IDBs Remain Popular, Spurred by Significant Legislative Changes
– Capital Expenditure Limitation Increase Already Paying Dividends for Issuers –
– CDFA’s Legislative Agenda On Track with Industry Needs –
January 2007 – In December, CDFA surveyed several hundred issuers throughout the country to gauge their use of Industrial Development Bonds (IDBs) in 2006 and gather insight into the legislative challenges facing the use of this important economic development tool. The survey also sought input on the impact that the increase in the capital expenditure limitation is currently having and will have in the future on the issuing agency’s IDB program. The results clearly validate the importance and timeliness of the increase passed by CDFA in May.
The survey, conducted in December 2006, is not an all inclusive research survey thus CDFA will not be promoting national statistics on issuances. Instead, this survey was designed to measure the general use of IDBs and the growing popularity of this financing tool. The survey was also designed to provide a number of positive case studies of issuers in action – issuing bonds, creating and saving jobs and catalyzing new investment in the manufacturing sector.
Local Issuers Tap Into IDB Popularity
IDBs remain a popular and growing form of finance for local and state issuers. CDFA surveyed issuers to gather input and insight into their programs and was able to gather several significant examples of the importance of IDBs. One local issuer, located in a northern Midwest state, financed 13 projects using IDBs in 2006 with an average individual issuance of $5-7 million per project. In total the agency issued $58 million in IDBs in 2006, helping to create 136 new jobs and even more importantly, retaining 1,780 existing jobs. This same agency indicated that the capital expenditure increase has impacted their program’s interest and that three of the projects financed using IDBs would not have happened without the cap ex increase.
Capital Expenditure Limitation Increase Impacts Issuers
Furthermore, the change in the capital expenditure limitation, from $10 to $20 million, is having a major impact nationally on IDB issuances. While the change did not take effect until December 31st, many issuers were able to initiate projects and deals prior to the change while waiting to actually issue bonds until after the effective date. In fact, 53% of the issuers responding to the survey indicated that the capital expenditure limitation increase passed by CDFA has impacted their IDB program. Accordingly, the changes in the capital expenditure limitation resulted in more interest in IDBs for the majority (68%) of issuers. Almost half of the agencies represented in the survey have increased the number of IDBs issued as a result of the changes. Many issuers indicated that a significant number of projects that they are currently assisting with IDBs would not have been financed without the capital expenditure limitation increase.
“The increase in the capital expenditure limitation has achieved exactly what we expected, an increase in interest in the IDB program and an increase in IDB issuances throughout the country. IDBs continue to prove themselves time and time again as the most reliable and significant financing tool for small to medium sized manufacturers. IDBs have created and retained thousands of jobs this past year and CDFA fully expects this to continue in the New Year,“ said Toby Rittner, CDFA’s Executive Director.
State Issuers Remain Active
State issuers were also busy in 2006 issuing IDBs. One state agency, located on the east coast, issued 39 IDBs with an average individual project issuance of $5-7 million. The agency issued $250 million in IDBs alone and helped to create 581 new jobs while retaining 47 existing jobs. This same state agency indicated that interest and deal flow for IDBs has increased due to the capital expenditure limitation increase and that 10 of the projects financed through IDBs would not have been completed without this important change.
Volume Cap Allocation Mixed
Volume cap allocation continues to be a mystery throughout the country with states using a variety of methods for issuing cap. CDFA asked survey respondents to indicate the method used in their state for allocating cap and received a wide variety of results with a quarter indicating that they allocate through state statue or through a first come, first serve basis. Many states use a committee of state leaders/legislators to determine allocation while others rely on the governor’s discretion to allocate cap.
Legislative Agenda on Target
On the legislative front, CDFA’s legislative agenda continues to be on target for 2007. The majority of respondents (60%) selected “updating the definition of manufacturing as it relates to IDBs to include new economy industries” as the most important issue impacting IDBs. This issue was followed closely by increasing the maximum IDB bond size limitation from $10 million to $20 million and amending limitations on bank-qualified bonds. These three legislative challenges remain CDFA’s top priorities for the new Congress. CDFA’s legislative committee will begin in the New Year to cultivate relationships and partnerships with Congress and the IRS to address many of these issues. Currently, CDFA is circulating a strategy for updating the definition of manufacturing as it relates to IDBs through several partner organizations to gauge the potential for a regulatory ruling at the IRS supporting this modification. CDFA expects to approach the IRS in early 2007 to present this proposal. In addition to addressing these issues, CDFA will also be submitting comments in January addressing the proposed IRS regulations that will narrow the use of PILOTs for tax-exempt bond transactions. CDFA is gathering case studies and examples of the positive use of this tool for cultivating economic development, spurring investment and creating jobs. CDFA’s comments will be submitted in mid-January to the IRS.
“CDFA’s legislative affairs efforts remain on target as this survey indicates. Our very active Legislative Committee is working every day to cultivate new relationships with the incoming Congress and we expect great support for our improvements to IDBs next year. We look forward to working with Congress to enact these improvements and providing economic developers with added resources for financing manufactures, creating jobs and spurring local investment,” said Toby Rittner.