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Private Activity Bond Program
The Private Activity Bond (PAB) Program is Utah’s tax-exempt bonding authority creating a lower cost, long-term source of capital under the Federal Tax Act of 1986. The Federal Government allocates over $37 billion per year to states on a per capita basis, with Utah receiving $325,692,465 for 2018. Each state establishes its usage priorities by statute. The Utah State Legislature has distributed our volume cap into the various allotment accounts listed below:
The Private Activity Bond Authority Board Meetings are held five times during the year, generally on the second Wednesday of the scheduled month and begin at 9 a.m.
- John T. Crandall, Chairman
- Ginger Chinn, Managing Director, Governor’s Office of Economic Development
- David Damschen, State Treasurer
- Grant S. Whitaker, President & CEO, Utah Housing Corporation
- David A. Feitz, Executive Director, Utah Higher Education Assistance Authority
- Bryan E. Thompson, County Clerk/Auditor, Utah County
- Wayne C. Parker, Chief Administrative Officer,City of Provo
- Wayne Cushing, County Treasurer, Salt Lake County
- James P. Davidson, City Manager, City of Orem
- Ricky D. Hatch, County Clerk/Auditor, Weber County
1385 South State Street - Suite 400
Salt Lake City, UT 84115
About Tax Exempt Bonds
What are Tax-Exempt Bonds?
A bond is a certificate representing a promise to pay a specified sum of money (face value or principal amount) at a specified date in the future (maturity dates), together with periodic interest at a specified rate.
The Tax Reform Act of 1986 distinguishes between two types of municipal bonds; Governmental Bonds and Private Activity Bonds (PABs).
Governmental Bonds are used for public purposes (e.g., highways, schools, sewers, government equipment and buildings, jails, parks, bridges, etc.) and benefit the general public. The interest on Governmental or Municipal Bonds is exempt from federal income taxes and in many cases, state and possibly local income taxation if the bonds are issued by the State, its Agencies and/or Political Subdivisions. Because of this feature, the interest rates on municipal bonds are lower than interest rates on other types of bonds. Municipal bonds are backed by the full faith and credit (taxing and borrowing power) of the municipality issuing the bonds.
Private Activity Bonds are issued for the benefit of private individuals or entities and are issued on a tax-exempt basis if they are “qualified,” meaning they fit under any of the seven categories outlined by the Internal Revenue Code. (Utah uses four of the categories.) The owner (buyer) of a tax-exempt bond does not pay federal income tax on the interest received on such bonds; consequently, tax-exempt bonds bear lower interest rates than bank loans or taxable bonds. This lower borrowing cost is passed on directly to the borrowing entity.
Why Should Manufacturers Use Tax-Exempt Bonds?
- State and Federal laws allow manufacturing companies to use a city or county’s name and tax-exempt financing status to issue tax-exempt bonds.
- If all tax requirements are met, bond issues are exempt from federal income taxes and possibly state and local taxes.
- Interest rates of tax-exempt bonds are usually lower than taxable bonds.
- There is no guarantee, debt, liability, obligation or pledge of faith by the city or county issuing the bonds.
- Governmental entities are willing to do this because PABs meet a public purpose or create a public benefit, i.e. creation of jobs from a new manufacturing facility.
- Tax-exempt bonds provide an alternative, low-cost, source of funds to finance capital expenditures.
Why Should Developers Use Tax-Exempt Bonds?
- Lower interest rates than conventional loans of comparable maturity.
- Higher loan amounts (greater leverage) due to lower interest rates.
- Access to greater variety of financing tools.
– Variable rate demand bonds to provide greater cash flow.
– Derivative products to customize financing to desired risk tolerance.
- – Provides 25 percent to 30 percent more capital as a source of funds.
- Access to equity from 4 percent Low-Income Housing Tax Credits (“LIHTCs”).
– Provides 25 percent to 30 percent more capital as a source of funds
- Easier and quicker path to obtain necessary authorization to proceed.
Volume cap is allocated by the Private Activity Bond Review Board in 90-day certificates at the regularly scheduled meetings. Applications are submitted at least five weeks prior to the Board Meetings. For a copy of the current Board Meeting Agenda, click on the link at the top of this page.
Volume cap allocations require qualified bond counsel to complete the issuance transaction.