WASHINGTON - A wide-ranging bill to ease tax-exempt bond curbs introduced this week by Rep. William J. Coyne would create a new type of bond that could aid distressed communities and provide a new way for issuers to avoid the arbitrage rebate requirement.
Among other major provisions, the Pennsylvania Democrat's bill would index the private-activity volume cap for inflation and ease limits on bank deductibility.
Municipal bond proponents said they were impressed by the broad scope of Coyne's bill and by the level of support thrown behind the measure by Coyne's colleagues on the House Ways and Means Committee. Nine panel members have signed on in support of the measure, including Rep. Benjamin L. Cardin, D-Md., who has been a strong advocate of municipal finance.
"This is a comprehensive bill, focusing not only on that which has been proven legislatively, but also trying out some new ideas, recognizing that the needs of states and localities warrant some creative thinking on the part of policy makers," said Micah S. Green, the executive vice president of the Public Securities Association.
Bond proponents said the legislation, introduced on the last day of this year's congressional session. should form a rallying point next year for supporters of bond initiatives on the committee.
Coyne said in a statement that his bill was necessary "because the tax-exempt bond provisions in the tax code have been developed in a haphazard fashion over the last 25 years." As a result of piecemeal changes, "many of the provisions that affect tax-exempt bonds are confusing and needlessly complex," he said.
Coyne's bill would create a new type of exempt facility bond, the "distressed community economic development bond."
Proceeds from such bonds could be used to finance economic development projects in areas that qualify as distressed communities. The bonds "would be targeted at communities that have been hard hit by population loss, job loss, slow growth, or military base closings," Coyne said.
To be designated as a distressed community, a locality would have to meet one of four criteria: population loss equal to or greater than 5%; an average five-year unemployment rate of not less than 8%; slow job growth; or a military base closing resulting in the loss of not less than 500 jobs.
Fifty percent of each issue would be exempt from the private-activity volume cap. In addition, the bonds would be bank eligible as long as the issue was sold by an issuer that expects to sell no more than $10 million of governmental bonds each year.
On the arbitrage rebate requirement, Coyne is proposing to permit issuers, in certain cases, to avoid rebate if they spend their proceeds according to a three-year schedule. The proposal would apply to governmental bonds and 501(c)(3) bonds, and would also apply to private-activity bonds if they are issued to finance a governmentally owned facility.
The proposal would apply to bonds issued for construction or rehabilitation, as well as to acquisition of land, equipment, or furnishings. Issuers would be exempt from the requirement if they spent 33.3% of proceeds in the first year after issuance, 75% in the second year, and 100% by the end of the third year.
The proposal is designed to replace the current safe-harbor spending provision enacted in 1989. The provision permits issuers of governmental and 501 (c)(3) bonds to avoid rebate if they spend 10% of proceeds in the first six months after issuance, 45% after one year, 75% within 18 months, and 100% by the end of the second year. Issuers have complained that the 1989 law, though well intentioned, is complex and unworkable.
Coyne's provision would be effective for bonds issued after the date of enactment.
Another item in Coyne's bill would index the private-activity volume cap for inflation. Since 1988, states have been permitted to allocate the greater of $50 per capita or $150 million each year for private-activity bond issues.
But issuers complain that inflation has eroded the amount. Coyne's bill would allow the cap to rise each year by an amount tied to the consumer price index, a widely used measure,of inflation.
Although the bill says the provision would be effective in 1993, an aide to Coyne said the congressman intended that it be effective in the first full calendar year after enactment.
Coyne's bill also contains several provisions that were passed by Congress last year but vetoed by former President Bush. One would increase the small-issuer exemption from the arbitrage rebate requirement to $10 million from $5 million. Another would repeal the requirement that no more than 5% of the proceeds of an issue go toward purposes "disproportionate and unrelated" to the purpose of the issue. Both provisions would be effective for bonds issued after the date of enactment.
Another provision in Coyne's bill that was passed last year but vetoed would increase the supply of bank-qualified bonds. Under current law, issuers are permitted to deduct 80% of the cost of purchasing and carrying tax-exempt bonds if they are purchased from a governmental issuer who expects to sell no more than $10 million annually. Coyne's bill would increase that limit to $25 million. The provision would be effective for bonds issued after the date of enactment.
Passed last year but missing from Coyne's bill is a proposal that would eliminate the $150 million limit on the amount of bonds that a nonhospital 501(c)(3) organization may have outstanding at one time. The proposal has been introduced as a separate piece of legislation by another Ways and Means member, Rep. Robert Matsui, D-Calif.
Among other provisions, Coyne's bill would:
* Eliminate a yield-restriction rule on reasonably required reserve or replacement funds. Under that rule, an issuer is not permitted to have more than 150% of the amount used to pay one year's worth of debt service invested in securities that pay a yield higher than that of the bond issue.
* Increase the limit on the amount of proceeds from a public-purpose bond issue that may be used to finance loans to private businesses. Under current law, that limit is the lesser of 5% or $5 million. Coyne's bill would change that to the lesser of 5% or $15 million.
* Expand the six-month exception from the arbitrage rebate requirement to an issuer that spends 95% of proceeds within that period and spends the other 5% in the following six months.
* Clarify that transactions in which state or local governments prepay equipment purchases are eligible for tax-exempt financing if certain conditions are met.
* Repeal a requirement that effectively limits the private-use portion of most public power bonds to $15 million, which is stricter than the 10% limit that applies to all other types of public-purpose bonds.
