Oregon Client Alert: Urgent – Action Needed to Preserve Private Activity Bonds

Public Finance Alert | December.05.2017

Maintaining the existing authority under the Code for private activity bonds (PABs) is vital to continuing public and private investments in infrastructure that support the economy and essential public services. Such investments are financed by issuers across the state, including the Oregon Facilities Authority, Oregon Housing & Community Services and local housing authorities and hospital facilities authorities, among other issuers.

Why Do PABs Exist?  PABs largely exist to enable tax-exempt financing of assets often thought of as part of the public infrastructure, but subject to private use, even if the “private user” is merely a qualified 501(c)(3) organization. For example:

  • Airport Financings. Most financings for airports across the country are PABs because of lease or use agreements with airlines, yet most people would consider an airport a vital part of public infrastructure.
  • Hospitals and Senior Living Facilities. Most financings for non-profit hospitals and senior living facilities across the country are PABs due to ownership and/or operation of the hospital by a non-profit organization.
  • Housing. PABs and the related low-income housing tax credit (LIHTC) are crucial in financing affordable housing projects, including housing for military veterans, with projects often developed and operated by non-profit organizations or local public housing agencies.

What Regulations Govern PABs?  The Code and regulations are strict in defining what constitutes a “private activity bond” and include many public projects where paid private use, including use by non-profit organizations, may be sufficient to categorize these projects as private use.  Current federal income tax laws and regulations include extensive restrictions on the use of tax-exempt bonds for private business concerns, including a cap on the amount of bonds that may be issued in a single calendar year. 

Who Benefits?  PABs are an essential public/private partnership, providing a critical financing tool to support capital investment in infrastructure for qualified 501(c)(3) bonds for non-profit hospitals, universities and charter schools, senior living/continuing care retirement facilities, single-family first time homebuyer mortgage bonds, low-income multifamily housing bonds, bonds for exempt facilities such as airports, seaports and solid waste infrastructure projects, bonds for state-run student loan programs, bonds used in public-private partnerships to finance infrastructure including roads and water and sewer facilities, and more.

What Types of Projects?  Key infrastructure and public services would be undermined by eliminating or further limiting PAB authority.  Both large and small institutions would be affected including, small, non-profit borrowers that have been able to finance essential capital projects because of the ability to access favorable financing by using PABs.  Examples in Oregon include:

  • Healthcare. Cascade Health Solutions, a non-profit healthcare organization, financing a 14-bed inpatient hospice care facility in Lane County, Oregon
  • Schools. Redmond Proficiency Academy, a non-profit charter school, financing new charter school facilities for the expansion of its middle school and high school programs, in Redmond, Oregon
  • Affordable Housing. Innovative Housing, Inc., a non-profit providing high-quality affordable housing to individuals and families, financing housing communities to provide safe housing and access to economic opportunities to break the cycle of poverty
  • Senior Living Communities. Cascade Manor, the only accredited continuing care retirement community in the City of Eugene, provides independent living apartments, assisted living apartments, and nursing beds for seniors

Compounding the Affordable Housing Crisis. If the provisions of H.R. 1 (the “House Bill”) are enacted, dozens of affordable housing projects (both under construction and in development) throughout the State of Oregon will fail, compounding the statewide housing crisis and reversing the collaborative work of the public and private sectors to accelerate the production of crucial housing units. 

The provisions of the House Bill that eliminate PABs will prevent the financing of most low-income, affordable housing projects.  While the House Bill purports to preserve the LIHTC, it keeps in place only the 9% LIHTC program and eliminates the 4% LIHTC program which operates in conjunction with PABs to provide essential tools for private investment in affordable housing.  The LIHTC and private activity bond programs are long-established and proven financing tools that are now more essential than ever to address the affordable housing crisis in Oregon and many other states across the country.

In summary, a loss of the tax exemption on important categories of municipal bonds would increase borrowing costs and result in an increase in local taxes, fees, low-income housing rents and the cost of healthcare and housing for seniors, among other costs, to cover the increased cost of capital.  These higher costs will also result in a reduction in the amount of investment in infrastructure and other critical capital projects that would be undertaken by state and local governments and will preclude many capital projects from being undertaken at all. 

Please call and email Representative Walden, Senator Wyden and all other members of the Oregon Congressional Delegation today to urge them to maintain Private Activity Bonds as currently authorized.