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Bond Financing & Eligible QEBC Projects - The Public Finance Perspective
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Bond Financing & Eligible QEBC Projects - The Public Finance Perspective



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  • 1. ORNL’s 3rd Annual Southeast Sustainability Summit August 21, 2013 Qualified Energy Conservation Bonds Public Finance Perspective George Masterson 615-742-6263 gmasterson@bassberry.com
  • 2. What are qualified energy conservation bonds (QECBs)?  QECBs are − taxable bonds − issued by a state or local governmental entity or instrumentality − partially subsidized by U.S. government if: • proceeds finance specified types of energy conservation projects and • issuer meets other detailed Internal Revenue Code requirements at time of issuance and during life of bonds
  • 3. How does the federal subsidy for QECBs work?  Historically, federal government has used three approaches to subsidizing state and local bonds ̶ Tax-exemption – bond investors accept a lower rate of interest because interest is exempt from gross income for federal income tax purposes ̶ Tax credits – bond investors accept a lower (or, in some cases, zero) taxable rate of interest because ownership of bond carries tax credits that can be applied against any federal tax liability ̶ Direct payments – bond investors receive a market, taxable rate of interest and U.S. Treasury makes regular subsidy payments directly to the issuer of the bonds on each interest payment date
  • 4. How does the federal subsidy for QECBs work? (continued)  Tax-exemption – relevant to QECBs because most projects that qualify for QECB financing also qualify for financing with traditional tax-exempt bonds  Tax credits – default subsidy method for QECBs  Direct payments – may be elected by a QECB issuer in lieu of tax credits
  • 5. How does the federal subsidy for QECBs work? (continued)  Tax-credit mechanics − holders of QECBs receive annual tax credits equal to: 70% of “applicable tax rate” times principal amount of bond − “applicable tax rate” • U.S. Treasury’s estimate of credit rate that will permit the issuer to sell bonds at zero interest and no discount • announced periodically by the U.S. Treasury at https://www.treasurydirect.gov/GA-SL/SLGS/selectQTCDate.htm • determined on the date issuer sells the bonds
  • 6. How does the federal subsidy for QECBs work? (continued)  Direct payment mechanics − issuer submits a form to the IRS prior to each interest payment date − receives a direct payment from the IRS equal to the lesser of • interest due on the bonds on that interest payment date and • 70% of the applicable tax rate with respect to the bonds − payments reduced by the Sequester
  • 7. What requirements apply to QECBs at issuance?  State or local government issuer  Issuer reasonably expects to: − enter into a binding commitment with a third party to spend 10% of proceeds within six months of issue date − spend proceeds on “qualified conservation purposes” within three years  Issuer has allocation of a portion of the nationwide $3.2 billion cap on the amount of QECBs that may be issued  Maturity does not exceed the maximum term for QECBs announced by the Treasury Department at time of issuance
  • 8. What requirements apply to QECBs at issuance? (continued)  Issuer formally designates bonds as QECBs  Issuer formally elects direct payment treatment as opposed to tax credit (if desired)  No more than a de minimis amount of original issue premium  No more than 2% of proceeds used to pay costs of issuance  No prohibited conflicts of interest
  • 9. What requirements apply to QECBs at issuance? (continued)  Qualified conservation purposes include: − capital expenditures that: • reduce energy consumption in publicly-owned buildings by at least 20% • implement green community programs • rural development including the production of electricity from renewable energy sources • renewable energy facilities − mass commuting facilities − demonstration projects and public education campaigns − research facilities or grants relating to energy reduction and efficiency and production of non-fossil fuels
  • 10. What requirements apply to QECBs at issuance? (continued)  QECB allocation process − nationwide: $3.2 billion of capacity − Internal Revenue Code mandates allocation among states and “large local governments” (i.e, cities and counties with populations greater than 100,000) − states and large local governments may re-allocate their cap to other issuers
  • 11. What requirements apply to QECB during life of bonds?  Davis Bacon prevailing wage rules apply  Spending requirements − three-year spending requirement • basic requirement: o 100% of “available project proceeds” spent on qualified conservation purposes within three years OR o unspent available project proceeds used to redeem corresponding portion of bonds • limits on reimbursement of prior expenditures and refunding of other obligations
  • 12. What requirements apply to QECB during life of bonds? (continued)  Arbitrage requirements − For tax-exempt bonds, Internal Revenue Code prohibits, with many exceptions, investment of bond proceeds at a yield that is greater than yield on bonds − For QECBs, tax-exempt bond arbitrage rules apply, with the following exceptions: • yield is net of direct payments received • issuer permitted to establish a level-funded “sinking fund” invested at yield no greater than a target yield announced by U.S. Treasury immediately prior to issue date
  • 13. What special rules apply to QECBs that are “private activity bonds?”  “Private activity bonds” = more than 10% of the proceeds are used for private rather than governmental projects AND more than 10% of the debt service of which is from payments related to the private use  QECBs may be “private activity bonds” as long as − all “qualified conservation purpose” expenditures are capital expenditures − no more than 30% of the volume cap allocation of any state or large local government consists of private activity bonds, with green community bonds NOT treated as private activity bonds
  • 14. Summary • QECBs benefit from significant federal subsidy • Detailed requirements to be met ̶ at issuance ̶ during life of QECBs