Memorandum

City of Lawrence

City Manager’s Office

TO:              David L. Corliss, City Manager

CC:               Diane Stoddard, Assistant City Manager

FROM:          Roger Zalneraitis, Economic Development Coordinator/Planner

DATE:           July 21, 2009

RE:               Bonds for Economic Development

The following memo provides a brief overview of Industrial Revenue Bonds, as well as two new types of bonds that have been made authorized by the IRS for economic development purposes. 

Industrial Revenue Bonds

Industrial Revenue Bonds (IRB) are frequently used in Northeast Kansas.  There have also been inquiries recently from local firms about IRBs, which raises the possibility that IRB requests may come before the City Commission in the future.

An IRB is a private activity bond that may be used by an applicant to: obtain an exemption from sales tax on construction material; acquire up to a 10 year tax abatement at the discretion of the City Commission; and, for certain manufacturing projects, receive tax-exempt financing.  An IRB is issued by the City and the property for which the IRB is issued becomes City property.  The applicant, however, makes all payments on the IRB. Should the applicant fail to make payments, the applicant goes into default and the City takes possession of the property.  There is no financial risk for the City.  The accompanying white paper from Gilmore and Bell provides a more comprehensive review of IRBs (available here).

The reason that IRBs are becoming more popular is because many firms seeking economic incentives do not fall into one of the three categories (manufacturing, warehousing, or research and development) permitted to receive constitutional tax abatements in Kansas.  For example, the recent expansion by Black & Veatch of its headquarters building in Overland Park would not have been covered by a constitutional tax abatement.  Instead, an IRB was issued with a 75% tax abatement for 10 years in order to incent Black & Veatch. 

Economic Development Bonds

The IRS has authorized two new types of bonds that can be used at the local level on or before December 31, 2010.  The first is the Recovery Zone Economic Development Bond, and the second is the Recovery Zone Facility Bond.  Both types of bonds can only be used in areas that a local jurisdiction has declared a “Recovery Zone.”  The language for defining a Recovery Zone is extremely broad.  The IRS states that a zone may be declared using “any reasonable manner using good faith discretion.”

In order for the City to be able to issue Recovery Zone bonds, the City must receive an allocation of bonding authority from Douglas County.  About $10 billion was allocated for Recovery Zone Bonds nationwide.  Douglas County Kansas received $7,834,000 of these bonds.  There was $15 billion allocated for Facility Bonds, of which Douglas County received $11,751,000.

Recovery Zone Economic Development Bonds (“Economic Development Bonds”) are available to local taxing jurisdictions to enhance economic recovery in “distressed” zones.  Unlike most municipal bonds, Economic Development Bonds are taxable.  They are like Build America Bonds that the City recently sold for water and sewer projects, except that the Economic Development Bonds have a 45% direct subsidy payment from the IRS, whereas the Build America Bonds have only a 35% direct subsidy payment.  The direct subsidy payment can result in substantial savings over a traditional tax-exempt bond.  Economic Development Bonds may be used on specific capital expenditures for a facility or property; for infrastructure or construction of public facilities; or for job training.

Recovery Zone Facility Bonds (“Facility Bonds”) are tax exempt bonds that private firms can use for construction of a new facility or the renovation of an existing facility, provided the renovation results in an increase to the tax base worth at least the value of the property when it was first acquired.  A Facility Bond may not be used to refinance existing property.  Like an IRB, a Facility Bond is a bond for which the taxing jurisdiction serves as a conduit.  A Facility Bond expands the types of private projects that can be financed on a tax-exempt basis.  This can provide substantial interest rate savings to a private firm by taking advantage of the lower rates on tax-exempt bonds.  As with Recovery Zone Bonds, Facility Bonds can only be used in designated Recovery Zones. 

A white paper from Gilmore and Bell on Recovery Zone Bonds is available here.

Finally, Gilmore and Bell also forwarded a summary of debt-financing tools for economic development in Kansas.  In addition to the bonds described above, these tools include Tax Increment Financing (TIF), Transportation Development Districts (TDD), Community Improvement Districts (created by the State Legislature this year), STAR Bonds, and Improvement Districts.  The summary is available here.  Staff notes that the City enacted TIF and TDD ordinances in 2008.