End municipal tax exemptions for private projects

February 29, 2012

There is a very blurry line in muniland between truly public activities and private activities that allegedly have some public good, and into this ill-defined space, for-profit and non-profit organizations have found ways to issue tax-exempt municipal bonds. This gray area should be a prime target for Congress to examine when it goes looking for ways to raise more tax revenue from muniland.

It’s easy to find these quasi-public projects. A quick look at the listing of today’s new bond offerings on EMMA immediately produces this $29 million bond offering at the private Rollins College in Florida to fund the renovation of its science center, campus center and one of its residence halls. There is an additional $15 million bond offering at the college to refund bonds previously issued at a higher interest rate. These bonds are being issued through Florida’s Higher Education Facilities Financing Authority, which is acting as public conduit for the private school. Rollins, an exclusive southern college, charges $50,400 per year for tuition, room and board. At these tuition levels it’s hard to see how much good the general population receives.

A more egregious example in today’s muniland bond offerings is the remarketing agreement for $14 million in bonds issued for Koch Industries subsidiary Georgia-Pacific to acquire and construct solid waste disposal facilities in the Parish of East Baton Rouge, Louisiana. In the case of the Koch bonds, the conduit authority is the Industrial Development Board of the parish. Koch Industries is not some small fish — just last year Forbes listed it as the second-largest privately held company in the country with estimated annual revenues of $100 billion.

Revenue bonds are generally not the obligations of governmental agencies. They are a species apart, even getting different treatment in bankruptcy courts:

Revenue bonds are considered riskier than general obligation bonds because repayment is dependent on specific revenue streams, such as user fees or lease payments. Revenue bonds issued for private institutions such as hospitals are even more risky. If the institution goes bankrupt and is unable to meet its debt obligations, the government or agency issuing the bonds for the companies is not under any legal obligation to repay the debt.

A sewer plant that’s built by a local community to service its needs creates tremendous public good by allowing citizens to upgrade from septic systems. It’s easy to see the public good in the activity, and the ownership of the sewer facility is public, too. But a waste treatment facility owned by one of the richest private companies doesn’t fit the “public good” formula. The savings from the municipal tax exemption flow to Koch Industries’ bottom line and enrich private citizens.

Calling Congress: Is it really necessary to give these projects a tax exemption?

No comments so far

We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/