Public Finance Update - February 2011

Anschutz Entertainment Group (“AEG”) recently submitted a proposal to the City of Los Angeles to construct an event center, a convention center hall, and parking facilities near the site of AEG’s planned $1 billion professional football stadium in downtown Los Angeles. City officials, including Mayor Antonio Villaraigosa, have expressed support for the football stadium and excitement at the prospect of attracting a professional football team to the City after a 16-year absence. In its proposal, AEG reiterated its commitment to construct the stadium without any public subsidy, and to finance the other facilities without burdening the City’s general fund.

The proposed financing package includes a long-term ground lease for the event center site and approximately $350 million in tax-exempt revenue bonds. Proceeds from the sale of the bonds are expected to pay for the convention center hall and parking facilities, and to refinance outstanding tax-exempt bonds that are currently secured by the event center site.

AEG’s proposal notes that the proposed new facilities are necessary to keep the Los Angeles Convention Center nationally competitive, and that a substantial number of jobs will result. AEG has proposed that, to the extent project and increased tax revenues do not support the debt service payments on the requested bonds, it will make up the shortfall under a gap funding agreement.

The company, which has a hugely successful development history in downtown L.A., having constructed the L.A. Live and Staples Center facilities, has set a target date of fall 2015 for completion of the stadium and convention facilities.

The Municipal Securities Rulemaking Board (the “MSRB”) recently issued proposed amendments to three of its rules concerning gifts and gratuities: Rule G-8, G-9, and G-20. In its current form, Rule G-20 prohibits brokers and securities dealers from giving gifts or gratuities worth more than $100 to individuals or entities that could have an influence in their hiring. The proposed amendment to G-20 would extend similar limitations to municipal advisors. Similarly, the proposed amendments to Rules G-8 and G-9, which currently impose requirements on brokers and dealers with respect to the maintenance and preservation of records, seek to extend such requirements to municipal advisors.

The MSRB has issued the proposed amendments in response to the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), which directs the MSRB to adopt rules for municipal advisors designed to prevent fraudulent and manipulative acts and practices and to promote just and equitable principles of trade. Under the Dodd-Frank Act, “municipal adviser” is defined as a person who provides advice to or on behalf of a municipal entity or other borrower with respect to municipal financial products or the issuance of municipal securities. In its notice requesting public comment on the proposed amendments, the MSRB has noted that such amendments are based on the definition of “municipal advisor” contained in the Dodd-Frank Act, rather than the definition used by the Securities and Exchange Commission (“SEC”) in its proposed permanent registration rule for municipal advisors. If the SEC adopts the registration rules in their current form, however, the MSRB has indicated that it may revise its draft amendments accordingly. See Exchange Act Release No. 34-63576 here.

Governmental assistance for infrastructure development has become a “hot potato” topic, with newly elected Republican legislators pushing to end grant and subsidy programs on both the state and federal level, while their Democratic colleagues continue to encourage increased governmental participation in the nation’s economic recovery.

Most of the economic development programs promoted by the state and federal governments target small businesses and/or economically distressed areas. Nevertheless, several programs available to larger developers are still worth considering:

Community Development Block Grants

Community Development Block Grants represent federal moneys available to local communities to finance housing rehabilitation, public facilities, and community development projects. The program is administered by U. S. Department of Housing and Urban Development (“HUD”). More information about the program can be found here.

Renewal Communities and Empowerment Zones

Developers can receive tax incentives for hiring local residents, upgrading certain equipment, and constructing or rehabilitating commercial property with respect to designated Renewal Communities or Empowerment Zones.

Available incentives include:

• Annual employment credits up to $3,000 per employee in Empowerment Zones and up to $1,500 per employee in Renewal Communities
• Commercial Revitalization Deductions (based on accelerated depreciation) for construction or renovation within Renewal Communities or Empowerment Zones

The programs are administered by the Office of Community Renewal of HUD. More information regarding the programs can be found here.

Business Energy Tax Credits

Developers can obtain tax credits for installing certain energy efficiency systems on or before December 31, 2016. Eligible systems include:

• Solar energy
• Fuel cells
• Microturbines
• Small wind-energy systems
• Geothermal heat pumps
• Combined heat and power (CHP) systems

The Business Energy Tax Credit program is administered by the Office of Energy Efficiency & Renewable Energy (“EERE”) of the U.S. Department of Energy.

Commercial Building Tax Incentives

Under this program, authorized as part of the Energy Policy Act of 2005 and extended through December 31, 2013, by the Emergency Economic Stabilization Act of 2008, commercial building owners can obtain tax deductions for expenditures related to energy efficiency. The deduction is currently limited to $1.80 per square foot, with partial deductions for certain improvements, including:

• Interior lighting
• HVAC and hot water systems
• Building envelope systems

These commercial building tax incentives are administered by EERE. Information regarding the program can be found here.

Work Opportunity Tax Credit

Pursuant to the Internal Revenue Code, businesses may be eligible for a Work Opportunity Tax Credit of up to $9,000 for each new hire who qualifies as a member of a target group. Designated target groups include:

• Qualified recipients of Temporary Assistance to Needy Families
• Qualified veterans receiving Food Stamps
• Qualified veterans with a service connected disability
• Ex-felons hired no later than one year after conviction or release from prison
• Individuals between ages 18 and 39 who reside in an Empowerment Zone, Renewal Community, or Rural Renewal County
• Vocational rehabilitation referrals
• Qualified summer youth ages 16 through 17 who reside in an Empowerment Zone, Enterprise Community, or Renewal Community
• Qualified Food Stamp recipients between ages 18 and 39
• Qualified recipients of social security income
• Long-term family assistance recipients

The Work Opportunity Tax Credit program is administered by the U. S. Department of Labor.  More information about the program can be found here.

This month, the yield gap between treasuries and municipal bonds continued to narrow, with 10-year treasury notes overtaking 10-year municipal bonds for the first time since September 2010. The unrest in the Middle East, which could prompt some investors to make safe trades, is pushing against the recent positive news about lower unemployment claims, resulting in a relatively calm bond market.

The yield on AAA-rated municipal bonds fell this month from 5.20% to 4.80% for 30-year bonds and from 3.56% to 3.36% for 10-year bonds. Yields on treasuries dropped slightly from 4.56% to 4.52% for 30-year bonds, but increased from 3.37% to 3.41% for 10-year notes.

Source: Bloomberg (www.bloomberg.com)