- Details
- By Rob Capriccioso
- Economic Development
WASHINGTON — A legislative push to renew the Tribal Economic Development (TED) Bonds multi-billion dollar financial program is gaining steam in the U.S. Congress, with Alaska legislators, in particular, keen on doing so.
The Alaska delegation, led by Republican Sens. Lisa Murkowski and Dan Sullivan, as well as Rep. Don Young, in late July introduced what they hailed as “landmark legislation” in both chambers that would increase accessibility for tax-exempt financing on economic development efforts involving Alaska Native and American Indian projects.
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Their joint plan, called the Tribal Economic Development Act, would replenish the almost exhausted TED Bonds program, first established during the Obama administration.
That program was intended as a means by which tribes could borrow on a cheaper, tax-exempt basis for projects that they previously could not finance in a tax-exempt fashion. The whole point of financing in a tax-exempt manner is that it results in a lower interest cost, according to numerous financial experts. Under TED Bonds, for bondholders or lenders providing money to tribes, the interest that they receive is not subject to income tax, so the idea is that they are willing to loan tribes money at a lower interest rate.
Congress established a national volume cap of $2 billion in tax-exempt incentives, and individual tribes were able to apply for up to $100 million, to be used on reservation-based, non-gaming economic development projects.
The Alaska Republicans now want to double the cap to $4 billion in new tax-exempt financing opportunities for tribes, American Indians and Alaska Natives.
As part of their plan, they want to remove the requirement that TED Bonds be used solely on reservations.
They also want the program to be able to be used for economic development by any “qualified Native user,” which includes any tribal entity, Alaska Native Corporation, and entity that is majority-owned and controlled by a tribe or Alaska Native Corporation, regardless of whether such use would normally be considered “private use.”
“This will greatly broaden the opportunities for American Indians and Alaska Natives to partner with those who are non-Native for mutual benefit,” the legislators said in a joint statement.
They further noted that the legislation permits third parties to guarantee the repayment of TED Bonds, which they say “will enhance the creditworthiness of the bonds and should allow the TED Bonds to be issued at a lower effective interest rate.”
Tribal advocates are not necessarily against the plan, but many would like to see broader changes in federal control over tribal finance issues — equating to parity with local and state governments — that could actually make the need for TED Bonds obsolete. And some see the inclusion of for-profit ANCs as a possible dealbreaker.
A misunderstood program
TED Bonds were first established after the 2008 economic collapse as part of the American Recovery and Reinvestment Act of 2009.
The Obama administration and lawmakers who had been pushing for such a program for years, including former Democratic Sen. Max Baucus, of Montana, believed they would become a strong economic development tool and a force for tribal self-determination. They were hailed by the administration as a major investment in Indian Country and were one of the largest components of its Native-focused stimulus plan.
Tom Rodgers, a tribal lobbyist with Carlyle Consulting who worked with Baucus on getting the program included in ARRA, said at the time that it was one of the accomplishments he was most proud of in his career after several years of discouragements on this front.
Rodgers pointed then to Republican concerns in both the House and Senate over potentially putting Indian Country on equal footing with localities and states as being a major reason for the longtime legislative stagnation on the issue. Some lawmakers especially did not want to see tribal gaming projects funded in a tax-exempt manner, he noted at the time.
An overarching hope of Rodgers and many finance experts in Indian Country was that the TED Bonds program would not be a last step, but rather a first in this area. Essentially, they wanted it to be seen as a pilot program that would illustrate that if the federal government treated tribes equally as local and state governments when it came to tax-exempt financing, tribes could accomplish new and lasting economic development.
Frustratingly for some people in Indian Country and for Obama administration officials who had highlighted it as an early centerpiece of former President Barack Obama’s tribal platform, the TED Bonds program was widely misunderstood initially, with many tribes thinking it amounted to actual grant dollars to finance tribal enterprise projects. Tribes were largely disappointed, and expressed their dissatisfaction, when they learned that was not the case, with some blaming the Treasury and Interior Departments for not doing a better job of explaining the program.
At the same time, many tribes wanted to stake a claim to the opportunity before all of the incentives were used up by other tribes, so some applied without having the ability to take advantage of the program. Thus, other tribes that perhaps could have taken part in the program or could have received a larger share of it were at times shut out.
The Obama administration’s Treasury Department had to clarify what TED Bonds were and were not many times over in tribal meetings and through public guidance. The agency also developed a more rigorous application process requiring financial documents showing that the projects were qualified and could be used within 180 days.
In an official press release from 2014, five years after the program had been established, Treasury was still explaining basic aspects of the program: ”[I]f a tribe receives a $50 million TED Bond allocation, the tribe would not receive $50 million from the federal government. Instead, the tribe receives the authority to borrow $50 million from private investors by issuing bonds. Because interest income paid on TED Bonds is not subject to federal income tax, investors are generally willing to accept a lower interest rate than they would if they were lending to the same borrower and on the same terms, but the interest were taxable. As a result, a tribe may be able to borrow at lower interest rates through the issuance of TED Bonds than it would otherwise.”
Ultimately, it took tribes many years to meet the $2 billion volume cap, with $58 million currently left in the program, according to the Treasury Department. Over the years, some tribes have applied for and been granted the largest amount of financing allowed to them under the program — $100 million — with unused funds cycling back into it, accounting for the still remaining funds.
TED Bonds are generally seen as a success story, but perhaps a slower one than tribal advocates had been hoping for back in 2009.
The ANC angle
Now that the TED Bonds are almost drained down, Alaska legislators want to re-establish the program, double its national cap to $4 billion, and allow Alaska Native Corporations to also take advantage of it.
The idea is a popular one for ANC stakeholders, and many people who are well-versed in their economic development capabilities believe that ANCs would be well-positioned to take advantage of the finance opportunities of such a program.
But some experts in the field are already raising warning flags.
“While folks in Alaska may like that idea, I think it will be strongly opposed by many tribal governments in the lower 48 in the same way that they opposed allowing ANCs to access CARES Act relief funds,” Townsend Hyatt, a Portland, Ore.-based partner at Orrick Herrington & Sutcliffe LLP who leads the law firm’s Indian Tribal Finance practice, told Tribal Business News.
Hyatt said the bill “may be an overreach, and that could doom its chances.” He also notes that many Alaska Native entities are already eligible for participation in the TED Bonds program, which Alaska legislators have not noted in their press releases regarding the legislation to date.
Hyatt believes that the best argument that tribal governments, including Alaska Native villages and communities, have for tax reform is to “level the playing field.”
“In other words, tribal governments should have the same tax-exempt borrowing options and limitations that state and local governments have — no more, no less,” Hyatt said.
“That goal is best served by eliminating the ‘essential governmental function’ test, which is an extra burden placed on tribes that state and local governments do not have to bear.”
That test, created by Congress in the 1980s, limited tribal governmental borrowing for certain projects in a way that borrowing is not limited for localities and states, which is exactly the issue that TED Bonds program attempts to address, albeit with caps and rules.
Tribes have unsuccessfully argued for years that they should be able to have the same tax-exempt status for borrowing for a greater variety of projects, just like states and localities. TED Bonds were supposed to level the playing field, and they did to some extent, but the strings attached — that the projects had to be on reservations, and they could not be related to gaming — have often been seen as paternalistic, Hyatt said.
Tribes’ ‘distinct disadvantage’
The Obama administration’s own Treasury Department, after experiencing a couple of years of the pros and cons of the TED Bonds program, in 2011 came out in support of removing the essential governmental function test.
“This was the primary recommendation from the U.S. Treasury in its 2011 report to achieve tax fairness between tribal governments and state and local governments,” Hyatt noted.
“If we remove the EGF test, then the TED bond program becomes unnecessary since the TED program was created as an exception to the EGF test,” Hyatt added. “Eliminating the EGF test would mean there’s no need for the TED exception.”
The Biden administration has not made a recommendation on the issue to date, but tribal officials are hopeful that it would be open to removing the essential governmental function test altogether.
The National Congress of American Indians, representing many tribes, has long been in favor of removing the essential governmental function test, and it reiterated its position in April for Congress to do so as part of its ongoing infrastructure legislation negotiations.
“Currently, the tax code does not provide Tribal governments many of the benefits and protections available to state and local governments,” NCAI and several other Native organizations wrote in an April 16 letter to congressional leaders. “These disparities place Tribal governments at a distinct disadvantage when it comes to providing for the health, safety, and welfare of their communities.”
“These inequities are further exacerbated by dual taxation,” the organizations continued. “While Tribal Nations have the inherent authority to tax within their jurisdiction, economic activities on Tribal lands are often subject to attempts by state and local governments to tax the same activity. Dual taxation creates unpredictability and disincentives for investments on Tribal lands.
“Tribal governments often forego taxation in order to retain private investment on their lands. As a consequence, they lose essential government revenue to support their communities’ infrastructure needs.”
One of the specific actions called for by NCAI in the letter is for Congress to “remove the Essential Government Functions Test.”
Political calculations
Given recent legal battles between lower 48 tribes and ANCs over CARES Act pandemic funding, Congressman Young knows that expanding TED Bonds to ANCs may prove controversial. But removing the essential governmental function test altogether may not be an attractive legislative solution to him if ANC issues are not addressed.
“The truth is, Alaska Native communities and organizations are different from those in the lower 48,” Zack Brown, a spokesman for Young, told Tribal Business News. “TED Bonds have historically benefitted reservation-based systems, which essentially do not exist in Alaska. This causes Alaska Natives to miss out on financing that their communities could genuinely benefit from. The congressman’s bill recognizes that the program can be working more effectively and reforms it to better serve Alaska Natives and tribes across the country.”
Brown said that since the creation of TED Bonds over a decade ago, Congressman Young has been working hard to make sure this financing is available to Alaska Natives and to ensure that the program is working for all Indigenous people.
“The bill reforms the TED Bond program so that projects do not need to be located on a reservation or other Native owned lands,” Brown said. “This benefits Alaska Natives because much of Alaska is rural and qualifying lands may not be near areas of economic opportunity.”
Brown also makes the case that this “simple change helps lower 48 tribes as well.”
“By allowing TED Bond financing to be used off of a reservation or Native-owned lands, tribes can finance projects located anywhere,” Brown said. “For instance, if a tribe is extremely rural, this bill would allow them to finance an economic development opportunity in an urban area.”
Young’s bill has been referred to the House Committee on Ways and Means.
“Although the Congressman does not sit on Ways and Means, he will be using his working relationships, especially with Ranking Member Kevin Brady, to help move this legislation forward,” Brown said. “In the meantime, he will continue using his platform as ranking member of the Subcommittee for Indigenous Peoples to empower Native communities as they bounce back from this pandemic.”
