Treasury Department Seeks Input To Improve Tribal Economic Development Bond Program

The Treasury Department is seeking comments from Tribal Governments and interested individuals regarding the ability of Tribes to issue tax-exempt bonds. This includes Tribal Economic Development Bonds (TEDBs) that were authorized by ARRA. The attached PDF document contains the Treasury Department's notice, and comments are due by September 10, 2010.

Questions posed by the Department include:

Are there any specific additional types of projects or activities beyond those allowed for State and local governments for which Indian tribal governments should be authorized (or not authorized) to use qualified tax-exempt private activity bonds (i.e., in which private business ownership, leasing, or other private business use of the bond-financed projects would be permitted) in light of their special needs or unique circumstances?

Should the limitation on use of Tribal Economic Development Bonds to finance projects that are located outside of Indian reservations be modified to address special needs or unique circumstances of Indian tribal governments?

Should consideration be given to changing the law permanently to authorize Indian tribal governments to use qualified tax-exempt private activity bonds for the same types of projects and activities as are allowed for State and local governments?


Many Tribes and their partners have chafed over the past decade as the IRS introduced, largely on a retroactive basis through its audit program, new requirements that prohibited Tribes from issuing debt on a tax-exempt basis (e.g. there could be no commercial aspects of a bond-financed project and a tribe would need to prove that numerous state and local governments had been financing similar improvements with bonds over long periods of time).

Comments can include real-life examples of projects that Tribes had to forego (or finance on a more expensive taxable basis) because the current tax laws prohibited tax-exempt financing. It may also be helpful to identify frustrations Tribes have encountered trying to use TEDBs, and debunk the myth that tribes are mainly focused on casinos.

For more information regarding how to help influence the Treasury Department to improve its Tribal bond program, contact Foster Pepper’s Jeff Nave.
 

Wells Fargo Loses Again In Lac Du Flambeau Tribal Bond Litigation

In the latest round of litigation in the controversial Lac Du Flambeau bond default case, the US District Court for the Western District of Wisconsin has issued an order denying Wells Fargo's motion to vacate the dismissal of its lawsuit and to amend the complaint to add new claims.  The Court has confirmed the lower court's ruling that the original agreement between Wells Fargo and the Lac Du Flambeau Tribe was actually a "management contract" that required approval from the National Indian Gaming Commission.  Since the NIGC was not consulted and did not approve the agreement in advance, the Trust Indenture between Wells Fargo and the Tribe has been ruled void and unenforceable by the bank.

The Tribe has issued a press release, with Tribal President Jerome "Brooks" Big John stating: "This significant victory confirms the strength of the Tribe's legal position and provides the Lac Du Flambeau Band with further confidence in the Tribe's ability to manage Tribal operations in support of the Tribal membership."

The litigation arose when the Tribe was unable to make scheduled debt service payments on bonds that were issued through Wells Fargo to finance the Tribe's Lake of the Torches casino and resort facility.  The Tribe's press release does not indicate the current status of repayment plans.

Second Billion-Dollar Tribal Economic Development Bond Allocation Announced

The second billion-dollar tranche of Tribal Economic Development Bonds has now been allocated by the federal government, with the funding authorization being spread over 76 projects for Tribes throughout the country. The largest dollar allocation for any single project in this financing tranche is $30,000,000.00, which was authorized for five projects, with the remainder receiving smaller authorizations.

Examples of approved projects in the second allocation round include:

Campo Band of Mission Indians in California: $30,000,000.00 for Renewable Energy, Tourism, and Wastewater Facilities

Delaware Nation in Oklahoma: $27,253,437.90 for Retail, Industrial, Tourism, Housing, and Renewable Energy Facilities

Ohkay Owingeh in New Mexico: $22,913,488.65 for Refinancing, Recreational, Governmental, and Commercial Facilities

Yankton Sioux Tribe in South Dakota: $10,934,616.39 for Retail, Farming, Renewable Energy, Tourism, and Governmental Facilities

Confederated Tribes of the Umatilla Indian Reservation in Oregon: $5,330,048.86 for Health Facilities

Skokomish Indian Tribe in Washington: $1,822,436.05 for Refinancing

The complete list of Tribal projects authorized for bond issues in this second phase is available HERE.
 

 

NAFOA Issues Statement On Controversial Tribal Bond Repayment Case

Bill Lomax, President of the Native American Finance Officers Association, has issued the following statement regarding the recent federal court decision in the Lac du Flambeau bond repayment case.

Dear Tribal Leaders and Finance Officers,

I am writing to inform you about a case concerning a Tribal bond issuance that has recently been decided and, in theory, has potential implications for any Tribe that currently has financing or may be seeking financing for a Tribal project.

The Decision:
On January 6, 2010, the United States District Court for the Western District of Wisconsin (the “Court”) issued an order in the case of Wells Fargo Bank, National Association, as Trustee v. Lake of the Torches Economic Development Corporation. This order invalidates the trust indenture for $46,615,000 of bonds issued by a tribal corporation of the Lac du Flambeau Band of Lake Superior Chippewa Indians (“LDF”) for the refinancing of the Lake of Torches Casino and other LDF debt. In this order, the Court ruled that the indenture amounted to a management contract and is void due to failure to seek the required National Indian Gaming Commission approval.

Some have suggested that this case may have dire consequences for all Tribes seeking financing. We have consulted with some of the top attorneys in Indian country and believe that this case is “sui generis” or unique in its facts and are hopeful that it will not have widespread application to the Native American community.


The Risk of Existing Tribal Trust Indentures or Financing Agreements Being Invalidated as Management Contracts:

The Indian Gaming Regulatory Act prohibits Tribes from entering into management agreements for casinos without review and prior approval by the Chairman of the NIGC. A financing arrangement risks being invalidated in its entirety if it includes provisions that could be construed as providing the lender with rights of management. The Court concluded that the bond indenture in the LDF financing does not comply with NIGC guidelines related to impermissible elements of management control.

Some have suggested that this case could lead to other Tribal trust indentures and financing agreements being invalidated as management contracts. We at NAFOA do not think this is the case. The trust indenture in the LDF case includes several critical provisions not commonly found in Tribal gaming financings.

One highly experienced Indian country attorney we consulted has suggested that “the trust indenture is like none [he has] ever seen and clearly does not conform with the standards set by the NIGC.” For example, according to the pleadings in this case, the indenture included provisions: 1) requiring bondholder approval of changes to specified senior management of LDF’s casino operation; 2) permitting bondholders to direct LDF to hire new management in the event of default by LDF; 3) upon certain financial covenant violations, requiring LDF to retain an independent gaming management consultant and thereafter use “best efforts” to implement the recommendations of such consultant; and 4) permitting the appointment of a receiver over casino revenues and casino equipment in the event of a default by LDF. The Court concluded that these provisions, among others, overstep NIGC rules concerning a lender’s ability to assert management powers within a financing agreement.

We believe that few trust indentures or other financing agreements in Indian country are likely to have provisions similar to the ones mentioned above and we think this will limit the applicability of this case to other Tribes. Thus, it is our hope that Tribes and their lenders need not be concerned about the validity of their financing agreements.

We do however have some concerns about the broad language used by the Court in this case. In addition to the provisions noted above, the Court included references to some commonly used provisions often found in trust indentures and loan agreements. We are hopeful that the National Indian Gaming Commission will provide some guidance so as to avoid confusion about which of the provisions, taken together or separately, would constitute a management contract if included in a trust indenture or loan agreement.
 

For detailed information on Tribal bond issues and the impact of current legal decisions, contact Jeff Nave, Marc Greenough, or Bill Tonkin.

Ruling In Lac du Flambeau Casino Bond Case Highlights Tribal Sovereignty Power Against Creditors

When the Lac du Flambeau Tribe fell behind on repaying $50 million in bonds that financed its casino in northern Wisconsin, bond issuer Wells Fargo asked a federal judge to appoint a receiver to run the casino and increase payments on the debt service. As reported on Turtletalk, the judge refused based on principles of Tribal sovereignty, leaving the bank and bondholders with few legal options other than negotiating with the Tribe.

In 2008, the Lac du Flambeau issued bonds to provide capital for the construction and operation of its casino. The bonds carried interest at 12% and required a monthly payment from the Tribe of approximately $800,000. With the economy plunging and over $46 million still to be repaid on the bonds, the Tribe stopped setting aside money to service the debt. Wells Fargo then filed suit in federal court to appoint a receiver to run the casino, in accordance with the terms of the bond agreement the Tribe executed with the bank.

The Tribe argued that the receivership clause in the bond agreement was so broad that it was actually a management agreement that would require approval by the National Indian Gaming Commission. The Commission had not been involved in negotiating the deal and did not provide any approval, therefore the Tribe argued that the agreement was void. The judge’s refusal to appoint a receiver essentially validated that position, leaving Wells Fargo with no direct ability to take control over the casino’s operations. “The entire agreement is a void issue,” said Tribal administrator William Beson.

The judge’s decision means the Tribe is not legally responsible to pay back the money, said Monica Riederer, the Tribe’s attorney. However, she said that does not mean the Tribe will completely renege on the debt. “They will do whatever they’re legally required to do,” Riederer said. Meanwhile, investors and Tribes across the country will no doubt closely monitor the impact this situation has on the ability of Tribal entities to obtain future bond financing. Having no ability to enforce collection of a bond debt is “a nightmare for investors,” said Megan Neuburger, an analyst who follows the Indian gaming industry for Fitch Ratings. “It’s sort of an investor’s worst-case fear.”

 

IRS Allocates First Billion In Tribal Economic Development Bonds

The first billion-dollar tranche of Tribal Economic Development Bonds has now been allocated by the federal government, with the funds being spread over 58 projects for Tribes throughout the country.  The largest dollar allocation for any single project in this financng tranche is $22,565,088.46, which was authorized for over 30 projects, with the remainder receiving smaller authorizations. 

Examples of approved projects in the first financing round include:

Confederated Tribes of the Warm Springs Reservation of Oregon: Water Infrastructure and Tourism Facility Improvements -- $22,565,088.46

Lummi Nation (Washington): Environmental and Transportation Infrastructure -- $22,565,088.46

Santee Sioux Tribe of Nebraska: Health Facility -- $13,539,053.08

Pueblo of Acoma (New Mexico): Manufacturing Facility -- $8,273,865.77

Mille Lacs Band of Ojibwe (Minnesota): Education Facility -- $6,279,393.17

The first tranche of bond authorization was significantly oversubscribed, with the IRS receiving many more applications for projects than the available funding could support.  In an unusual move, rather than reject certain projects completely, the IRS imposed an across-the-board percentage cut to nearly all projects that were approved.  As a result, many projects did not receive the full amount of funding sought, and Tribes may need to revise the scope of work to achieve completion with available funds.

The complete list of Tribal projects authorized for bond issues in this first phase is available here.

Major Native American Economic Development Conference, 16-18 September 2009 At Caesar's Palace

Foster Pepper PLLC and KeyBank are Co-Sponsors of the huge Native American Economic Development Conference to be held at Caesar's Palace in Las Vegas September 16-18, 2009.  The far-ranging seminar will cover topics of immense importance to Tribal economies, including:

  • Tribal Leaders Roundtable: The Impact of President Obama’s Administration
  • Economic Development Bonds and the Federal Stimulus Package: Effects on Tribal Financing
  • Tribal Enterprises Facing Bankruptcy
  • CEO Roundtable: Private Enterprise Boards vs. Tribal Governments
  • CFO Roundtable- External Diversification vs. Internal Reinvestment: Weighing Risk Management Issues
  • Economic Development Roundtable: Stimulating Revenue Growth
  • Effective Master Planning
  • Design and Construction Roundtable: Climbing out of a Recession
  • Strategic Marketing in a New Economic Era
  • Using Sports and Entertainment to Maximize Casino Traffic
  • Planning for Retirement in Indian Country

The conference presenters possess unparalleled expertise in Tribal economic development issues, and include:

  • William "Mike" Lettig, Executive Vice President & National Executive, KeyBank
  • Mellor Willie, Executive Director, National American Indian Housing Council
  • Elaine Fink, Chairperson, Northfork Rancheria of Mono Indians
  • Henry Cagey, Chairman, Lummi Nation
  • Bob Garcia, Chairman, The Confederated Tribes of the Coos, Lower Umpqua, and Siuslaw Indians
  • Robert Martin, Chairman, Morongo Band of Mission Indians
  • Georgia Noble, Chairperson, Sac & Fox National Business Enterprise Board
  • Mel Sheldon, Chairman, Tulalip Tribes of Washington
  • Glenn Hall, CEO, Bishop Paiute Tribe
  • Robert Mele, CFO, Seneca Construction Management Corporation
  • Robert Winter, CEO, Navajo National Gaming Enterprises
  • Chris Kelley, CFO, Viejas Band of Kumeyaay Indians
  • Eletta Tiam, CFO, Nisqually Tribe
  • Michael Marchand, President, Affiliated Tribes of Northwest Indians Economic Development Corporation
  • Virgil Moorhead, Chairman, Big Lagoon Rancheria
  • Morris Reid, Chairman, Picayune Rancheria of Chuckchansi Indians
  • Ivan Posey, Chairman, Shoshone Tribe of the Winder River Reservation
  • Theresa Two Bulls, President, Ogalala Sioux Tribe of The Pine Ridge Reservation
  • Cedric Black Eagle, Chairman, Crow Nation
  • Louis J. Manuel Jr., Chairman, Ak-Chin Indian Community
  • Michael Broderick, Director of Marketing, Lake of the Torches Resort Casino
  • Mary Galbraith, Director of Strategic Marketing, Cherokee National Entertainment
  • Michael L. Bearhart, Director of Gaming, St. Croix Casino & Hotel
  • Scott Eldredge, General Manager, Santa Ana Start Casino

Additional conference information and registration information can be accessed through Pier Conference Group.

 

IRS Provides Guidance And Applications For Tribal Economic Development Bonds

The IRS has just released Notice 2009-51 soliciting applications for and providing interim guidance on the $2 billion of Tribal Economic Development Bonds authorized in the American Recovery and Reinvestment Tax Act, and providing an application form for Tribes to use.

Tribal Economic Development Bonds can be used to finance on a tax-exempt basis anything that a State or local government could finance on a tax-exempt basis, whether with tax-exempt governmental bonds or tax-exempt private activity bonds, except for any portion of a building in which gaming is conducted or any property actually used for gaming and facilities not located on the reservation.

The IRS notice appears to establish that no portion of a building may be financed with these bonds if gaming is conducted in any other portion of the same building, even if those portions are physically discrete from each other. The notice provides a safe harbor under which a structure will be treated as a separate building if it has an independent foundation, independent outer walls and an independent roof. Connections such as doorways, covered walkways or other enclosed common area connections between two adjacent independent walls of separate buildings may be disregarded as long as such connections do not affect the structural independence of either wall.

Other notable points from the IRS guidance include:

The volume cap for these bonds will be allocated in two $1 billion tranches.

Applications for an allocation from the first tranche must be filed with the IRS by August 15, 2009, and the bonds must be issued by December 31, 2009.

Applications for an allocation from the second tranche must be filed with the IRS after August 15, 2009 and before January 1, 2010, and the bonds must be issued on or before December 31, 2010.

No single Tribal government may be awarded more than $30 million from the first tranche, but there is authorization for projects to be financed jointly. If the total of applications for the first tranche exceed $1 billion each award will be reduced pro rata so the total does not exceed $1 billion.

A similar limit is expected to apply to applications for the second tranche, but the IRS reserves the right to change or eliminate the limit.

Unused volume cap for these bonds would carry over to future years under a process to be determined at some future date.

 

For further information on accessing funding and developing projects through Tribal Economic Development Bonds, contact William Tonkin.

IRS Ruling Provides Good News For Tribal Energy Bonds

Reservation Energy Projects - Oneida Tribe of Indians

A recent Private Letter Ruling by the IRS has held that for certain purposes related to government finance, Native American Tribes are to be treated like states. This allows Tribes to issue financially-attractive tax exempt bonds to finance projects related to “essential government functions”. Normally, commercial or industrial activity by Tribes is not considered an “essential” function of Tribal government, thereby precluding the issuance of tax exempt bonds for such activities. However, the IRS ruling states that an exemption to this rule exists for utilities “if the activity provides substantially all of its service on (a) tribe’s reservation. A utility-type activity includes the furnishing or sale of electrical energy, gas, water, or sewage disposal services.”

Stating that “we find the ownership, operation, and financing with proceeds of tax-exempt bonds of the facilities of municipal power utilities to be both sufficiently prevalent and sufficiently longstanding among state and local governments to be considered customarily performed by state and local governments.” Since Tribes and states are treated the same by the IRS in this context, the IRS held that Tribal utility projects may be financed with tax-exempt bonds when they are “not a commercial activity, (are) indistinguishable from public works projects...focus on benefits to local citizens, and are not in competition with other businesses.” The ruling also allows for some energy generated by Tribal projects to be sold to off-reservation users, so long as “the electrical power generated by (the Tribe) will be used to service the local population with only minimal amounts of power sold to customers in the immediate vicinity of the Reservation that are not adequately served by other power providers.”

At a time when interest in and opportunities for generating renewable energy on Tribal Lands are beginning to soar, the ability of Tribes to finance such projects with desirable tax-exempt investment vehicles will help raise necessary capital even in the current economic climate.
 

Congress Seeks $2 Billion For Tribal Economic Development Bonds

The House and Senate are closing in on final draft legislation that would authorize the issuance by Tribes of up to $2 Billion worth of tax-exempt government bonds for economic development projects. The provisions are included in the “American Recovery and Reinvestment Tax Act of 2009” (H.R. 598) sponsored by Representative Charles Rangel of New York, a broad package of stimulus measures and tax credits designed to spur public infrastructure works and economic growth throughout the country.

Section 1532 of the Bill provides for federal support to “Indian Tribal governments” to issue up to $2 Billion in tax-exempt “Tribal economic development bonds”. The bonds will pay interest to investors who purchase them, but that interest will not be subject to federal taxes. The revenue generated by Tribes through the sale of these bonds may be used to provide capital for Tribal infrastructure projects and essential governmental functions. Tribes will not be permitted to apply such revenues to “any portion of a building in which class II or class III gaming is conducted”, nor for “any facility located outside the Indian reservation”.

The use of tax-exempt bonds by Tribal governments has increased significantly in recent years, as they provide both needed capital for Tribes and are attractive securities for tax-conscious investors. If signed by the President and fully implemented, H.R. 598 will provide significant assistance to Native communities in accessing capital markets for development projects in 2009.