibility for Indian tribal governments seems
unduly restrictive. The Indian Tribal Government Tax Status Act sought to provide tax parity
between Indian tribal governments and State and local governments. The disparate scopes of
Private Activity Bond authority are inconsistent with this parity goal.

The Treasury Department believes that tax policy warrants providing parity between
Indian tribal governments and State and local governments for tax-exempt Private Activity Bond
financing eligibility purposes using comparable standards, with certain tailored modifications.

One difficult issue regarding Private Activity Bond eligibility for Indian tribal
governments involves how to impose a bond volume cap. In the case of State and local
governments, Section 146 imposes an annual State Private Activity Bond volume cap on most
types of Private Activity Bonds, based on State populations, with minimum allocations for small,
less populous States. The development of a workable comparable Private Activity Bond volume
cap for Indian tribal governments that takes into account the diverse characteristics of Indian
tribal governments is not a simple task. Factors to consider include the large number of Indian
tribal governments (565 Federally recognized Indian tribes), the wide range of tribal populations
within a total national Indian tribal population of about two million people (ranging from about
176,000 residents of the Navaho reservation to fewer than 50 residents of other reservations), and
the wide range of land holdings (ranging from approximately 3,468 square miles for the
Cheyenne River reservation to less than one square mile for some tribal reservations in
California).’°> These characteristics weigh against an automatic formula-based allocation to each
of the individual Indian tribal governments. An aggregate nationally-based bond volume cap
allocation method for Indian tribal governments collectively as a group similar to the allocation
method for Tribal Economic Development Bonds may be more workable.

2. Recommendations for Private Activity Bonds.

For reasons of tax parity, fairness, and flexibility, the Treasury Department recommends
that Congress allow Indian tribal governments to issue tax-exempt Private Activity Bonds for the
same types of projects and activities as are allowed for State and local governments under
Section 141(e), under a tailored national bond volume cap as described below, subject to the
same volume cap exceptions as those for State and local governments (and subject to a project
location targeting restriction and a gaming facility financing restriction).

The Treasury Department recommends an annual national tax-exempt Private Activity
Bond volume cap for all Indian tribal governments together as a group equal to the greater of: (i)
a total national Indian tribal population-based measure determined under Section 146(d)(1)(A)
(applied by using such national Indian tribal population in lieu of State population); or (ii) the
minimum small population-based State amount under Section 146(d)(1)(B). For 2012, the State
numbers for this volume cap are the greater of: (i) $95 multiplied by the State population; or (ii)
$284,560,000.”°

% See Note 1 Supra.
26 See Note 7 Supra.

12


produce securities that are more attractive than benchmark U.S. Treasury securities (in that
Federally-guaranteed tax-exempt bonds have the full faith and credit backing of the Federal
Government as security and they produce more attractive tax-exempt income). In addition, the
potential Federal revenue cost of any such guarantee is a significant concern. The Federal
Government has a budget policy against Federal guarantees of tax-exempt bonds.*

D. Bond Volume Cap Allocation Process and Limited Bond Issuance.

This section provides certain information regarding the bond allocation process and bond
issuance for Tribal Economic Development Bonds. Indian tribal governments have shown
significant interest in this program. The Treasury Department allocated the full amount of bond
authority to interested Indian tribal governments for identified projects. Actual issuance of these
bonds through November 2011, however, has been very limited, comprising less than three
percent of the total $2 billion bond authorization. The Treasury Department believes that the
reasons for this lack of actual usage relate mainly to credit challenges facing Indian tribal
governments rather than deficiencies in the more flexible tax parameters for this program.

Section 7871(f)(1) required the Treasury Department to allocate the $2 billion national
volume cap for Tribal Economic Development Bonds among Indian tribal governments in such
manner as the Treasury Department, in consultation with the Secretary of the Interior,
determined to be appropriate.

Pursuant to Notice 2009-51,” the Treasury Department solicited applications for
allocation of the $2 billion in bond volume cap of Tribal Economic Development Bonds and
provided guidance on the application procedures, deadlines, forms, and methodology for
allocating this bond volume cap. The Treasury Department employed a pro rata allocation
method to allocate this bond volume cap in two separate $1 billion phases, subject to specified
maximum allocations for any particular Indian tribal government. The two-phased allocation
approach aimed to distribute bond-issuing authority promptly to issuers that were ready to
proceed with projects for economic stimulus purposes and to try to take into account the needs of
other issuers for additional time for applications.

In Internal Revenue Service (“IRS”) News Release 2009-81 (September 15, 2009) and
IRS News Release 2010-20 (February 11, 2010), the IRS announced the results of the two phases
of Tribal Economic Development Bond allocations. Attached in Appendix A are the results of
the allocations of this bond volume cap.'°

5 See Office of Management and Budget Circular No. A-129 Revised (November 2000), at Section II entitled
“Budget and Legislative Policy for Credit Programs,” Subsection 2 entitled “Form of Assistance,” under
Subsections d and e.

° 2009-28 IRB 128 (July 13, 2009).

'° See http://www. irs.gov/taxexemptbond/article/0,,id=213053,00.html.



on- and off-reservation population, location, land base, and other unique circumstances (FR
Notice Question 6).

There is a general consensus among Indian tribal governments that the restriction on the use of
Tribal Economic Development Bonds outside of Indian reservations should be lifted. The
opinions on whether this should be replaced with a standard for proximity of the project to a
reservation are more mixed. Some tribes believe that projects within a “reasonable” proximity
should be eligible for tax-exempt bonds, while other tribes believe that this subjective standard
should be avoided by allowing the use of tax-exempt bonds on all types of land owned by tribal
governments. Overall, the sentiment is that the limitation on use of Tribal Economic
Development Bonds outside of Indian reservations should be eliminated because of the
exceptionally complex mix of land tenure in Indian country. One specific suggestion was the use
of the “substantial connection” or “nexus” test to determine whether there is a “direct, material
benefit to the issuing jurisdiction.” This tribe suggests that this nexus test would provide parity
with State and local governments (FR Notice Question 7).

The large majority of Indian tribal governments submitting comments also agree that the
prohibition on the use of Tribal Economic Development Bonds for gaming facilities should be
eliminated because many tribes rely on gaming revenues in the absence of an adequate tax base
to support a significant amount of their governmental and social services (FR Notice Question

8).

Other general comments were that the ability of tribal communities to utilize tax-exempt bond
financing should be at least equal to the ability of State and local governments, the unique
position and responsibility of tribes requires much more flexibility than is currently offered, and
what may be considered only a customary government function for a state or local government is
often essential for tribes to carry out their responsibilities. Many tribes emphasized the
extremely limited access to credit markets that hinders tribal economic development, and noted
that special needs and unique circumstances of tribal governments should be considered when
making tax laws (FR Notice Question 9).

A Note on Section 17 Corporations

In recognition of sovereign status, previous federal law has acknowledged the authority of tribes
to establish unique corporate forms (Section 17 corporations), Many tribes believe that Section
17 corporations should be eligible for Tribal Economic Development Bonds and widely eligible
to issue tax-exempt bonds because they are not technically for-profit entities. These corporations
are wholly owned by Indian tribal governments and many tribes believe that these corporations
should be afforded the same treatment as the Indian tribal governments that control them.

sn imiimmimmmmmmmmmemea

Appendix C Page 3


U.S. Treasury Department Report and Recommendations to Congress on
Tribal Economic Development Bond Provision under Code Section 7871

I. Introduction.

A In General.

Indian tribal governments have significant basic economic development needs, high
poverty, high unemployment, and significant credit constraints that impede their access to the
tax-exempt bond market.' From 1987 through 2010, Indian tribal governments issued an
average of about $157 million annually in tax-exempt bonds for a total of about $3.76 billion in
321 total transactions, representing less than one-tenth of one percent of the total $6.599 trillion
in new issues of long-term tax-exempt municipal bonds issued during this period.’

Section 1402 of Title I of Division B of the American Recovery and Reinvestment Act of
2009° authorized $2 billion in bond authority for a new category of tax-exempt bonds for Indian
tribal governments, known as “Tribal Economic Development Bonds” under Section 7871(f) of
the Internal Revenue Code (“Code”),* to promote economic development on tribal lands. This
bond provision provides Indian tribal governments with greater flexibility to use tax-exempt
bonds for economic development projects than is allowable under an existing more restrictive
“essential governmental function” standard for Indian tribal governments under Section 7871(c).
This more flexible bond provision generally allows Indian tribal governments to use tax-exempt
bonds under standards that are more comparable to those applicable to States and local
governments under Section 103 (subject to express targeting restrictions on Tribal Economic
Development Bonds that require financed projects to be located on Indian reservations and that
prohibit the financing of certain gaming facilities).

Section 1402(b) of ARRA directs the Secretary of the Treasury, or the Secretary’s
delegate, to conduct a study of the effects of this bond provision and to report to Congress on the
results of the study conducted under this paragraph, including the Secretary’s recommendations
regarding this bond provision. The legislative history indicates that Congress seeks
recommendations on whether to “eliminate or otherwise modify” the essential governmental
function standard for Indian tribal tax-exempt bond financing and a legislative summary
indicates that the Treasury Department should study whether to repeal this standard on a

"See GAO Testimony, Observations on Some Unique Factors that May Affect Economic Activity on Tribal Lands
(GAO-11-543T) (April 7, 2011).

? See Indian tribal governmental tax-exempt bond issuance data in Appendix A to this Report.
* Pub. L. No. 111-5, 123 Stat. 115 (2009) (“ARRA”).

* Except as noted, Section references in this report are to the Code.


Table of Contents

I. Introduction.
A. In General.
B. Summary of Structural Recommendation:

Cc. Comment on Credit Challenges Facing Indian Tribal Governments.
D. Bond Volume Cap Allocation Process and Limited Bond Issuance.
E. Consultation with Indian Tribal Governments...
II. Background on the Structure of Tax-exempt Bond Standard:
A. Governmental Bond and Private Activity Bond Classificatioi
B. Governmental Bonds.......c.sscecscsseeseesessessseesserees
1. In General..........
2. Private Business Use Limitation
3. Private Payments Limitation...

(on Private Activity Bonds.
D. Essential Governmental Function Standard for Indian Tribal Governments.
E. Tribal Economic Development Bond Provision............ccececcecieseeeseereeeeee
Ill. Analysis and Recommendations.

A. Governmental Bond Standar
1. Analysis.
2. Recommendations for Governmental Bonds. il
B. Private Activity Bond Standard. . 1
1. Analysis. - 1
2. Recommendations for Private Activity Bond: 12
Cc. Project Location Restriction
1. Analysis.

2. Recommendation to Modify the Project Location Restriction
D. Gaming Facility Financing Restriction.
1. Analysis
2. Recommendation to Retain Existing Gaming Facility Restriction.

E. Credit Challenges Facing Indian Tribal Governments.
IV. Conclusion

Appendices

Appendix A: Historic Data on Indian Tribal Governmental Issuances of Tax-exempt Bonds
Appendix B: Results of $2 Billion Bond Allocation Process

Appendix C: Summary of Comments Received in Response to Public Solicitation of Comments


The Treasury Department recommends that Congress delegate to the Treasury
Department the responsibility to allocate that national bond volume cap among Indian tribal
governments.

Cc. Project Location Restriction.
1. Analysis.

The Tribal Economic Development Bond provision includes a project location restriction
under Section 7871(f)(3)(B)(ii) which requires financed projects to be located on Indian
reservations. This restriction aims to target the use of Indian tribal tax-exempt bond financing
appropriately to areas of need for Federal borrowing subsidies on Indian reservations. The
Treasury Department generally believes that some form of location restriction is necessary and
appropriate. In this regard, absent a project location restriction, Indian tribal governments could
use this more flexible tax-exempt bond provision to finance projects throughout the country in
competition with private businesses.

Some Indian tribal governments have suggested that the project location restriction is
unduly restrictive for various reasons associated with the range of configurations of Indian
reservation lands. Some Indian reservations have non-contiguous portions or gaps in land areas.
In addition, some Indian tribal governments seek to serve their resident reservation populations
with projects that are reasonably proximate in location to Indian reservations (e.g., electric or gas
utility service projects), but that are not located directly on Indian reservations. The Treasury
Department believes that a project location targeting restriction is necessary and that some
additional flexibility is warranted for project locations.

2. Recommendation to Modify the Project Location Restriction.

The Treasury Department believes that there ought to be some targeting restriction for the
location of projects financed with tax-exempt bonds issued or used by Indian tribal governments.

The Treasury Department recommends that Congress provide some additional flexibility
to the existing project location restriction under Section 7871(f)(3)(B)(ii) to allow Indian tribal
governments to use tax-exempt bonds to finance projects that are located on Indian reservations,
together with projects that both: (i) are contiguous to, within reasonable proximity of, or have a
substantial connection to an Indian reservation; and (ii) provide goods or services to resident
populations of Indian reservations.

D. Gaming Facility Financing Restriction.

1. Analysis.

For policy reasons, Congress prohibited the use of Tribal Economic Development Bonds
to finance certain gaming facilities under Section 7871(f)(3)(B)(i). A similar restriction under
Section 141(e) prohibits State and local governments from using any portion of the proceeds of
tax-exempt Private Activity Bonds to finance facilities primarily used for gambling.

13


private activity bond volume cap is equal to the greater of: (1) $95 multiplied by the State
population; or (2) $284,560,000.

The Treasury Department recommends that Congress delegate to the Treasury
Department the responsibility to allocate that national bond volume cap among Indian tribal

governments.

(3) Recommendation to Retain and Modify the Project Location Restriction. The
Treasury Department agrees that there ought to be some targeting restriction on the location of
projects financed with tax-exempt bonds issued or used by Indian tribal governments that is
similar to the restriction under Section 7871(f)(3)(B)(ii) which requires financed projects to be
located on Indian reservations. The Treasury Department recommends that Congress provide
some additional flexibility with respect to the existing project location restriction under Section
7871(£)(3)(B)(ii) to allow Indian tribal governments to issue or use tax-exempt bonds to finance
projects that are located on Indian reservations, together with projects that both: (i) are
contiguous to, within reasonable proximity of, or have a substantial connection to an Indian
reservation; and (ii) provide goods or services to resident populations of Indian reservations.

(4) Recommendation to Retain the Gambling Facility Restriction. For policy reasons,
the Treasury Department recommends retaining the existing targeting restriction under Section
7871(£)(3)(B)(i) against financing certain gaming projects for tax-exempt bond financing by
Indian tribal governments.

Some Indian tribal governments have emphasized that gaming revenues are an important
source of revenues, given their lack of tax-based revenues or other revenues. The Treasury
Department points out that, although gaming projects themselves are ineligible to be financed
with proceeds of Tribal Economic Development Bonds under the existing provision, gaming
revenues may be used as a source of payment or security for tax-exempt bonds that finance
eligible types of projects under both the existing Tribal Economic Development Bond provision
and the recommended tax framework for Indian tribal governmental tax-exempt bond financing
discussed in this report.

Cc. Comment on Credit Challenges Facing Indian Tribal Governments.

The Treasury Department emphasizes that a more flexible framework for tax-exempt
bond financing cannot ameliorate the significant credit challenges facing Indian tribal
governments that impede their access to the tax-exempt bond market. The Treasury Department
recommends that Congress examine this difficult issue and explore possible ways to improve
bond market access for Indian tribal governments, such as possible reserve fund programs, credit
enhancement facilities, or other measures, subject to prudent fiscal controls.

Some Indian tribal governments have recommended Federal guarantees to support Indian
tribal tax-exempt bond financings. In general, however, Section 149(b) broadly prohibits
Federal guarantees of tax-exempt bonds, subject to certain limited exceptions for housing and
other specific programs. A policy reason underlying this general prohibition against Federal
guarantees of tax-exempt bonds is a concern that such guarantees could have the potential to


Allocation Schedule of 1st Tranche of Tribal Economic Development Bonds

Name of Applicantissuer State Type of Project

Seminole Tribe of Florida FL Parking Facility

Souther Ute Indian Tribe CO Refinancing

‘Spokane Tribe of indians WA Tourism Facility, infrastructure,

Ute Mountain Ute Tribe (Lite Mountain Tribe of the Ute Mountain
Reservation)

Viejas Band of Kumeyaay indians,

‘Winnebago Tribe of Nebraska

Yankton Sioux Tribe

Yankton Sioux Tribe
Yankton Sioux Tribe

Total of 51 Disclosed Applications
Total of 7 Non-disclosed Applications:

Total of 58 Applications

co

NE
sD

sD
sD

Manufacturing Facility, and Low
Income Housing
Tourlam Facility

Tourism Facility

Tourism Facitity

‘Tourism Facility and Convention
Center

Corrections Facility
Administrative Offices

TEDBs Allocation

$22,565,088.46
$13,539,053.08
$10,530,374.62

$4,513,017.69
$7,521,696.15

$856,967,985.42

$143,032,014.44

$999,999,999.86

Note: This list contains the allocations awarded to those applicants that provided discloure consent. The seven non-disclosed

applicants did not provide a disclosure consent with their applications.

B-2


Report and Recommendations to Congress regarding
Tribal Economic Development Bond provision

under Section 7871 of the Internal Revenue Code

Department of the Treasury
December 2011


(1) more than 10 percent of the bond proceeds are used for private business use
(the “private business use limitation”); and

(2) the debt service on more than 10 percent of bond proceeds is payable or
secured from payments or property used for private business use (the “private payments
limitation”).

Bonds also are treated as Private Activity Bonds under various special rules in Sections
141(b)(3)-(5), and Section 141(c). These special rules include restrictions on private business
use that is unrelated or disproportionate to governmental use, restrictions on financing of private
loans (including private business loans and consumer loans), special restrictions on private
business involvement in output facilities (such as electric, gas, or other output generation,
transmission, and distribution facilities, but excluding water facilities), and restrictions on private
business involvement in larger Governmental Bond issues absent obtaining special volume cap.

Overall, various limitations on tax-exempt Governmental Bonds aim to identify
arrangements that have the potential to transfer the benefits of tax-exempt bond financing to
persons other than State or local governments and to constrain this potential transfer.

B. Governmental Bonds.
1. In General.

State and local governments are eligible to issue Governmental Bonds for an unspecified
wide range of public infrastructure projects and other projects if the bond proceeds are used
predominantly for State or local governmental use or the bonds are payable or secured
predominantly from State or local governmental sources of payment, such as generally
applicable taxes. Here, it should be understood that Governmental Bonds can be used to finance
a project that has significant private business use or that has significant private business sources
of payment, but not both. Longstanding final 1997 Treasury Regulations under Treas. Reg. §
1.141-1 through § 1.141-15 provide guidance on these private business limitations on tax-exempt
governmental bonds.

For the interest on Governmental Bonds to be excluded from the bond holder’s gross
income for Federal tax purposes under Section 103, a number of general eligibility requirements
must be met. Requirements generally applicable to all tax-exempt bonds include arbitrage
restrictions, bond registration and information reporting requirements, a general prohibition on
Federal guarantees, advance refunding limitations, restrictions on unduly long spending periods,
and pooled financing bond limitations. In general, no volume cap limitations apply to
Governmental Bonds.

2. Private Business Use Limitation.
In general, the private business use limitation on Governmental Bonds limits private

business use to no more than 10 percent of the proceeds of a tax-exempt bond issue. Private
business use generally arises when a private business has legal rights to use bond-financed


In IRS Announcement 2010-88,'! the IRS extended the time period for issuing bonds
under the first allocation from December 31, 2010 to June 30, 2011 and provided a process for
further extensions for bond issuance until December 31, 2011.

In IRS Announcement 2011-71,'? the IRS solicited public comments regarding
reallocation of allocations of bond-issuing authority for Tribal Economic Development Bonds
that remain unissued as of December 31, 2011. Absent further legislative changes to this
program, the Treasury Department and the IRS expect to implement an ongoing reallocation
process for unused bond volume cap under this program.

E. Consultation with Indian Tribal Governments.

Pursuant to Executive Order 13175, the Treasury Department consults with tribal
officials in the development of Federal policies that have tribal implications to reinforce United
States government-to-government relationships with Indian tribes and to reduce the imposition
of unfunded mandates upon Indian tribes. In furtherance of the objectives of Executive Order
13175, the Treasury Department solicited comments on the Tribal Economic Development Bond
provision.'? The Treasury Department received twenty-seven different comment letters, which it
considered carefully and which provided helpful perspective in preparing this report. A brief
summary of the comments is attached as Appendix C, and the full list of comments received is
publicly available.'*

Il. Background on the Structure of Tax-exempt Bond Standards.
A. Governmental Bond and Private Activity Bond Classification.

In general, there are two basic types of tax-exempt bonds for State and local
governments: “Governmental Bonds” and “Private Activity Bonds.” Bonds generally are
classified as Governmental Bonds if the bond proceeds are used predominantly for State or local
governmental use or the bonds are repaid predominantly from State or local governmental
sources of funds. The Code does not define Governmental Bonds. Instead, bonds generally are
treated as Governmental Bonds if they limit private involvement sufficiently to avoid
classification as Private Activity Bonds under Section 141.

Bonds are classified as private activity bonds under a two-pronged test in Section
141(b)(1) and Section 141(b)(2) if private involvement exceeds both of the following thresholds:

'' 2010-47 LR.B. 754 (November 22, 2010).

"? 2011-46 LR.B. 770 (November 14, 2011).

8 75 Fed. Reg. 39730 (July 12, 2010).

4 See Regulations.gov website (docket number: TREAS-DO-201 1-0001) at the following link:

http://www.regulations.gov/#!docketDetail:dct=FR+PR+N+PS:rpp=10:so=ASC:sb=documentT ype:po=0;D=TREA
S-DO-2011-0001.



“permanent basis.”” This report focuses primarily on this structural issue regarding the
appropriate tax standard for tax-exempt bond financing for Indian tribal governments.”

B. Summary of Structural Recommendations.

Set forth below is a brief summary of the Treasury Department's structural
recommendations for the Tribal Economic Development Bond provision:

a) Core Recommendation to Adopt for Indian Tribal Governments the Comparable
State or Local Government Standard for Issuing Tax-exempt Governmental Bonds on a
Permanent Basis. For reasons of tax parity, fairness, flexibility, and administrability, the
Treasury Department recommends that Congress adopt the State or local government standard
for tax-exempt “governmental bonds” (as distinguished from “private activity bonds”) under
Section 141, as generally embodied in the limited authorization for Tribal Economic
Development Bonds under Section 7871(f) on a permanent basis for purposes of Indian tribal
governmental eligibility to issue tax-exempt governmental bonds, without a bond volume cap on
such governmental bonds (subject to a project location restriction and a restriction against
financing certain gaming facilities).

The Treasury Department recommends repealing the essential governmental function
standard for Indian tribal governmental tax-exempt bond financing under Section 7871(c).

(2) Recommendation to Adopt a Comparable Private Activity Bond Standard. For
reasons of tax parity, fairness, and flexibility, the Treasury Department further recommends that
Congress allow Indian tribal governments to issue tax-exempt private activity bonds for the same
types of projects and activities as are allowed for State and local governments under Section
141(e), under a tailored national bond volume cap as described below, subject to the same
volume cap exceptions as those for State and local governments (and subject to a project location
restriction and a restriction against financing certain gaming facilities).

The Treasury Department recommends a tailored version of a comparable annual tax-
exempt private activity bond volume cap for Indian tribal governments. The tailored national
Tribal private activity bond volume cap for all Indian tribal governments together as a group
would be in an amount equal to the greater of: (i) a total national Indian tribal population-based
measure determined under Section 146(d)(1)(A) (applied by using such national Indian tribal
population in lieu of State population), or (ii) the minimum small population-based State amount
under Section 146(d)(1)(B). For 2012, taking into account inflation adjustments,” each State’s

* See H.R. Conf. Rep. 111-16, 111" Cong, I Sess. (February 12, 2009) at Page 694. See also
hitp://waysandmeans. house. gov/media/pdf/ Varra.pdf (Ways and Means Committee and Senate Finance
Committee summary).

° The Treasury Department delayed the timing of this report in part to accommodate a tribal consultation process
and to give the program more opportunity for usage. For further perspective generally on the program, see IRS
Advisory Committee on Tax-exempt and Governmental Entity (ACT) Reports on Implementation of Tribal
Economic Development Bond Provision, dated June 9, 2010 and June 15, 2011

” See Rev. Proc. 2011-52, 2011-45 LLR.B. 701 (November 7, 2011)
2


Appendix A
to U.S. Treasury Department Report on Tribal Economic Development Bonds

Historic Data on Indian Tribal Governmental Issuances of Tax-exempt Bonds”

Year Dollar Volume Number of Bond Issues
1987-1989 $ 74,198,889 10
1990 $ 2,342,500 4
1991 $ 1,394,766 3
1992 $ 15,995,579 4
1993 $ 16,264,300 6
1994 $ 33,260,669 9
1995 $ 27,606,263 10
1996 $ 502,420,372 18
1997 $ 236,809,502 13
1998 $ 59,754,766 19
1999 $ 103,819,035 16
2000 $ 35,445,360 14
2001 $ 256,467,447 31
2002 $ 267,858,617 18
2003 $ 187,576,494 31
2004 $ 135,292,601 21
2005 $ 171,234,371 13
2006 $ 337,587,227 24
2007 $ 618,203,075 18
2008 $ 261,238,662 14
2009 ? $ 113,437,702 13
20107 7 $ 302,082,450 12
Total: $3,760,290,647 321 total bond issues
Annual Average: $156.68 million 13.4 average number of bond issues annually

Comparison to Total Tax-exempt Bond Market Issuance Data for Same Period *

Total 1987-2010: $6.599 trillion 408,557 total bond issues
Annual Average: $274.94 billion 17,023 average number of bond issues annually

*8 Source: IRS, Statistics of Income Division. Table includes all bonds filed on Form 8038- G, Information Return

for Tax-Exempt Governmental Obligations that specifically reference "Tribal or Indian" governments.

> Tax year includes all bonds filed on Form 8038-G, Information Return for Tax- Exempt Governmental Obligations
that specifically reference "Tribal or Indian" governments, or "Tribal Economic Development " bonds.

> Preliminary data as of November 29, 2011, subject to revision.
* Data includes all bonds filed on Form 8038. G, Information Return for Tax-Exempt Governmental Obligations and
Form 8038, Information Return for Tax-Exempt Private Activity Bond Issues. Contains preliminary data as of
November 29, 2011, subject to revision.


Appendix C
to U.S. Treasury Department Report on Tribal Economic Development Bonds

Summary of Comments Received in Response to Public Solicitation of Comments

The following summary is a broad aggregation of all comments submitted in response to the
public solicitation of comments from Indian tribal governments and other members of the public
regarding the Tribal Economic Development Bond provision pursuant to a Notice published in
the Federal Register at 75 Fed. Reg. 39730 (July 12, 2010) (the “FR Notice”).

In their comments, Indian tribal governments advocated for the removal of the essential
government function test and for tax law parity with state and local governments. They believe
that the essential government function test places burdens on Indian tribal governments that are
not placed on State and local governments and is therefore inequitable. It was recommended that
this test be removed to open up the capital markets to tribal governments. Some argued that
many economic development projects must go unfunded because the debt service on taxable
financing is too expensive for most tribal governments. At a minimum, most tribes want parity
with state and local governments in terms of qualification requirements for tax-exempt financing
because tribal governments must provide the same types of economic development and other
services as State and local governments.

One tribe noted that the essential government function test is difficult to administer because the
IRS does not define an essential government function while the legislative history indicates only
that such a function is “customarily performed” by state and local governments. Another tribe
noted that tribal governments may need to directly engage in commercial and industrial
enterprises to create jobs and tribal income due to the absence of other private sector activity.
(FR Notice Question 1).

When asked whether the focus should be shifted from the essential government function test to
the tribal governmental use of tax-exempt bond financed facilities under the standard that applies
to state and local governments, tribes generally agreed that there should be at least parity with
the standards applied to State and local governments. For some tribes, this meant that the State
and local government standard described in the question would be a sufficient standard, but other
comments indicated that that the State and local government standard would not go far enough in
providing adequate consideration of the tribes’ unique roles and responsibilities in the provision
of essential services. At least seven other tribes commented that the State and local government
standard does not provide sufficient flexibility for Indian tribal governments and that special
consideration should be made of the tribes’ unique circumstances beyond that which is made for
State and local governments. Thirteen other tribes either said that they would support the same
standards as applicable to State and local governments or that they opposed any special standards
for Indian tribal governments. The tribes agreed that no standard applied to tribes should be
more restrictive than those applied to State and local governments (FR Notice Question 2).

In general, Indian tribal governments oppose any restrictions on the use of their revenue streams
as security or sources of payment for Indian tribal tax-exempt bond financing. Tribes indicated
that they are often forced to use alternate revenue streams because they do not have adequate tax

rr RENEE
Appendix C Page 1



iE.

Lor
DEPARTMENT OF THE TREASURY
WASHINGTON, D.C, 20220

1789,

December 19, 2011

The Honorable Dave Camp

Chairman, Committee on Ways and Means
U.S. House of Representatives
Washington, DC 20515

Dear Chairman Camp:

As mandated by Section 1402(b) of Title I of Division B of the American Recovery and
Reinvestment Act of 2009 (“ARRA”), the Department of the Treasury has conducted a study of
the effects of the Tribal Economic Development Bond provision in Section 7871(f) of the
Internal Revenue Code. Section 1402(b) of ARRA directs the Secretary of the Treasury, or the
Secretary’s designee, to conduct a study of the effects of this tax-exempt bond provision and to
report to Congress on the results of this study, including recommendations regarding this tax-
exempt bond provision.

Enclosed is our Report and Recommendations to Congress regarding the Tribal Economic
Development Bond provision under Section 7871. An identical letter is addressed to
Representative Sander Levin.

Sincerely,

Comal, S MMe Llan —

Emily S. McMahon
Acting Assistant Secretary (Tax Policy)

Enclosure


Bonds to finance certain manufacturing facilities upon satisfaction of complex and restrictive
employment requirements.

D. Essential Governmental Function Standard for Indian Tribal Governments.

In general, a restrictive existing standard under Section 7871(c) applicable to Indian tribal
governments limits their use of tax-exempt bonds to the financing of certain activities that
constitute “essential governmental functions.” Further, activities cannot qualify as essential
governmental functions under Section 7871(e) unless they are “customarily” performed by State
and local governments with general taxing powers. The essential governmental function
standard under Section 7871(c) was enacted originally in 1982 as part of the Indian Tribal
Government Tax Status Act.'* The legislative history to this legislation indicated that essential
governmental functions for this purpose included activities such as schools, streets, or sewers,
but did not include activities financed with private activity bonds or other commercial or
industrial activities.'°

In 1987, Section 7871(e) was added to the Code to limit the essential governmental
functions standard further to provide that essential governmental functions do not include any
functions which are not customarily performed by State and local governments with general
taxing powers.”° Further, in the legislative history to this provision, the House Ways and Means
Committee criticized 1984 Temporary Treasury Regulations”! under section 7871(c) for treating
certain commercial and industrial activities eligible for Federal funding as essential
governmental functions and indicated that these regulations were invalid to that extent.

In 2006, the Treasury Department and the IRS promulgated an Advance Notice of
Proposed Rulemaking regarding the essential governmental function standard for Indian tribal
tax-exempt bonds under Section 7871.”° This guidance provided that proposed regulations will
treat an activity as an essential governmental function that is customarily performed by State and
local governments under Section 7871(c) and Section 7871(e) if: (1) there are numerous State
and local governments with general taxing powers that have been conducting the activity and
financing it with tax-exempt governmental bonds, (2) State and local governments with general
taxing powers have been conducting the activity and financing it with tax-exempt governmental
bonds for many years, and (3) the activity is not a commercial or industrial activity. Examples of
eligible customary State and local governmental activities under this guidance included public
works projects such as roads, schools, and government buildings.

'§ Pub. L. No. 97-473 (1983), 96 Stat. 2605.

” See H.R. Rep. No. 97-982, 97th Cong. 2d Sess. 17 (1982); S. Rep. No. 97-646, 97th Cong. 2d. Sess. 13-14 (1982).
* See The Omnibus Budget Reconciliation Act of 1987, Pub. L. No. 100-203, 101 Stat. 1330, §10632(a) (1987).

*! Temp. Treas. Reg. § 305.7871-1 (1984).

* See H.R. Rep. No. 100-391, 100th Cong. Ist Sess, at 1139 (1987).

3 See 71 Fed. Reg. 45474 (August 9, 2006).


regulations on the essential governmental function standard for Indian tribal governments under
Section 7871(c) as too flexible.

Moreover, the custom-based limitation on the essential governmental function standard
introduced in 1987 under Section 7871(e) has proven to be particularly unworkable, based on
difficulties in determining customs, the subjective nature of customs, the evolving nature of
customs over time, the differing nature of customs among diverse State and local governmental
entities, and the increasing involvement of State and local governments in quasi-commercial
activities.

The Indian Tribal Government Tax Status Act sought to provide tax parity between
Indian tribal governments and State and local governments. The Treasury Department
emphasizes, however, that the existing tax framework for eligibility for tax-exempt bond
financing for State and local governments, on one hand, and Indian tribal governments, on the
other hand, reflects fundamentally different analytic standards. Application of the different
analytic standards has resulted in different outcomes and attendant perceived unfairness.

The Treasury Department believes that tax policy warrants providing parity between
Indian tribal governments and State and local governments for tax-exempt Governmental Bond

financing eligibility purposes using comparable standards, with certain tailored modifications.

2. Recommendations for Governmental Bonds.

For reasons of tax parity, fairness, flexibility, and administrability, the Treasury
Department recommends that Congress adopt the State or local government standard for tax-
exempt Governmental Bonds (as distinguished from Private Activity Bonds) under Section 141,
as embodied in the limited authorization for Tribal Economic Development Bonds under Section
7871(f) (including a location restriction and a restriction against financing gaming facilities), on
a permanent basis for purposes of Indian tribal governmental eligibility to issue tax-exempt
Governmental Bonds, without a bond volume cap on such Governmental Bonds (subject to a
project location targeting restriction and a gaming facility financing restriction).

The Treasury Department recommends repealing the existing essential governmental
function standard for Indian tribal tax-exempt bond financing under Section 7871(c).

B. Private Activity Bond Standard.
1. Analysis.

State and local governments may issue tax-exempt Private Activity Bonds for a wide
range of specified types of projects and activities, subject in most cases to an annual State bond
volume cap. By contrast, outside the limited authorization for Tribal Economic Development
Bonds, Section 7871(c)(2) generally prohibits Indian tribal governments from issuing Private
Activity Bonds, except in narrow circumstances to finance manufacturing facilities upon
satisfaction of complex and restrictive employment requirements.

il


DEPARTMENT OF THE TREASURY
WASHINGTON, D.C. 20220

December 19, 2011

The Honorable Orrin G. Hatch

Ranking Member, Committee on Finance
United States Senate

Washington, DC 20510

Dear Senator Hatch:

As mandated by Section 1402(b) of Title I of Division B of the American Recovery and
Reinvestment Act of 2009 (“ARRA”), the Department of the Treasury has conducted a study of
the effects of the Tribal Economic Development Bond provision in Section 7871(f) of the
Internal Revenue Code. Section 1402(b) of ARRA directs the Secretary of the Treasury, or the
Secretary’s designee, to conduct a study of the effects of this tax-exempt bond provision and to
report to Congress on the results of this study, including recommendations regarding this tax-
exempt bond provision.

Enclosed is our Report and Recommendations to Congress regarding the Tribal Economic
Development Bond provision under Section 7871. An identical letter is addressed to Senator
Baucus.

Sincerely,

Emel, SMH —

Emily S. McMahon
Acting Assistant Secretary (Tax Policy)

Enclosure


Allocation Schedule of 2nd Tranche of Tribal Economic Development Bonds

Name of Applicantissuer State
‘Absentee Shawnee Tribe of Oklahoma OK
Agua Caliente Band of Cahuilta indi cA
Alabama-Coushatta Tribe of Texas TM
‘Aituras Indian Ranchera cA
‘Apache Tribe of Oklshoma ok
Big Lagoon Indian Rancheria cA
‘Cabazon Band of Mission indians cA
Campo Band of Mission indians cA
Cedar City Band of Palutes of the Palute Indian Trfbe of Utsh ut
Chemenuew Indian Tribe of the Chemehuevi Reservation cA
Cher-Aa Heights Indian Community of the Trinidad Rancheria, CA cA
Chippewa Cree Tribe Mr
‘Comanche Nation, Oklahoma OK
Confederated Tribes of the Goshute Reservation ur
Confederated Tribes of the Umatia Indian Reservation oR
Confederated Tribes of the Warm Springs Reservation of Oregon OR
Coyote Valley Band of Pome Indians cA
Delaware Nation OK
Elk Valley Rancheria, Califomia cA
Ely Shoshone Tribe Ww
Fort Bidwell Indian Community Council cA
Fort Pack Assiniboine & Sioux Tribes MT
Fort Sill Apache Tribe of Oklahoma OK
Gila River Indian Community AZ
Grindstone indian Rancheria of Wintun-Wailaki Indians of California cA
lipay Nation of Santa Ysabel CA
lone Band of Miwok Indians cA
Jamul Indian Village of California cA
Kaw Nation OK
La Posta Band of Mission Indians cA
Lummi Tribe of the Lumml Reservation Wa
Match-E-Be-Nash-She-Wish Band of Pottawatomi Indians Mi
Mesa Grande Band of Diagueno Mission Indians cA
Mille Lacs Band of Ojibwe MN
cA

Morongo Band of Cahuilia Mission Indians

of Project TEDBs Allocation
Educational’Commercal Facility 9,981,846,80
Renewable Energy 10,934,618.39
Manufacturing Factity
Industrial, Tourism, Housing, 29,609,847,73
Commercial, Educational, and
Health Facilities
‘Supply Distribution Facility 7,289, 744,26
Tourism Facility 10,932,879.61
‘Manufacturing and Tourism 21,504,745.58
Facilities
Refinancing 30,000,000.00

Renewable Energy, Tourism, and ——_-30,000,000.00
‘Wastewater Faciities

Manufacturing Facility 7,289,744.28
Tourism Facility and Marina 3,280,384.91
Tourism and Renewable Energy 10,932,879.64
Facilities

Refinancing 4,488,015.02

Tourism, Parking, Convention, 10,570,129.18

and Retail Facilites; and Land

Acquisitions

Governmental, Retail 10,934,616.38

Manufacturing, and Renewable

Energy Faciities

Health Faciity 5,330,048.86

Water Infrastructure and Tourism 5,107,849.19

Facility Improvements

Tourism Facitty Expansion 18,147,818.34

Retail, Industrial, Tourism, 27,253,437.90

Housing, and Renewable Energy

Facilities

Tourism Facility 2,709,930.18

Health Facility 2,988,795.13

Renewable Energy Facilities 10,934,616.38

Renewable Energy 10,934,616.38

Tourism Faciities 10,934,616.39

Retail, Tourism, and Youth 30,000,000,00

Facitios

‘Supply Distribution Facility §,467,308.19

Tourism Faciities 10,932,879.61

Tourism and Renewable Energy 10,934,616.38

Facilities

Retail Faciity 3,848,238.13
* Renewable Energy Facility 24,056,156.08

Retail Facility 8,560, 769.84

Infrastructure and Tourism 3,848,238.13

Facilities

Parking, Water, and Wastewater 14,943,975.73

Infrastructure Facitties

Renewable Energy 10,034,616.39

Refinancing and Tourtsm 27,870,387.58

Facilites

Tourism, Retail Renewable 18,766.411.78

Energy, and Water infrastructure

Fociities


ENT OF

q DEPARTMENT OF THE TREASURY
2) WASHINGTON, D.C. 20220
i

1789,

December 19, 2011

The Honorable Max Baucus
Chairman, Committee on Finance
United States Senate
Washington, DC 20510

Dear Chairman Baucus:

As mandated by Section 1402(b) of Title I of Division B of the American Recovery and
Reinvestment Act of 2009 (“ARRA”), the Department of the Treasury has conducted a study of
the effects of the Tribal Economic Development Bond provision in Section 7871(f) of the
Internal Revenue Code. Section 1402(b) of ARRA directs the Secretary of the Treasury, or the
Secretary’s designee, to conduct a study of the effects of this tax-exempt bond provision and to
report to Congress on the results of this study, including recommendations regarding this tax-
exempt bond provision.

Enclosed is our Report and Recommendations to Congress regarding the Tribal Economic
Development Bond provision under Section 7871. An identical letter is addressed to Senator
Hatch.

Sincerely,

Emly SMWchn—

Emily S. McMahon
Acting Assistant Secretary (Tax Policy)

Enclosure


bases comparable to those of State and local governments. Most notably, tribal land is held in
trust and not subject to property taxes. When tribes try to levy business taxes, it is often
perceived as “double taxation” because the state and local governments may also levy taxes on
economic activities in the same area when those activities involve non-Native persons. The
alternate revenue streams that tribes draw from were identified as income from lands held in
trust, oil, gas and other natural resources, and gaming. Many tribes said that limiting qualified
sources of tribal revenue further limits tribes’ already restricted access to credit markets. One
tribe said that the sole determinant of the eligibility for tax-exempt bond financing should be the
nature of the project undertaken. Another said that it is unlikely that tribes can meet the 90
percent governmental use or governmental payment requirement without including revenue
streams unique to Indian tribal governments. In general, the tribes believe that special
consideration should be given to special sources of revenue for Indian tribal governments
because they do not have the same taxing abilities as State and local governments (FR Notice

Question 3).

There is a consensus among tribes that current law should be modified permanently to authorize
tribal governments to use qualified tax-exempt private activity bonds for the same types of
projects as State and local governments. Additionally, some noted that qualified small issue
manufacturing bonds (as allowed for State and local governments) would be more useful than the
existing limited form of tax-exempt private activity bonds for manufacturing facilities under
restrictive parameters currently authorized for tribal governments (FR Notice Question 4).

In response to the question of whether there are additional projects that Indian tribal governments
should be allowed to finance using qualified tax-exempt private activity bonds, tribes generally
said that Indian tribal governments should be allowed to finance commercial projects and
corporations that produce revenues for tribal government services. Additionally, four tribes said
that they only sought parity with State and local governments while five tribes asserted that there
should be a “presumption” that all projects undertaken by tribal governments are eligible for tax-
exempt bond financing. Most other tribes gave specific types of projects for which they believed
tribal governments should be authorized to use private activity bonds. Suggestions included
commercial projects with economic, environmental, and other social value, elderly housing
projects, residential assisted living projects, recycling facilities, fire stations, renewable energy
projects, and grocery stores. Some argued that tribal governments should be authorized to use
private activity bonds for other types of projects beyond those allowed for State and local
governments, including projects that would address the unique housing needs of tribes. Indian
tribal governments also sought to use private activity bonds for tourism and recreational facilities
and travel centers. Many tribes noted that Section 17 corporations should be able to issue tax-
exempt private activity bonds (FR Notice Question 5).

Responses were varied on the question of what the nature of a bond volume cap should be if the
government was to impose one. A few tribes said that a bond volume cap, if used, should be
identical to the one used for State and local governments. The majority of tribes submitting
comments said that they opposed the use of any bond volume cap for the use of private activity
bonds for tribal governments. Proposed structures in the event of a bond volume cap include a
minimum allocation for each tribe, and additional allocations based on several factors including

a mmmmmmimmimmmmeem |

Appendix C Page 2


property. Thus, private business use arises from ownership, leasing, certain management
arrangements, certain research arrangements, certain utility output contract arrangements (e.g.,
certain electricity purchase contracts under which private utilities receive benefits and burdens of
ownership of governmental electric generation facilities), and certain other arrangements that
convey special legal rights to use to tax-exempt bond-financed property.

Various exceptions and safe harbors apply with respect to the private business use
limitation, which allow limited private business use of property financed by Governmental
Bonds in prescribed narrow circumstances. Exceptions to the private business use limitation
include exceptions for use in the capacity as the general public, such as use by private businesses
of public roads, certain short-term use arrangements, certain de minimis incidental uses, certain
uses as agents of State and local governments, and certain uses incidental to financing
arrangements (e.g., certain bondholder trustee arrangements). In addition, safe harbors against
private business use apply to certain private management and research arrangements. For
management contracts, in Rev. Proc. 97-13,'° the IRS provided safe harbors that allow private
businesses to enter into certain qualified management contracts with prescribed terms and
compensation arrangements without giving rise to private business use to accommodate public-
private partnerships for private management of public facilities. For research contracts, in Rev.
Proc. 2007-47,"° the IRS. provided updated safe harbors that allow certain research contract
arrangements with private businesses at tax-exempt bond financed research facilities without
giving rise to private business use (e.g., certain Federally sponsored research).

Most tax-exempt Governmental Bonds qualify for this type of tax-exempt bond financing
based on limiting private business use of the bond-financed projects (as contrasted with limiting
private payments).

3. Private Payments Limitation.

Bonds also qualify as tax-exempt Governmental Bonds if, despite significant private
business use, the bonds are payable predominantly from State or local governmental sources of
payment, such as generally applicable taxes. In general, the private payments limitation on
Governmental Bonds requires limiting aggregate private payments to no more than 10 percent of
the debt service on a bond issue (on a present value basis). The private payments limitation
broadly considers direct and indirect payments from property used by private businesses that
represent sources of payment or security for the debt service on a tax-exempt bond issue. For
example, if a private business pays rent for its use of the bond-financed property, the rent
payments give rise to private payments even if that rent is not pledged formally to secure the
bonds. Various limited exceptions apply for purposes of the private payments limitation.

The private payments limitation is more complex than the private business use limitation
and is applied less often to achieve tax compliance for Governmental Bonds. Bond issues that
qualify as Governmental Bonds based on the absence of significant private payments tend to
involve certain structured financings, such as tax increment financings and stadium financings.

'S 1997-1 C.B. 632.

‘6 2007-29 LR.B. 108 (July 16, 2007).


E. Tribal Economic Development Bond Provision.

The Tribal Economic Development Bond provision under Section 7871(f) provides
Indian tribal governments more flexibility to finance economic development projects than is
allowable under the existing essential governmental function standard of Section 7871(c). This
more flexible provision generally allows Indian tribal governments to use tax-exempt bonds
under a $2 billion volume cap to finance an unspecified broad range of governmentally-used
projects that would qualify for Governmental Bonds under Section 141 and projects that would
qualify for Private Activity Bonds under Section 141(e), to the same extent and subject to the
same limitations imposed on State and local governments under Section 103.

For this purpose, Federally-chartered corporations organized and controlled by Indian
tribal governments under Section 17 of the Indian Reorganization Act of 1934, 25 U.S.C. § 477
(“Section 17 Corporations”) are eligible Indian tribal governmental issuers of tax-exempt bonds
under Section 7871 and eligible governmental users of proceeds of tax-exempt bonds for
purposes of the private business restrictions on Governmental Bonds under Section 141.74

Section 7871(£)(3)(B) includes certain specific limitations on Tribal Economic
Development Bonds that prohibit the use of any proceeds of these bonds to finance either of the
following: (1) any portion of a building in which class Il or class III gaming (as defined in
section 4 of the Indian Gaming Regulatory Act) is conducted or housed or any other property
actually used in the conduct of such gaming; or (2) any facility located outside the Indian
reservation (as defined in Section 168(j)(6)).

Hl. Analysis and Recommendations.

A. Governmental Bond Standard.

1. Analysis.

The private business restrictions on tax-exempt Governmental Bonds for State and local
governments under Section 141 involve established, well-known, and administrable tax
standards. The private business use limitation particularly involves workable tax standards using
general tax principles that focus on ownership, leasing, and contractual rights. These standards
focus eligibility for Governmental Bonds on the nature of the beneficiaries of the tax-exempt
financing (rather than on the nature of the activities financed).

By contrast, the essential governmental function standard under Section 7871(c) focuses
on appropriate governmental activities (rather than the actual beneficiaries) and has proven to be
a difficult standard to define and administer. The analogous essential governmental function
standard under Section 115 is vague. Congress criticized the Treasury Department’s 1984

a4 See Treas. Reg. § 1.301.7701-1(a)(3) (Section 17 Corporations are integral parts of Indian tribal governments and
are not recognized as separate entities apart from the Indian tribal governments for Federal tax purposes); Rev. Rul.
94-16, 1994-1 C.B. 19 (Section 17 Corporations are not separate taxable entities apart from the controlling Indian
tribes and are not subject to Federal income taxation).

10