11'1 I I I I II , TAX-EXEMPT i, FINANCING: A Glossary of Tenns GEORGIA DEPARTMENT OF COMMUNITY AFFAIRS TAX-EXEMPT FINANCING: A Glossary of Tenns prepared by GEORGIA DEPARTMENT OF COMMUNITY AFFAIRS Jim Higdon, Commissioner Government Information Division 1200 Equitable Building 100 Peachtree Street Atlanta, Georgia 30303 (404) 656-5526 February 1988 An Equal Opportunity Employer TAX-EXEMPT FINANCING: A Glossary of Terms -Table of Contents- Introduction and Overview Governemntal Bonds General Obligation Bonds Revenue Bonds Municipal Bonds Tax Anticipation Notes Non-Governmental Bonds Industrial Development (Revenue) Bonds Mortgage Revenue Bonds Multi-Family Housing Bonds Exempt Facility Bonds Student Loan Bonds 50 1(c)(3) Private Non-Profit Bonds Summary , Where to get Further Information List of Definitions February 1988 Page 1 2 2 2 3 3 3 4 4 4 4 5 5 5 5 6 TAX-EXEMPT FINANCING: A GLOSSARY OF TERMS INTRODUCTION Tax-exempt financing in Georgia has been a useful community and economic development tool. Because of their power to issue taxexempt industrial development bonds. local development authorities (along with chambers of commerce) have been the standard mechanisms for promoting new economic activity in Georgia's communities. The 1986 Tax Reform Act has reduced dramatically the number of industrial development bonds (IDBs) issued in Georgia. from approximately $860 million in 1985 to less than $40 million in 1987. However. tax-exempt debt is still being issued by Georgia's local governments in the form of general obligation bonds. tax anticipation notes and other forms of tax-exempt financing. In 1987 alone. Georgia's local governments issued $645.4 million in taxexempt debt: $529.5 million by counties and $115.9 million by municipalities. As these figures suggest, tax-exempt financing has not gone away. just changed some of its habits. This Glossary is designed to provide an overview of some of the major points in the terminology of tax-exempt financing and a listing of some of the definitions of the commonly used terms. It is hoped that the Glossary will provide some clarity to an often unclear topic. AN OVERVIEW OF TAX EXEMPT BOND TERMINOLOGY The confusing thing about tax-exempt bond terminology is that there are really three different sets of terms used in Georgia: those created by federal tax law; those recognized by state law; and those used commonly by people in the economic development business. For purposes of clarity. we propose use of the basic federal definitions (which makes sense, because it's federal law that makes a bond "tax-exempt" in the first place). but will explain how the other terms fit in. GOVERNMENTAL BONDS Under federal tax law, "governmental" bonds are the most favored category of tax-exempts. subject to fewer restrictions than "non-governmental" or "private activity" bonds. There's a very complicated use and benefit test for determining which side of the line a bond issue falls on. Generally. though. governmental bonds are issued to finance facilities owned and operated by state or local governments for a public purpose. The major "grey area" is for facilities owned and operated by a government. but primarily serving private users instead of the public at large. Bonds used to finance the fourth runway at Hartsfield Airport. for example. were deemed "non-governmental" because the airlines would benefit more than the public. On the other hand. bonds issued to finance a sewer line to a single private industry are treated as "governmental" because the industry receives the same service as the public at large. Governmental bonds can only be issued by governments or entities that have police powers. the power of eminent domain. and the power to tax. or which are "special purpose governmental units". such as local water and sewer authorities. Under state law. governmental bonds are divided into two categories. determined by the financial backing for the project rather than the beneficiary: General Obligation Bonds (GO): These bonds are supported by the "full faith and credit" of the government issuing them. On the local government level, all general obligation bond debt must be approved by the local voters through a referendum. This type of debt is traditionally used to finance nonrevenue producing facilities. such as schools. city halls. jails. and recreation improvements. The amount of local outstanding general obligation debt is restricted by the State Constitution to no more that 10% of the local tax digest. Revenue Bonds: Revenue bonds are obligations issued by or on behalf of the state or local government for specific revenue producing facilities. These type of bonds do not require voter approval and do not have the backing of the full faith and credit of the state or local government. The facility being financed. such as a local government utility expansion. or civic center. must generate sufficient revenues to retire the bond. Revenue bonds are not counted against the 10% 2 limit mentioned above, since the government has not pledged its taxing power to repay the debt. These types of bonds are generally issued by "authorities" such as water and sewer authorities. airport authorities, etc. Other terms used in conjunction with governmental bonds include: Municipal Bonds: This term is generally used to describe both general obligation and revenue bonds. It is a security issued by or on behalf of state or local government, with the interest exempt from federal income tax. Sometimes you'll hear the term "traditional municipal bonds" used to distinguish governmental from non-governmental bonds. Tax Anticipation Notes: Tax anticipation notes are generally issued by local governments in anticipation of receiving the proceeds of a specific, usually voted. tax. A good example is the "special purpose local option sales tax", where the proceeds from the tax may take several years to come in, but the projects to be financed are constructed now. NON-GOVERNMENTAL BONDS The terms "non-governmental bond" and "private activity bond" are used interchangeably to describe bonds issued to benefit private entities, but with a specific public purpose established in law. These types of bonds carry many different names, such as Industrial development bonds (IDBs), farm loan bonds, mortgage revenue bonds (MRBs), single family housing bonds, multi-family housing bonds, exempt facility bonds, student loan bonds. and 50l(c)(3) nonprofit bonds. Under state law, virtually all non-governmental bonds are "revenue bonds" rather than general obligation debt. and are issued by governmentally-created authorities rather than by state or local governments. With the major exception of (501)(c)(3) non-profit bonds, most non-governmental bonds are covered under the "State Bond Allocation System" reqUired by the Tax Reform Act of 1986. In calendar year 1988, Georgia cannot issue more than $305 million in these types of bonds. 3 Industrial Development Bonds: IDEs (also called "industrial revenue bonds" or IREs) are issued by local industrial development authorities to help finance capital facility needs of private enterprise. The Tax Reform Act of 1986 restricted the use of this type of financing to manufactUring facilities, with a sunset after calendar year 1989. At times, the term "small issue" is used to describe manufacturing IDEs with a principal amount of $10 million or less. Mortgage Revenue Bonds: The terms mortgage revenue bonds and single family housing bonds are used interchangeably to describe bonds issued for first mortgages for low and moderate income families. In Georgia, the Georgia Residential Finance Author~ty (GRFA), Atlanta's Urban Residential Finance Authority (URFA), and local housing authorities are authorized to issue these type of bonds. These bonds are scheduled for sunset at the taxing authority of state or local government, not the end of calendar year 1988. The mortgages and bond insurance are used to secure the bonds, Multi-Family Housing Bonds: These types of bonds can be issued by GRFA, URFA, and local housing authorities to help private developers finance "apartments" for qualified low and moderate income families. Once again, the credit worthiness of the developer/owner is the only thing pledged to repay the bond. Exempt Facility Bonds: This term is generally used to describe IDEs that are authorized by federal law to exceed the $10 million "small issue" limit. The public purposes of exempt facility bonds vary, depending on the uses that have been authorized by Congress over time. Various types of uses of exempt activity bonds include: Solid Waste Disposal Facilities Pollution Control Facilities Hazardous Waste Facilities Airport Facilities Stadium Construction (Georgia Dome) 4 Student Loan Bonds: This is a special use of tax-exempt bond proceeds authorized by the federal tax code. Generally, these types of bonds in Georgia have been issued by the "Private Colleges and Universities Authority", with the proceeds "loaned" to students attending private colleges and universities. 501(c)(3) Private Non-Profit Bonds: Sometimes called "quasi-governmental bonds," this category is determined by the tax-exempt status of the project beneficiary, rather than the specific use. Typical 501(c)(3) projects are construction for private non-profit hospital and health clinics, and construction for private colleges and universities. Though treated as "non-governmental" bonds by federal law, they are subject to few of the restrictions imposed on IDBs. They are not subject to volume limitations. In Georgia, these bonds are usually issued by a special- purpose authority. SUMMARY Tax-exempt financing is one of several tools available for community and economic development in the state. As shown above, there are several options from which to choose. However, a local government considering any single (or combined) option(s), should carefully analyze their total financial posture to make sure their financial stability will not be adversely affected. The Department of Community Affairs can assist the community with its fiscal analysis by providing specific and comparative financial information. To request assistance, call or write Lynn Thornton, Assistant Commissioner, Government Information Division, Georgia Department of Community Affairs, 1200 Equitable Building, 100 Peachtree Street, Atlanta, Georgia 30303. Telephone (404) 6565526. For further information about the Georgia Bond Allocation System (non-governmental tax-exempt bonds), please call (404) 656-3836. 5 A LIST OF DEFINITIONS OF TAX-EXEMPT FINANCING TERMS Arbitrage: Investing funds borrowed at a lower interest cost in investments returning a higher rate of return. Ad Valorem Tax: A tax measured or based on the value of the property being taxed. Bond: The written evidence of debt, bearing a stated rate(s) of interest, or stating a formula for determining that rate, and maturing on a date certain, on which date and upon presentation, a fixed sum of money plus interest is payable to the holder or owner. Bond Anticipation Notes: Interim short-term tax-exempt obligations used to provide funds for construction or completion of an enterprise. The proceeds of a future bond issue are pledged to pay the note at maturity. Upon completion and the final costing of the project, permanent financing is provided by a tax-exempt bond issue, and the bond anticipation notes are retired. Bond Rating: Designations assigned by credit rating agencies to give relative indications of credit quality. Capitalized Interest: A dollar amount, set aside from the proceeds of an issue, to pay interest on the issue for a period of time (often during the construction period of the project being financed). Competitive Bidding: Bidding provisions for sale of an issue on the best bid after published notice requesting bids. Construction Fund: A special fund, often held by the trustee or other fiduciary, into which the net proceeds of an issue are deposited to be used to pay project costs. The construction fund is often pledged for the payment of the securities, pending its use for the purpose of paying the project costs. Cost of Issuance: Items of expense paid by the issuer directly related to the authorization, sale, and issuance of bonds. These costs may include legal fees, trustee's fees, printing costs, bond discounts, costs of credit ratings, fees and charges for execution, and filing and recording fees. Debt: An obligation to pay money (usually to repay borrowed money) at a future date. . Debt Limit: Statutory or constitutional limit on the principal amount of debt that an issuer may incur or that it may have outstanding at anyone time. 6 I Debt Service: The total of principal and interest in a given time period. ~ General Obligation (GO): A security the payment of which is secured by a ~ pledge of the issuer's full faith and credit and taxing power. ~ Industrial Development Bonds (IDBs): Securities issued to finance capital facilities for private enterprise. The Tax Reform Act of 1986 restricted ~ the use of this type of financing to manufacturing facilities. This type of financing will no longer be available after 1989. ~ Mil: One-tenth of one cent. ~ Millage: A tax rate expressed in mils per dollar. ~ Municipal Bond: A security issued by or on behalf of a state or political ~ ~ subdivision, the interest on which is generally exempt from federal income tax. ~ Pass-Through Financing: Tax-exempt issue to finance facilities for the use of a private for-profit or non-profit entity, which is generally soley ~ responsible for the payment of the debt service. (This is the method of financing used by economic development authorities.) ~ Private Placement: The original placement of an issue in the private ~ money market composed of different types of financial institutions (banks, insurance companies, etc.). Since the passage of the Tax Reform ~ Act of 1986, this method of financing is no longer available for any private activity bond and use for GO bonds has been severely restricted. ~ Public Facilities: Facilities which serve any valid public purpose. ~ Public Offering: Sale by an underwriter to the public. ~ Refunding: Sale of a new issue, the proceeds of which are to be used, ~ immediately or in the future, to pay debt service either directly or indirectly on and retire an outstanding issue by replacing the outstanding ~ issue with a new issue. The object of a refunding may be to save interest cost, extend the maturity of the debt or to relax restrictive covenants. ~ ~ Revenue Anticipation Note: A short-term municipal debt obligation where the proceeds of future revenues are pledged as security to the ~ retirement of the notes at maturity. ~ Revenue Bond: A bond whose debt service is payable solely from the revenue generated from the operation of the facilities being financed, or ~ from other non-tax sources. ~ Tax Anticipation Note (TAN): Note issued in anticipation of receipt in future years of the proceeds of a speCific (usually voted) tax. ~ ~ 7 ~ DCA GEORGIA DEPARrMENT OF COMMUNI1Y AFFAIRS 1200 Equitable Building 100 Peachtree Street Atlanta. Georgia 30303