Federal tax overhaul plans target bonds widely used in Georgia

Congressional proposals to change the U.S. tax structure may have a major impact in the future on infrastructure projects in Georgia — from road construction to how much students pay to live in college dorms.

The tax overhaul that the U.S. House passed last week would eliminate the kind of bonds the University System of Georgia has used to build more than $3 billion worth of dorms, parking decks, dining halls and other facilities on campuses, and it would keep the state from saving tens of millions of dollars refinancing that debt.

The Georgia Department of Transportation would lose a tool to help finance major interstate projects.

Similar changes to the tax-free status of certain bonds used primarily for refinancing could make it harder for MARTA to find money for new projects as well. In addition, local officials are worried plans to eliminate the income tax deduction for state and local taxes would make it harder for cities and counties to sell new infrastructure projects locally.

All this comes at a time when President Donald Trump is continuing to call for increased spending on infrastructure — including roads and bridges — across the country by combining forms of public and private investment.

The centerpiece of the House-passed bill is a massive cut to corporate tax rates, paired with trims to individual income tax rates.

But to help pay for those cuts, the GOP authors of the legislation proposed eliminating the tax-free status of so-called private activity bonds, a move that surprised many local business interests.

The bonds are a form of debt issued by state and local governments to help lower the costs for private projects often used heavily by the public.

Many local interests, including Hartsfield-Jackson International Airport, Children’s Healthcare of Atlanta and a host of private schools, have used such bonds to help finance expansion and capital improvement projects in recent years. They have also been used to build low-income housing units.

In a recent letter to members of Georgia’s congressional delegation, Gov. Nathan Deal said the bonds have “assisted in financing our nation’s most critical and important public facilities and infrastructure.

“I understand the importance of streamlining the tax code and growing revenue; however, any tax reform legislation that eliminates private activity bonds would be devastating to economic development on our state and local levels,” Deal said. “Their elimination would undermine the purported gains of any tax reform.”

The financing helps nonprofits get more favorable borrowing rates, allowing them to save money on projects they can use for hiring and other operations down the road that proponents say help aid the local economy.

The bonds “have been around for a long time as tools for groups like ours to work with our community-based organizations to do worthwhile projects,” said Ray Gilley, the president of the Decide DeKalb Development Authority.

Dozens of local projects have taken advantage of such bonds. Children’s Healthcare of Atlanta issued $57 million this spring to finance the acquisition of about 30,000 square feet of space in Fulton County and equip it with 46 inpatient and 14 observation beds. The Robert W. Woodruff Arts Center issued more than $55 million in December 2015 to help finance the improvement of its facilities. The same went for Oglethorpe University, the Atlanta International School and the Lithonia Boys and Girls Club, according to records from DeKalb and Fulton County business groups.

Hartsfield-Jackson, meanwhile, issued upward of $770 million in such bonds in recent years for improvement work on its terminals and concourses.

But the Government Accounting Office says such bonds have also been used to finance stadiums, hotels and office buildings, which has drawn criticism. Supporters deny that.

“The Federal government should not subsidize the borrowing costs of private businesses, allowing them to pay lower interest rates while competitors with similar credit worthiness but that are unable to avail themselves of (the bonds) must pay a higher interest rate on the debt they issue,” the authors of the House tax bill wrote in a summary.

Supporters of the bonds warn that without them, they will face higher borrowing costs. As a result, projects could be canceled, delayed or scaled back, which could result in fewer local jobs and a lesser economic impact. Members of the public could also be charged more in user fees.

“There will be a market (for bonds), it just won’t be as favorable,” said Jim Pannell, a bond attorney at the firm Gray Pannell & Woodward. “They’ll be able to borrow, it’s just going to cost them more. So what does that do to the feasibility of projects if they’re paying 6 percent instead of 4 percent long-term?”

House tax-plan writers say eliminating the tax-free status of those bonds would save the federal government nearly $39 billion over 10 years. The Senate tax version, which the chamber is expected to consider next week, maintains the status quo.

Representatives for Atlanta Mayor Kasim Reed and Georgia U.S. Sens. Johnny Isakson and David Perdue declined to comment on the specific House proposal.

Meanwhile, transportation experts warn that the proposed elimination of such tax-free bonds could undermine Trump’s $1 trillion campaign pledge to upgrade the nation’s infrastructure, since that plan relied heavily on the concept of private-public partnerships to finance projects.

College dorms

Probably few if any governmental entities in Georgia have used the bonds more than the University System of Georgia.

Shelley Nickel, the executive vice chancellor for strategy and fiscal affairs, said Georgia’s colleges started using the bonds 15-20 years ago when state leaders decided to stop including certain types of projects — such as dining halls and dorms — in their annual borrowing package. So the system had to figure out a way to get things built on campuses where enrollment was exploding.

The schools themselves can’t legally sell the bonds, so campus fundraising foundations get local development authorities to do it on their behalf. The bonds are paid back through things such as dorm payments made by students or parking fees.

Over the years, the system has borrowed more than $3 billion to build facilities using such bonds.

While the state has other ways to get projects built now, one of the biggest impacts of the House bill would be to eliminate the advantage of refinancing old bonds, which saves the schools big money.

Nickel said the system has saved more than $187 million since 2013 refinancing student recreation centers, housing, science and cancer research centers, parking facilities, dining halls, and athletic complexes.

“Those savings we pass on to students,” she said. “Either the rent doesn’t have to go up, or we’ve lowered it in a couple of cases.”

If the House plan passes, she said, “That would go away.”

The Georgia Department of Transportation currently doesn’t use private activity bonds, or PABs, but it may in the future if the House plan doesn’t pass.

“Since the Georgia Legislature passed the $1 billion Transportation Investment Act in 2015, we have focused on leveraging state and federal resources with financing from the private sector,” DOT Commissioner Russell McMurry said.

“This will allow Georgia to advance major express lane projects along I-285 and (Ga. 400), and to also expand interstate highways in Georgia to meet ever-increasing freight demands,” McMurry said. “Working with private transportation developers, PABs provide Georgia DOT an important tool in the toolbox of project finance options.”

Both the House and Senate bills propose eliminating another type of bond that MARTA has used in recent years. The tax measures would end the tax-exempt status of so-called advance refunding bonds after Dec. 31.

The scheme is popular among state and local governments and nonprofits to refinance their outstanding debt and lower their costs when interest rates drop — similar to how people refinance their mortgages.

Deal came out against eliminating the bonds, as did MARTA, saying it would have a “significant negative financial impact” on the system. The system recently issued a series of advance refunding bonds that MARTA said led to roughly $41.5 million in savings.

“If Congress eliminates the ability to issue advance refunding bonds, MARTA and other transit agencies will not be able to take advantage of similar debt service savings opportunities in the future,” MARTA spokeswoman Stephany Fisher said.

Private activity bonds

Colleges in the University System of Georgia have used so-called private activity bonds to build many projects over the years. In recent years, they have saved $187 million refinancing those bonds. Below are some of those projects and savings made by getting lower interest rates on their borrowing.

Georgia State University

Science park

$16.8 million

Kennesaw State University

Parking facilities

$7.2 million

Dining hall

$3.6 million

University of Georgia

Tate Student Center and parking

$9 million

Intramural fields and performing art center parking decks

$1.8 million

Source: University System of Georgia