Bob Culver Testifies
May 21, 2009
Statement of Robert Culver
MassDevelopment President/CEO Bob Culver Testifies Before the Subcommittee on Select Revenue Measures of the House Committee on Ways and Means
Adam Bickelman, MassDevelopment, 617-330-2086
Chairman Neal, Ranking Member Tiberi, Members of the Committee: thank you for inviting me to testify before you this morning and for holding this hearing. One cannot overstate the importance of the American Recovery and Reinvestment Act of 2009, but more can be done to maximize the impact of ARRA.
I am President and CEO of the Massachusetts Development Finance Agency (MassDevelopment), a quasi-public finance and development entity established by the Legislature in the Commonwealth of Massachusetts. Having issued private-activity bonds that generated more than $2 billion in investment in Massachusetts in fiscal year 2008, MassDevelopment knows this market, which aids affordable housing, higher education, manufacturing, and waste recovery.
I speak this morning as a representative of my agency only.
In particular, I call your attention to two general themes that run through my testimony:
- First, standardize allocation processes using the already well-vetted and well-understood volume cap method as a model, and
- Second, extend allocations of special issuance capacity and make permanent certain enhancements to eligibility to allow more borrowers to take advantage of these programs.
Expanded Definition of Manufacturing Facility
These enhancements are important to supporting modern manufacturing and production facilities, and expanding the economy. Crucially, these bonds are subject to states’ annual allocations of volume cap, which was not expanded. For that reason, the expansions of the applications should not be seen as an additional cost to the government. Notably, many manufacturing companies will not take advantage of these provisions in the current economic climate but will need them for expansions as the economy rebounds. MassDevelopment strongly supports making these enhancements permanent to bring manufacturing bonds into the 21st century.
Recovery Zone Facility Bonds
As of the writing of this testimony, guidance from the U.S. Department of the Treasury has not yet been released on how the cap would be allocated among the states. After guidance is issued, further work must be done in each state to implement the allocation process and identify projects. While the interest rate savings on a tax-exempt bond is not enough of a subsidy to make or break large-scale projects, the savings can still be useful in steering development to underserved areas. These types of projects may take more than a year to be ready for permanent financing, which means that the December 31, 2010 expiration date may prove problematic.
To maximize the potential of this new bond program, MassDevelopment urges Treasury to give state governments control of allocating issuance capacity among eligible projects and asks Congress to provide for the carrying forward of unexpended issuance capacity for five years beyond December 31, 2010.
Clean Renewable Energy Bonds
These bonds are dependant on a vibrant tax credit market that does not exist at this time. This concern is exacerbated because the expanded program is limited to 70% of the tax credit allowed by the original program. The issuance capacity is awarded to governmental borrowers by the Internal Revenue Service by ranking applications from smallest to largest. This approach favors small issues that tend to be less efficient than larger ones because of the proportionately larger cost of issuance.
MassDevelopment used its entire allocation in 2006 to support 12 solar projects at state facilities. We are concerned, however, that we may not be able to use the program as successfully again because of the constrained tax-credit market and the reduced tax credit. The potential of the program would be greatly enhanced by giving states a pro-rata share of the overall issuance capacity along with the ability to select projects, rather than leaving the application process with the IRS, which takes more time and favors less efficient projects.
We would also favor giving the program a “direct pay” option from the federal government (as with Build America Bonds) instead of tax credits. Doing so would speed the use of the program and possibly deliver more benefits to the projects by eliminating some of the structuring costs and investor yield requirements.
Qualified Energy Conservation Bonds
MassDevelopment fully supports the objectives of this program. Like the Clean Renewable Energy Bonds, however, the energy conservation bonds are dependant on a vibrant tax credit market. In line with our prior recommendation for the Recovery Zone Facility Bond program, to enhance the program’s health states should have control over where to allocate issuance capacity. And unused issuance capacity should be able to be carried forward to 2015.
While MassDevelopment applauds the Congress for making tax-advantaged financing available for renewable energy projects, an efficient way to support this sector would be to create a new category of private-activity, tax-exempt facility bonds. Doing so would allow the sector to benefit from the same tax-exempt bonding programs currently available to waste recovery projects. This new category would also give renewable energy developers the certainty of a permanent provision of the tax code. These projects — which involve financing, permitting, and site-control issues — take years to advance, a process that could be short-circuited if the necessary incentives expire in the short term without certainty of renewal.
Bank Deductibility of Interest Expense
This provision will increase the market for tax-exempt bonds by enlisting more banks as potential purchasers while allowing them to pass through lower interest rates. MassDevelopment places many of its smaller issues directly with banks, which handle the transactions much like commercial loans. These borrowings benefit from the discipline of having a bank lender instead of the capital markets and also from having smaller costs of issuance.
MassDevelopment supports the increased bank qualified provisions, but recommends that they be extended to other types of private activity bonds other than 501(c)3 borrowings, in particular manufacturing. The Agency also recommends eliminating the expiration date of 2011.
Federal Home Loan Bank Confirming Letters of Credit
We fully support this program and recommend that it be made permanent beyond 2010 so that a market can develop. MassDevelopment believes this program comes with no significant cost to the federal government: the program does not increase the eligible uses of tax exempt bonds, but simply makes the market more efficient and puts more banks to work. In fact, MassDevelopment recently held seminars across Massachusetts that banks enthusiastically attended. Our agency closed its first issue under this expanded capacity in March.
Thank you for the opportunity to submit this testimony.