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Corporate
Finance
Chapman Spira &
Carson draws upon a depth of experience and established
relationships to assist U.S and foreign corporations
with acquisitions, divestitures and joint ventures.
Our finance staff guides client companies through
changing economic environments while providing them the
necessary financial and management tools to assure their
success in these globally dynamic times. Municipal
financing for your Place of Business or Your
Investments.
A Primer When the American Constitution was original
written, an extraordinary effort was made to separate
states right's from those of the Union as a whole.
Although the colonies were involved in a common argument
with England, they were composed of people with
dissimilar backgrounds who had immigrated to the United
States for much contrasted reasons.
At that time, homogeneous groups tended to settle within
borders containing similar ethnicity's. These people
brought to this country different understandings of the
way laws worked and what they ought to look like.
As time has gone on the ghetto mentality as for the most
part disappeared and this particular issue has lost its
relevancy. Although most were in favor of a union, the
great majority wanted to preserve certain rights that
they felt important, and the founding fathers did a
superlative job to deliver on that premise.
These rights gave the original participants in the
Continental Congress sovereignty over a number of
important spheres. Among these are the ability to set
their own local regulations as long as they don't
conflict with the constitution. They were also allowed
to levy taxes on people living within their defined area
while maintaining some veto power over new
constitutional actions. Therefore, a scenario begins to
unfold in which the states compete among themselves for
revenue. Considering the fact literally all of the
revenue accruing to the states is tax based, they are
all anxious to increase their indigenous community of
taxpayers, both individual and corporate. States mold
their laws to attract businesses in particular
industries in which they feel they have an edge.
Delaware has become synonymous as the most congenial
state in which to incorporate, Michigan has very
favorable legislation on their books that are directed
toward resident automobile manufactures and Nevada is a
breeze for anyone desiring helpful legislation in the
gambling field. Localities that have taxing powers
within states also have joined this regional economic
chauvinism. These can be cities, counties, townships,
school districts, sanitary districts or just about
anything else that the elected officials determine
qualify for such status. Fortunes in certain regions wax
and wane creating pressures on the tax receipts from
residents. When this situation becomes to severe, social
services are usually the first to suffer and the result
is that the government that cut them usually loses the
next election. It is far easier to anticipate the
occurrence in the first place by insuring that the tax
base remains intact no matter what the short-term
regional economics may be. A combination of taxing
authorities within the individual state often work in
harmony to create a package of incentives that will be
attractive to industry.
These benefits many include but are not limited to
reduction of the company's taxation for a period of
time, credits for hiring workers and donations of plant,
equipment and land. They also set up regional
authorities to help the new business get off to a flying
start while making sure that the local banker is an
integral part of the local welcome wagon. Early on, it
dawned on the powers that be that by financing revenue
producing civic products with project specific municipal
revenue bonds two things could be accomplished
simultaneously; the first is the fact that a much needed
civic facility such as a hospital, dormitory or toll
road would be actualized without creating a credit risk
to the issuing authority if the projected revenues did
not cover the debt serviced. This probably represented
one of the earliest attempts at off balance sheet
financing ever undertaken by state government. Once the
project had paid for itself through internally generated
revenues the tax authority could reduce its fee income
or use the proceeds to erect other projects from
existing cash flow without having to go back to the
voters for approval. Many of civic projects exist only
because someone thought up this ingenious format without
which we doubt that new football stadiums or civic
centers could be built. The toll roads of America
constructed shortly after World War II ended stand as
another monument to this type of debt structure.
An interesting example of the scope of this concept
would be the regional toll roads built surrounding the
city of Chicago. Tolls collected from this confined
system ultimately were responsible for the creation of
most of the state highway network in Illinois. The
downstate region's tax base could not support the
mammoth construction necessary to create the highway
grid. Revenues would from the sparse traffic using the
highways would never support another revenue bond; thus,
money was simply siphoned from the successful toll
operations in the Chicago area. Grave questions arouse
as to why the citizens of Chicago should be subsidizing
roads over 250 miles away. A legal case brought by
residents and bond holders eventually went to the courts
which said some very strange things which no one seemed
to understand and the export of funds continued
unabated. Therefore, we can see that profit-making
enterprises have been allowed to use the vehicle of
municipal financing to create needed infrastructure.
A whiz kid of another age probably got up in a state
legislature and stated to one and all; "if we can build
stadiums and dormitories and airports and tunnels and
bridges and roads and buildings by forming a new taxing
body, why can't we create an aberration, authorized to
operate in the private sector under our municipal aegis
if it ultimately benefits the community." We can
visualize the hush that must have gone up in the
chamber; a startling idea everyone agreed. The
environment was now ripe for another phase in America's
glorious economic history. Everybody joined this new
game allowing one and all to use municipal financing
authorities to act as stalking horses for attracting
industry into their locale. As can be expected, the
early birds were opportunists that were more interested
in lining their own pockets than helping either the
investors or the municipalities. Scattered all over the
United States are plants that never opened, built with
money, which came from hybrid types of municipal
financing. The casualty rate among investors was legion
and the big economic losers were concentrated among the
poor and the returning Vietnam War Veterans. Regulations
were tightened up because of this and it became more
difficult to obtain this type of financing.
Today, there is substantial less fanfare and few less
promoters floating around attempting to pick peoples
pockets as regulations have been tightened. There is
probably no state in the country that is not anxious to
bring in industry in one form or another to their
region. One of the prizes that has been offered to
companies over the years has been Industrial Development
Bond status. (IDB) At the bargaining table, the public
sector officials ultimately put on the table the fact
that; "maybe you could use some cheap money". Who could
say no to a request like that? What is occurring is an
offer of municipal bond status to company, thus because
states and their affiliates are exempt from federal
taxation, so are the purchasers of the their debt.
Municipal securities (muni's) sell a price that
represents the tax differential between debt's coupon
and the purchasers federal tax rate. As an example,
assuming an equal rating, a person in a 30% federal tax
bracket being offered a 5% muni or a 5% treasury bond
would not have much of a choice. The effective rate on
the treasury would only be 3.5%, to equal the muni; the
treasury would have to yield almost 7%. There is also a
bit of cache attached to the state giving the company
this status which for no apparent reason makes the
instrument appear more attractive for cosmetic reasons
as well. The yields can be adjust up or down considering
what the markets perception of the industry is.
These bonds are revenue securities and not guaranteed
either by any authority or by the company. They are only
geared to pay interest if the entity that is issuing
them is successful in their business. Thus the company
receives money and other benefits that may not have been
available under other circumstances, they receive terms
and conditions that are extremely favorable and their
credit is not effected by the infusion because it is not
an obligation of the company if not earned. Sounds like
a good idea. Well it is, but it was so good, some very
smart people started to take special advantage of it. So
some states got together, raised a lot of money in
municipal financing, and then invested the receipts in
government bonds. Whatever project the municipal funding
was supposed to cover become mired in one delay after
another while the taxing authority kept collecting the
difference between what they were paying out and what
they were receiving. Uncle Sam scratched hard at his
beard and said; "Hey guys, state's rights don't mean you
can steal from your uncle, that's enough already."
Indigenous taxing bodies are not the only parities
interested in providing incentives to attract new
industry into a region?
Any local purveyor may have a personal stake in joining
the party. An obvious example would be the local
trucking company or railroad. The fact that you may be
shipping substantial product from your plant and
bringing in raw materials is of great appeal to these
people. We are aware of railroads that will organize the
overall negotiation strategy with taxing authorities in
an effort to attract a potential user. They will donate
land and property on their right-of-way and walk to
prospect through the regional authority. This type of
financing is extremely economic for the user, it is an
excellent bargaining tool for the authority and it is
more often than not considered choice paper by brokers.
Could any of this apply to your situation? Let us know.
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