| Illinois Finance Authority

Recovery Zone Bonds / Qualified Energy Conservation Bonds

Federal Authorization for Federal ARRA Volume Cap programs: The federal government through the American Recovery and Reinvestment Act of 2009 (the “Act”) has allocated $660 million in authority to issue Recovery Zone Economic Development Bonds (“RZEDBs”) and more than $1 billion in authority to issue Recovery Zone Facility Bonds (“RZFBs,” together with the RZEDBs, “the “RZBs”), directly to Illinois’ 102 counties and 8 largest cities.

RZEDB allocation and a RZFB allocation to counties and municipalities in Illinois were made in accordance to guidelines issued by the Department of Treasury. Under current law, both your RZFB allocation and RZEDB allocation must be used to issue RZFBS and RZEDBs, as applicable, on or before December 31, 2010. The Illinois Finance Authority (the “Authority”) has been designated by Governor Quinn to manage and coordinate the re-allocation of RZB allocations and the issuance of RZBs in the State of Illinois (the “State”) to fully utilize RZBs before December 31, 2010.

Recovery Zone Economic Development Bonds

Description: RZEDBs are a category of Build America Bonds (BABs), used to fund public infrastructure, facilities and equipment; job training and educational programs in “recovery zones.” RZEDBs as sometimes called “super BABs,” in that regular BABs are taxable bonds with a 35% tax credit feature. RZEDBs are also taxable bonds, but with a 45% refundable tax credit paid to the State or Local Governmental issuers by the Treasury Department and the Internal Revenue Service (“IRS”) of the total coupon interest payable to investors in these taxable bonds.)

By passing this higher subsidy on to participating municipalities, it is expected that municipalities will be able to achieve financing rates lower than comparable tax-exempt municipal bonds and finance economic development projects that can spur job creation in these communities.

Eligible Borrowers: Include counties, cities, towns, villages, school districts, and other units of local government qualifying RZEDBs projects and costs:

Capital expenditures paid or incurred for property in Recovery Zones.
Expenditures for public infrastructure and construction of public facilities.
Expenditures for job training and educational programs.

Timeframe for Issuing RZEDB’s: Projects must have started after February 16, 2009 and be issued / closed on or before December 31, 2010.

Further information on Qualifying RZEDB Projects and Costs: Specific federal tax regulations apply to projects financed under this program. Bond issuers will need the advice of qualified bond counsel and tax counsel in order to ensure the project and the bond issuance are in compliance with all applicable federal bond and tax regulations

Sections: § 1.150-1(b) & §1.150-2 of the Federal Income Tax regulations
IRS Publication: http://www.irs.gov/pub/irs-drop/n-09-50.pdf

RZEDB Application in PDF Format RZEDB Application in Word Format RZEDB Volume Cap Waiver Form in Word Format

Recovery Zone Facility Bonds

Description: Recovery Zone Facility Bonds or RZFBs are a new type of tax-exempt private activity bonds created in the American Recovery and Reinvestment Act of 2009 (ARRA) to finance certain depreciable property, including new or used equipment, located or to be located in a designated “Recovery Zone”. RZFBs are a type of “exempt facility bond,” which are tax-exempt private activity bonds. They provide tax incentives for borrowing at lower costs to promote job creation and economic recovery targeted at areas particularly affected by employment declines. RZFBs can be used for the construction of new or expanded buildings and for the purchase of equipment used in the trade or business. Certain restrictions on the use of funds apply.

Benefit to the private sector is a lower cost of financing than traditional methods; Longer debt term (e.g., 20 years versus 5 year bank financing); not limited to industrial firms but also can be used by other qualified businesses including retail, commercial, office, and service providers; and less restrictive than traditional industrial revenue bond (IRB) financing.

Eligible Borrowers: “Qualified Business” is any trade or business except residential rental property, private or commercial golf course, country club, massage parlor, hot tub facility, suntan facility, racetrack or other facility used for gambling or any store in the principal business in which is the sale of alcoholic beverages for consumption off premises.

Qualifying RZFBs Projects and Costs: RZFBs may be used by taxpayers engaged in certain types of businesses to finance the purchase of depreciable business property within a Recovery Zone, provided the taxpayer acquires the property after the area has received the Recovery Zone designation. Some kinds of property specifically do not qualify under this program; including land, rental property, and property used for certain kinds of activities such as golf courses, country clubs, and several others listed in federal tax regulations.

Specific federal tax regulations apply to projects financed under this program. Bond issuers will need the advice of qualified bond counsel and tax counsel in order to ensure the project and the bond issuance are in compliance with all applicable federal bond and tax regulations.

Timeframe for Issuing RZFB’s: Projects must have started after February 16, 2009 and be issued on or before December 31, 2010.

Further Information on Qualifying RZFB Projects and Costs: Specific federal tax regulations apply to projects financed under this program. Bond issuers will need the advice of qualified bond counsel and tax counsel in order to ensure the project and the bond issuance are in compliance with all applicable federal bond and tax regulations:

Sections: § 1.150-1(b) & §1.150-2 of the Federal Income Tax regulations
IRS Publication: http://www.irs.gov/pub/irs-drop/n-09-50.pdf

RZFB Application in Word Format RZFB Application in PDF Format RZFB Volume Cap Waiver Form in Word Format

Qualified Energy Conservation Bonds

Federal Authorization: Qualified Energy Conservation Bonds (QECBs) are codified in Section 54D of the Internal Revenue Code of 1986. QECBs first authorized by Congress under the Energy Improvement and Extension Act of 2008 and the provisions were later amended by the American Recovery and Reinvestment Tax Act (ARRA) of 2009. In the February 2009, thru ARRA, Congress increased the QECB volume cap to $3.2 billion. A total of $3.2 billion is available for qualified energy conservation bonds, which are a new category of tax credit bonds that can be used to finance government initiatives designed to reduce greenhouse gas emissions. The $3.2 billion will be allocated to states, municipalities and tribal governments, and a portion* (* Up to 30% max of the QECB allocation) of the allocation may be issued as private activity bonds.

QECBs may be used by governmental issuers to finance certain types of energy projects. QECBs are qualified tax credit bonds. With tax credit bonds, generally the issuer of the bond pays back only the principal of the bond, and the bondholder receives federal tax credits in lieu of the traditional bond interest. The tax credit may be taken quarterly to offset the tax liability of the bondholder. The tax credit rate is set daily by the U.S. Treasury Department; however, QECB holders will receive only 70% of the full rate set by the Treasury Department. Credits exceeding a bondholder's tax liability may be carried forward to the succeeding tax year, but cannot be refunded. QECBs differ from traditional tax-exempt bonds in that the tax credits issued through the program are treated as taxable income for the bondholder

For QECBs issued after March 18, 2010, the bond issuer may make an irrevocable election to receive a direct payment from the Department of Treasury for interest on the QECBs. For these types of QECBs, the amount of such payment with respect to any interest payment date under the bond is equal to the lesser of (i) 100 percent of the amount of interest payable under the bond on such date; or (ii) 70 percent of the amount of interest which would have been payable under such bond on such date if such interest were determined at the applicable tax credit rate as described in the preceding paragraph. The direct payment comes in the form of a refundable tax credit to the issuer in lieu of a tax credit to the bondholder. This option was formerly limited to Build America Bonds. The advantage of either option is that it creates a lower effective interest rate for the issuer because the federal government subsidizes a portion of the interest costs.

Calculation of the Tax Credit: The tax credit amount is set by the Treasury on a daily basis and Can be found on-line at: https://www.treasurydirect.gov/govt/rates/irs/rates_qtcb.htm. The credit rate is 70% of the rate set by the Treasury for qualified tax credit bonds. In theory, QECBs could provide a borrower with a 0% interest rate, but it is likely that purchasers will require a discount on the QECB or a supplemental interest payment. Any supplemental interest earned on a QECB is federally taxable.

Eligible Borrowers: States, municipalities, local governmental units and tribal governments, and a portion* (* Up to 30% max of the QECB allocation) of the allocation may be issued as private activity bonds**.

**Private Activity Bonds: Up to 30% of each state or large local government allocation may be issued as private activity bonds, where the proceeds of the QECBs are loaned to nongovernmental entities and used for energy conservation improvements on privately owned property. Private activity bonds may only be issued to finance capital expenditures. However, the statute states that bonds issued to provide loans, grants or other repayment mechanisms for capital expenditures to implement green community programs will not be treated as private activity bonds for purposes of the allocation provisions.

Qualifying Projects and Costs: 100% of the available project proceeds of QECBs must be used for one of the following qualified conservation purposes:

(A) Capital expenditures incurred for purposes of:

reducing energy consumption in publicly owned buildings by at least 20%;
implementing green community programs (including the use of loans, grants, or other repayment mechanisms to implement such programs);
rural development involving the production of electricity from renewable energy sources; or
(iv) any facility eligible for the production tax credit under Section 45 (other than Indian coal and refined coal production facilities); or

(B) Expenditures with respect to facilities or grants that support research in the development of cellulosic ethanol or other non-fossil fuels, technologies for the capture and sequestration of carbon dioxide produced through the use of fossil fuels, increasing the efficiency of existing technologies for producing non-fossil fuels, automobile battery technologies and other technologies to reduce fossil fuel consumption in transportation, and technologies to reduce energy use in buildings; or

(C) Mass commuting facilities and related facilities that reduce the consumption of energy, including expenditures to reduce pollution from vehicles used for mass commuting; or

(D) Demonstration projects designed to promote the commercialization of green building technology, conversion of agricultural waste for use in the production of fuel or otherwise, advanced battery manufacturing technologies, technologies to reduce peak use of electricity, and technologies for the capture and sequestration of carbon dioxide emitted from combusting fossil fuels in order to produce electricity; or

(E) Public education campaigns to promote energy efficiency.

Allocations: QECB provisions instruct the states to distribute separate allocations to each large city or county (greater than 100,000 in population) and the tribes based on a ratio of the jurisdiction’s population to the state population as a whole. The State will use its remaining volume cap to provide for projects inside the State. The State of Illinois was allocated $133,846,000 of QECB volume cap.

Timeframe for Issuing QECB’s: The current law does not state an expiration or sunset for the issuance of QECB bonds.

IFA’s New Authorization and Role: Effective 7/12/10, Governor Pat Quinn sign into law, Public Act 96-1020 (HB2369), giving the Illinois Finance Authority (“IFA”) the authorization to aggregate unused volume cap for Recovery Zone Economic Development Bonds (RZEDBs), Recovery Zone Facility Bonds (RZFBs) and Qualified Energy Conservation Bonds (QECBs) originally allotted counties and cities, that has been voluntarily waived and apply them for use, statewide to qualified projects subject to waived volume cap availability, ability to close prior to the ARRA bond program expiration, job creation and overall impact to the State of Illinois. The intent of this authorization is to help communities and businesses still struggling from the recent economic downturn, make the most of Federal resources designed to jumpstart the economy. By consolidating the remaining bonding authority under the IFA’s umbrella for reallocation to qualified projects, the State’s goal is to not leave these valuable financing resources on the table. The IFA will issue these bonds on a conduit basis. To see the full Act that provides this authorization, please refer to the links listed below on this website.

QECB Volume Cap Waiver Form in PDF Format QECB Application Form in PDF Format QECB Application Form in Word Format