Congress all but guaranteed tribal finance to be a clear winner in the American Recovery & Reinvestment Act. Included in the Act were two provisions that held the promise of jumpstarting local tribal economies (or at the very least, providing relief) and leveling the public financing playing field that, for more than two decades, was clearly tilted heavily in the favor of any and every other local government or authority. Good intentions from Congress, however, ran squarely into harsh economic realities, past influences coming home to roost, and a steep learning curve that is trending in the right direction, but taking more time to work through.
The first provision in the Act was the substantial allocation of $2 billion in typically lower-cost tax-exempt bonding authority made available to tribal governments for economic development purposes. The intent was to spark economic development with open access to the same tax-exempt financing as state and local governments. Included in the authorized use of the allocation was the ability to refinance existing taxable debt. Economic development in this case meant everything except the direct financing of gaming facilities. The allocation was divided into two $1 billion pools and allocated over time.
According to the IRS, up to a stunning 95 percent or more of the initial allocation is still up for grabs and will be allocated this year under new guidelines for accessing the debt. New guidelines may be useful, but they don’t fully explain why tribes have been able to use only 5 percent in three years of what other governments call an essential financing tool. Why has such a small percentage been used to date? There is no one answer to the question and to make the allocation work, a number of factors need to be addressed.
An irony that can’t be overlooked is that the federal government finally leveled the playing field for tribes by opening up the bonding authority for tribes at the worst possible time. Granted, interest rates are historically low; however, the authority was granted during what turned out to be one of the deepest and longest economic downturns in our nation’s history. Adding to the irony is an extensive credit disaster that left banks and investment firms unwilling or unable to lend. Trying to secure debt in this environment is difficult enough; still, tribes had other difficulties to navigate.
The $1 billion pools of newly available capital were over-subscribed. The Department of Treasury responded by trying to accommodate all requests regardless of a tribe’s ability to secure credit or use the allocation any time soon. As a result, the most a tribe could utilize was about $30 million. This imposed cap added expense and legal obstacles for tribes needing more capital or wishing to finance multiple projects. This forced tribes to navigate different lenders or types of financing.
Finally, because of past actions by the IRS, the capital markets have largely stopped funding tribal economic development projects. The perceived risk and inconsistent private letter ruling on what constituted an essential government function made the market unattractive.
The good news from all of this is threefold. First, Treasury and IRS have been willing to fix some of the issues that have hindered access. New guidelines due out shortly should make it easier for tribes to access the capital and use it in a timely manner.
Second, the $2 billion in allocation does not expire, which means tribes will have access to the debt while the economy and credit markets heal.
Third, and probably most significant, is that the second provision in the Act offers the possibility of permanent relief beyond the $2 billion limited authorization for tax-exempt economic development bonds. The Department of Treasury has issued a report, as required in the Act, which strongly recommends that Congress get rid of the unfair essential government function test. This would be a noteworthy advance for tribes in itself, but Treasury has gone further in the report by challenging Congress to address the inability of tribes to access affordable capital and make the purchase of tribal bonds attractive enough to incent the tax-exempt debt market to come into Indian Country.
With the Department of Treasury challenging Congress to find solutions, it becomes incumbent upon us in the tribal community to make sure Congress gets it right. Getting it right means challenging Congress to use lessons learned by the tribes and agencies, ensuring existing barriers are removed in the law, and providing the right incentives to attract the public capital markets to tribal governments. After all, tribal governments rely on revenue from economic development more than most other governments.
Dante Desiderio currently serves as the Executive Director of the Native American Finance Officers Association (NAFOA). Established 30 years ago, NAFOA is a national non-profit organization providing leadership and resources needed for tribal leaders to direct economic growth and change. Prior to joining NAFOA, he served as the Director of Economic Policy for the National Congress of American Indians (NCAI). Dante is a member of the Sappony where he serves in an advisory capacity on issues related to community and economic development. He holds a Certified Financial Planner designation and a B.A. in political science and economics from the University of Maryland.