September 24, 2009
RE: Federal Recovery Zone Bonds Guidance
As you may know, the United States Treasury Department released a list of allocations to New Jersey counties and municipalities from the $25 billion in Recovery Zone Bonds. These bonds are two new types of debt created by the American Recovery and Reinvestment Tax Act of 2009 (“ARRA”), a federal stimulus program designed to foster economic recovery in distressed areas, create jobs and grow the economy. Further, Recovery Zone Facility Bonds provide attractive financing opportunities for for-profit companies, which typically cannot enjoy the low rates offered through the issuance of tax exempt bonds.
The first type of bond, Recovery Zone Economic Development Bonds (RZEDBs), is a special class of “direct payment Build America Bonds” (direct pay BABs). Like regular direct pay BABs, RZEDBs are a taxable governmental bond with a Federal subsidy to offset a portion of the government unit’s borrowing costs. They key feature of RZEDBs is a direct payment cash subsidy provided to the issuer by the federal government, equal to 45% of the total interest expense payable to bondholders. The RZEDBs may be used to finance certain qualified economic development projects.
The second type of bond in this program is known as Recovery Zone Facility Bonds (RZFBs). RZFBs are a tax-exempt private activity bond with no “direct payment” subsidy payments and are not subject to the Alternative Minimum Tax (AMT). The RZFBs may be used to finance certain recovery zone properties including retail, commercial, office, manufacturing, entertainment, and warehouse facilities.
In both cases, the bonds must be issued before January 1, 2011 and must be used for economic development within a “Recovery Zone”, pursuant to ARRA. In order to access Recovery Zone Bond and Recovery Zone Facility Bond allocations, the municipality or county must first designate which areas in their jurisdiction will be considered Recovery Zones. A Recovery Zone is defined as: (i) an area designated by the issuer as having significant poverty, unemployment, rate of home foreclosures or general distress; (ii) an area designated by the issuer as economically distressed by reason of the closure or realignment or a military installation pursuant to the Defense Base Closure and Realignment Act of 1990; or (iii) any area for which a designation as an empowerment zone or renewal community has been previously been granted and is in effect. A sample resolution is available on the League’s website at http://www.njslom.com/Recovery-Zone-Resolution.pdf (PDF) and
If you choose to use this resolution form, we strongly suggest you have it reviewed by legal counsel before adopting the resolution.
Very truly yours,
William G. Dressel, Jr.