Last September, the Pennsylvania Supreme Court struck down a vital component of the Commonwealth’s Gaming Act, known as the “local share assessment” – a section of law that provides local governments with a significant funding stream backed by an assessment on certain gross revenue from casinos located in or around their municipality. The court’s ruling, prompted by a lawsuit filed by Mount Airy Casino, located in Monroe County, put in jeopardy hundreds of millions of dollars in local funding for counties and municipalities across the Commonwealth.

The basis of Mount Airy’s lawsuit revolved around its belief that the local share assessment violated the Article VIII, Section 1 of the Pennsylvania Constitution – the Uniformity Clause – which provides, “All taxes shall be uniform, upon the same class of subjects, within the territorial limits of the authority levying the tax, and shall be levied and collected under general laws.”

Mount Airy argued that the local share assessment violated the Uniformity Clause because language contained in statute set a minimum amount of tax certain casinos were required to pay, regardless of how much gaming revenue they produced. Specifically, the Gaming Act required casinos, except those located in Philadelphia and resort-based casinos (referred to as “Category 3” casinos), to pay 2 percent of their gross gaming revenue, or $10 million, whichever was higher, to their local municipalities. Since none of the state’s 12 operational casinos had gross gaming revenue from slot machine gaming above $500 million, casinos located outside of Philadelphia were required to pay the minimum $10 million amount.

Mount Airy argued that the flat fee of $10 million created variable tax rates between casinos outside of Philadelphia, in violation of the Uniformity Clause. The Supreme Court agreed, and struck down the tax, and in doing so gave the Pennsylvania General Assembly a mandate to fix the problem, or have this important funding stream end for several municipalities across the Commonwealth.

After several months of negotiation, and amid a larger debate on gaming expansion, on October 26, 2017, the General Assembly passed a sweeping gambling reform bill that included a “fix” for the local share assessment issue. The legislative fix removes any reference to the $10 million minimum local share assessment. To ensure that municipalities continue to receive the same level of funding, however, the new law imposes a “slot machine operation fee” on all casinos with the exception of Category 3 casinos, (but including casinos in Philadelphia), that is anticipated to result in $10 million paid by each casino per year.

It is yet to be seen whether the new fee structure created under this legislation will be challenged by any of the state’s casinos, and if so, how the courts may react to the language. But at least for now, municipalities who received local share funding from slot machine gaming can expect to continue to receive the same level of funding they previously received, and municipal officials can once again budget in reliance on the receipt of these funds for their municipality.

The author thanks William Thomas, who assisted in the preparation of this post. Bill served as the Executive Director of the House Gaming Oversight Committee from 2010-2014, and remained heavily involved in gaming policy for the House as the Leadership Executive Director for the House Democratic Caucus Secretary from 2014-2017. He now is President of Mid-Atlantic Strategic Solutions, a McNees subsidiary government affairs and political consulting firm. Bill can be reached at 717-574-2923.

Chairman Kevin Brady of the U.S. House of Representatives, Committee on Ways and Means today introduced the “Tax Cuts and Jobs Act,” H.R. 1, and it does not contain good news for municipal issuers of tax-exempt bonds and private sector entities able to borrow on a tax-exempt basis.

Among other things, H.R. 1 would eliminate municipalities’ ability to issue advance refunding bonds, i.e. refunding bonds where the refunding occurs more than 90 days after the date of issuance. Congress already had heavily restricted the issuance of advance refunding bonds through the enactment of the 1986 Internal Revenue Code, which limited governmental and 501(c)(3) bond issues to a single advance refunding. Beginning in 2018, advance refundings could not be issued on a tax-exempt basis.

H.R. 1 would also eliminate all private activity bonds, currently authorized under sections 142 (exempt facility bonds), 143 (certain mortgage bonds), 144 (small issue bonds), and 145 (501(c)(3) bonds). Again, beginning in 2018, all such private activity bonds could not be issued on a tax-exempt basis.

The bill would also eliminate municipalities’ ability to issue bonds to finance professional sports stadiums – a controversial ability in its own right that seems unlikely to generate the kind of opposition that may be seen on the other proposals (unless you’re Jerry Jones).

These proposals, if enacted, would apparently not affect existing bonds issued and outstanding prior to the effective date. However, preliminary analysis suggests that any change in the terms of an existing bond resulting in a “reissuance” for tax purposes would result in a loss of tax-exempt status, if the reissued bond fell within one of the disfavored categories.

With H.R. 1 just being introduced today, it remains to be seen what becomes of it. However, the Trump Administration and Congressional Republicans have made it clear that they want to pass this bill before the end of 2017. Municipalities, 501(c)(3) organizations, and other private businesses affected by it may have to move fast if they want to push for changes to the bill.

There was a collective sigh of relief from bond lawyers across the country today, as the Department of the Treasury announced that it intends to withdraw in their entirety the regulations proposed by the IRS on political subdivisions, originally published on February 23, 2016. A copy of Treasury’s press release announcing the decision can be accessed here.

The political subdivision regulations were met with immediate criticism from municipal finance professionals. The criticism directed at IRS representatives attending the 2016 Tax and Securities Law Institute sponsored by the National Association of Bond Lawyers was particularly animated. Treasury in its announcement appears to have admitted that the proposal was flawed, stating that the “regulations would have been costly and burdensome.”

While this news is a welcome development, municipal issuers and their advisors should be aware that the definition of a “political subdivision” may be the topic of proposed regulations in the future. In a report prepared by Treasury in connection with the announcement, it was noted that Treasury and the IRS “will continue to study the legal issues relating to political subdivisions,” and “may propose more targeted guidance in the future.”

 

 

In a Notice of Proposed Rule Making published September 28, 2017, the IRS announced new proposed regulations on the public approval requirement of section 147(f) of the Internal Revenue Code, 26 U.S.C. §147(f). A copy of the Notice can be accessed here. The announcement should not come as a surprise – IRS representatives announced earlier this year at the annual Tax and Securities Law Institute sponsored by the National Association of Bond Lawyers that the finalization of regulations interpreting section 147(f) was a regulatory priority for the agency. Continue Reading IRS Proposes New Regulations on Public Approval Requirement for Private Activity Bonds

A bill introduced by Representative Kate Harper (R-Montgomery) would impose a new public meeting requirement on municipalities considering selling or leasing their water or sewer systems. The bill was recently approved in the House unanimously, and has been referred to the Senate Consumer Protection and Professional Licensure Committee.

House Bill 477 would require municipalities to hold at least one public meeting prior to entering into an agreement to sell or lease a municipal-owned or operated water or sewer system. The bill would also apply to systems operated by municipal authorities, if the transaction contemplated the dissolution of the authority by the municipality. The meeting would have to be advertised at least twice, on successive weeks, not more than 60 nor fewer than 7 days before the date of the meeting. If the system served customers outside of the municipality considering the sale or lease, public notice would also have to be provided in the municipalities where those customers resided.

Additionally, the potential purchaser or lessee of the system would be required to attend the meeting – presumably to present its plans for the system and to answer questions.

In the event the Senate acts favorably on the proposal, and the Governor signs it, the new public meeting requirement would go into effect in 60 days. Municipalities considering selling or leasing their water or sewer systems should keep a close eye on the status of House Bill 477 to ensure they comply with its requirements in the event it become law.

McNees attorneys Tim Horstmann, Ade Bakare and Kathy Pape recently provided an update on municipal storm water management to the membership of the Pennsylvania State Association of Boroughs. Their presentation addressed recent changes in Pennsylvania laws governing municipal storm water management in boroughs, permissible user fee structures, and additional funding streams that are available to municipalities to pay for necessary projects.

Interested in learning more? A copy of the Power Point presentation is available online.

For Pennsylvania municipalities facing a rising tide of costs from implementing storm water management plans, the available funding options vary depending on where you are and what you are – but that could change as soon as later this year. The General Assembly has passed several laws that authorize certain municipalities and municipal authorities to impose “reasonable and uniform” fees to fund storm water management plans – and several additional bills are pending that, if passed, would extend these funding mechanisms to municipal entities across most of Pennsylvania. Continue Reading New Funding Mechanisms for Municipal Stormwater Management

It has traditionally been a fairly common practice in the municipal bond arena for issuers to either select or have significant input into the selection of underwriter’s counsel in connection with the issuance of municipal bonds. On July 27, 2017, the Municipal Securities Rulemaking Board (MSRB) issued a strong warning to the industry against continuation of these practices by publication of Notice 2017-14. Continue Reading MSRB Issues Warning Guidance On Issuer Involvement In Selection of Underwriter’s Counsel

Are municipal pension costs eating your budget alive?  Are streets, bridges, water and wastewater systems crying out for capital investment?  Are public safety costs pushing your budget to the brink?  If so, now may be the time to explore unlocking the value of your municipal assets.

Over the past five years, the Pennsylvania General Assembly has enacted several laws that have changed the landscape of municipal water and wastewater assets.  These changes make the sale of water or wastewater assets to a public utility more attractive.  These changes may also result in an increased sale price if your municipality decides to sell. Continue Reading Broken Budget? The Fix May be a Sale of Assets

Pennsylvania State Senators John Blake, John DiSanto, and Mike Folmer recently introduced a trio of new municipal debt reform bills that follow on the package of reform bills introduced in the Senate in March. The new bills – Senate Bill 694, Senate Bill 695, and Senate Bill 696 – would expand the power of the Office of Attorney General to prosecute political crimes at the municipal level, increase the statute of limitations for such crimes, and require third class cities to put out for competitive bid all contracts for professional services.

Continue Reading Pennsylvania Senators Introduce New Municipal Debt Reform Bills