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Recovery Zone Bonds under the ARRA refers to two new types of tax-preferred bonds that can be issued by state and local governments for areas designated as Recovery Zones. It also explains the action taken that was necessary in the form of a Governor’s Executive Order in order to enable the state and its local governments to take advantage of this benefit from the ARRA. Recovery Zone Bonds, as referenced in the ARRA , authorize the issuance of two new types of tax-preferred bonds that can be issued by state and local governments for areas designated as Recovery Zones:
Generally, Recovery Zones are areas designated by state and local issuers as having significant poverty, unemployment, rate of home foreclosures, or general distress. Areas currently designated as enterprise or renewal community areas, or areas experiencing economic distress by reason of military base closure pursuant to the Defense Base Closure and Realignment ARRA of 1990, also may be designated as Recovery Zones. RZ Economic Development Bonds are taxable bonds that provide state and local government issuers with a direct federal subsidy payment equal to 45 percent of the interest payable on the bonds. These bonds can be used to finance capital and working capital expenditures that promote development in a Recovery Zone including (1) capital expenditures, (2) expenditures for public infrastructure or public facilities, and (3) expenditures for job training and educational programs. These bonds must meet all of the requirements for governmental tax exempt bonds and cannot be private activity bonds. RZ Facility Bonds are a new category of private activity bonds. Property eligible for depreciation that is actively used in a business in a Recovery Zone may be financed with the proceeds of these bonds. The property must be acquired after the date on which a Recovery Zone designation took effect. Allocation of volume cap for each of these issues: The ARRA provides for a $10 billion dollar limit on volume cap for RZ Economic Development Bonds and a $15 billion cap on the RZ Facility Bonds. The Treasury Department has allocated the volume cap to the states in proportion to their respective 2008 job losses but with each state receiving at least $90 million for RZ Economic Development Bonds and $135 million for RZ Facility Bonds, respectively. Arkansas received the minimum allocation. In Notice 2009-50, the IRS further allocated the volume cap to cities (over 100,000 residents) and counties in the state, again based upon job losses. This meant that some counties such as Craighead, Greene and Poinsett, received zero allocation. Many of the county allocations are very small amounts that do not justify the effort and cost associated with issuing bonds. Much of the Arkansas volume cap will therefore, go unused if it is not reallocated. The cities and counties receiving volume cap are authorized to suballocate the cap to other potential issuers within their geographic jurisdiction that qualify as an issuer of bonds for purposes of the Internal Revenue Code and to allocate volume cap for the benefit of specific ultimate beneficiaries such as a developer of a qualifying RZ Facility Bond project. There is no authority for cities and counties to "give" any of their volume cap to another city or county. You will need the
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Reallocation of Volume Cap , as referenced in Section 1400U-1(a)(3)(A), provides that a county or large municipality may waive any portion of a volume cap allocation received for Recovery Zone Bonds. Notice 2009-50 provides that upon such waiver, the state is authorized to reallocate the waived volume cap "in any reasonable manner as it shall determine in good faith in its discretion." Absent state legislation, on October 13, 2009, Governor Mike Beebe signed Executive Order EO 09-13 that authorized the establishment of procedures for implementing the reallocation of Recovery Zone bond authority under the American Recovery and Reinvestment ARRA of 2009. The Arkansas Development Finance Authority and the Arkansas Economic Development Commission have submitted a plan to implement this process. Failure to provide a formal mechanism for the reallocation of this bonding authority may result in an underutilization of the Recovery Zone Bond Program in Arkansas.Tax-exempt interest on specified private activity bonds issued in 2009 or 2010 exempt from Alternative Minimum Tax (AMT). Tax-exempt interest on specified private activity bonds issued in 2009 or 2010 is not an item of tax preference and therefore is not subject to the AMT.Note that the ARRA will "sunset" on December 31, 2010, meaning tax-exempt bonds for the projects addressed in the preceding paragraphs must be issued by that date, unless extended by new legislation. Taxable EDBs If the borrower does not meet the above qualifications for a tax-exempt issue, taxable EDBs may be issued. Taxable EDBs are similar to tax-exempt EDB’s however the interest income is taxable to the investor at the federal level. The income is also taxable to the investor at the state level unless the investor is an Arkansas resident, then the interest income is exempt from taxes. Taxable issues are typically placed with institutional investors. These issues can feature higher up-front cost.
Other Related Documents regarding the Recovery Zone Volume Cap
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