Public Finance 101

Presented December 1, 2011

Nexsen Pruet, LLC Economic Development Seminar

ByApril C. Lucas, Esquire

Inventory of Principal EconomicDevelopment Finance Tools

Local Level-SC CodeInfrastructure Financing: Special Source Revenue Bonds - e.g. § §4-1-175 and 4-29-68 Special Source Credits - e.g. § §4-1-175 and 4-29-68 Tax Increment Financing - e.g. Title 31, Chapters 6 and 12 Assessment Bonds - Title 5, Chapter 37Revenue Bonds , such as water & sewer & parking facilities - e.g.

Title 6, Chapter 21General Obligation Bonds- e.g. Title 11, Chapters 15, 27 and 41Utility tax credit grants- §12-20-105 and other grants

Inventory of Principal EconomicDevelopment Tools

State Level-SC CodeIndustrial Development Bonds-below market financing for project costs - e.g.

Title 41, Chapter 43Grant Programs:

State Rural Infrastructure FundDOC Closing FundCommunity Development Block Grant Program (non-entitlement areas only)

State Infrastructure Bank - e.g. roads, rail, highway interchanges

Inventory of Principal EconomicDevelopment Tools

State Level-SC Code

Section 108 Program (non-entitlement areas only)Highway Set-Aside Program for Economic DevelopmentreadySC and Workforce Investment Act for Job TrainingSouth Carolina Research AuthorityVenture Capital Programs (Palmetto Seed Capital, InvestSC, SC

Launch)Other sources for particular projects

Inventory of Principal EconomicDevelopment Tools

Other

New Market Tax Credit financing for projects in poverty strickenareas

Rural America Bonds for businesses in rural areasVarious federal grant and loan programs; e.g. Empowerment Zones,

B&I, SBA, etc.University programs

Public Finance Considerations

S C Constitution, Article X, Sections 13 and 14The State and its political subdivisions may incur debt in thefollowing ways and no other ;(a) general obligation debt, which must be incurred for a publicpurpose; and(b) indebtedness payable from a revenue-producing project orspecial source, which source does not include any tax or, in thecase of political subdivisions, any license

Public Finance Considerations

S C Constitution, Article X, Sections 11The credit of neither the State nor any of its political subdivisionsshall be pledged or loaned for the benefit of any individual,company, association, corporation, or any religious or otherprivate education institution….

Public Finance Considerations

General Obligation Bonds may be used to finance publicly owned infrastructurenecessary to recruit industry

Taxes/full faith & credit pledged to repay debt Local Government General Obligation Bonds limited to 8% of assessed

value of property within jurisdiction; State limited to percentage of generalrevenue

Usually reserved for pure government projects which do not generaterevenues, e.g. county courthouse, jails etc.

Revenue Bonds typically used for infrastructure such as water and sewer linesand other revenue generating activities

Public Finance Considerations

Revenue Bonds also used to provide below market financing formanufacturers and other businessesConduit bond structure commonly usedGovernmental entity issues bonds and loans the proceeds to

private borrower Private borrower agrees to repay the governmental issuer

amounts sufficient to pay principal and interest on bonds Liability of governmental issuer limited to revenues under loan

agreement with private user

Public Finance Considerations

Most transactions driven by federal “tax exemption” Section 103 of the Internal Revenue Code of 1986, as amended, (the

“IRC”) excludes from gross income interest payable on bonds issuedby States and political subdivisions

Bondholder willing to accept lower interest rate since it doesn’t pay federaltaxes

Governmental entity passes through lower interest rate and liability inconduit bond transaction

Sections 103 and 141-150 of IRC specify the circumstances under which thefederal government will recognize tax exemption

Private activity bonds subject to heavy restrictions. See IRC Section 141

Public Finance Considerations

IRC Sections 142 and 144(a)--Industrial DevelopmentBonds

Conduit financing used for manufacturing and certain exemptfacilities such as solid waste disposal

See Code of Laws of South Carolina, 1976, as amended, (“S.C.Code”), §4-29-10 et seq. and §41-43-10 et seq.

Commonly Used Programs

Special Source Revenue Bonds (“SSRB’s”)-SC

Counties are authorized under §4-1-175 and §4-129-68 of the S.C. Code (andunder certain other statutes) to issue bonds payable solely from fee in lieu oftax revenues collected under negotiated fee in lieu of tax arrangements orunder Multi-County Park arrangements

Bond proceeds may be used to finance land and qualified improvements, i.e.,infrastructure and improved and unimproved real estate used in the operationof manufacturing and commercial enterprises, personal property and aircraft

Commonly Used Programs

SSRB’s-SC

May be used for single project or for group of projectsFor single projects, the primary benefit to the company is the

reduction of up-front costs associated with the projectFor a group of projects, county can obtain financing or build funds

to provide needed infrastructure, spec buildings or land for a newindustrial park

Commonly Used Programs

SSRB’s-SC

Bonds may be put out for bid or sold to company If put out to bid, county and company must assure bond purchaser

that FILOT revenues will be sufficient to pay debt service on bondsUnrelated bond purchaser may insist on mortgage or company

guarantee, thereby raising credit concerns with the company andits lenderCompany may want debt off its balance sheet

Commonly Used Programs

SC SSRB’s: Credit Issues

If company purchases bond, can negotiate forgiveness ofany debt service not timely made or cut off interest onspecified date

If company buys the bond, it claims a credit against itsFILOT payment equal to the debt service on the bondswith the net result of reducing the company’s tax burden

Commonly Used Programs

SC SSRB’s: Credit Issues

Incentive Agreement must clearly state whether all or aportion of FILOT revenues pledged to secure SSRB’s

Amortization schedule can be structured with fixed paymentterms similar to commercial loan or by applying specifiedpercentage of FILOT revenues to debt service

Must allocate principal to qualified costs

Commonly Used Programs

Special Source Credits (“SSRC’s”)-SC

In lieu of issuing SSRB’s, a county may use a portion of its FILOTrevenues for the same purposes for which the proceeds of SSRB’scould be used without having to issue the bonds. See §4-12-30(K)(3),§4-29-67(K)(3) and §12-44-70 of the S.C. Code

Company claims the credit against its FILOT payments

Credits much simpler to administer

Constitutional Constraints

Elliot v. McNair, 250 SC 75, 156 SE2d 42 (1967).Economic Development is a valid public purpose.

Byrd v. County of Florence, 281 S.C. 402, 315 S.E.2d 804 (1984).South Carolina Supreme Court held that ordinance authorizing general

obligation bonds for acquisition and development of an industrial park wasunconstitutional

General obligation debt may be incurred only for valid public and corporatepurpose

Constitutional Constraints: Byrd

Court set forth a four part test:

1) Court should determine ultimate goal or benefit to the publicintended by the project

2) Court should determine whether public or private parties will beprimary beneficiaries

3) Court should consider speculative nature of project4) Court should evaluate the probability that the public interest will

ultimately be served and to what degree

Constitutional Constraints: Nichols

Nichols v. South Carolina Research Authority, 290 S.C. 415, 351S.E.2d 155 (1986)

Supreme Court upheld the statute creating the South Carolina ResearchAuthority

Court overruled Byrd to the extent that it held that industrial development is not apublic purpose for which public revenues may be appropriated or extended

Retained four-part test from Byrd and posited the concept that public purpose isfluid and will change over time with the changing needs of society

Constitutional Constraints

See also:

Hucks v. Riley, 292 S.C. 492, 357 S.E.2d 458 (1987), upholding the constitutionality of industrial revenuebonds issued to finance the acquisition of public lodging and restaurant facilities providing service inconnection with tourism, sports and recreational facilities.

Quirk v. Campbell, 302 S.C. 148, 394 S.E.2d 320 (1990), upholding the constitutionality of negotiatedfee in lieu of tax program for property leased by counties to businesses based upon exemption forpublicly owned property despite fact that property not used exclusively for public purposes.

Horry County School District v. Horry County and the City of Myrtle Beach, 346 S.C. 621, 552S.E.2d 737 (2001), upholding the constitutionality of multi-county park/special source revenue bondlegislation.