Do you need relief from circuit breaker tax cap loss?
How does a restructuring work?
With the passage of HEA 1062, the General Assembly has provided that school corporations with at least a 20 percent circuit breaker loss can restructure debt without Distressed Unit Appeal Board approval.
Typically, refunding bonds can only be issued when there is a savings, and the new refunding bonds may not have a longer maturity than the bonds being refunded. This new law exempts a restructuring from those requirements.
With restructuring, a school corporation or building corporation issues bonds to refund the existing bonds. The new refunding bonds have a longer maturity than the old refunded bonds (up to 10 years later). Extending the maturity results in lower debt payments to bondholders each year (longer term, smaller annual payments). Click here to see an illustration
What is "increment?"
The school corporation will levy the original, needed debt service (prior to refunding) but will owe bondholders a smaller payment each year. The difference between old bond debt service and the smaller new bond debt service is called "increment."
The law provides that this increment can be transferred to the capital projects fund, transportation fund, school bus replacement fund, or some combination thereof up to the amount of tax cap loss in each fund.
Restructuring can be expensive (more interest paid because of delayed repayment of principal) and only certain bonds may be eligible for this restructuring.
Can taxpayers oppose it?
Yes, if one taxpayer a) objects to the restructuring at the public hearing and b) files a written objection with the school corporation and county auditor within 10 days of the hearing, then the school corporation must wait 30 days after the hearing to see if c) 100 taxpayers or voters file an application petition requesting that the petition-remonstrance race must be conducted before the school corporation may move forward with the restructuring.
If all three objections do not occur, or if the school corporation wins the petition-remonstrance race, a school corporation may issue the restructured bonds.
Is the approval of the Distressed Unit Appeal Board required?
No, if a school corporation has a circuit breaker loss of more than 20 percent, the Distressed Unit Appeal Board's approval (binding or otherwise) is not required.
If you are interested in finding out more, contact your financial advisor about the financial viability of restructuring and a member of the Ice Miller team about the required legal steps.
Relief from Protected Taxes
HEA 1062 also allows a school corporation with a 10 percent or more tax cap loss in its transportation fund relief from protected taxes for three years.
Each school corporation should calculate the percentage of loss in its transportation fund assuming the tax cap loss is allocated to capital projects fund, transportation fund and bus replacement fund, but not the debt service fund (in other words, as if the protected taxes concept is used).
A written request to certify the percentage of loss computation should be submitted to the DLGF no later than May 1 of each year. By June 1, the DLGF is required to determine whether the percentage calculation is accurate and whether a school corporation is eligible in order to ignore the protected taxes requirement.
If a school corporation is eligible, it may allocate the circuit breaker tax credit loss proportionally across the funds, including the debt service fund.
This relief from the protected taxes requirement is only available for tax years 2014, 2015 and 2016.
Debt Service Operating Balance
HEA 1062 limits the debt service operating balance for all debt issued prior to July 1, 2014 (and refunding bonds of that debt) to 50 percent of the annual payment. Permitted operating balances for debt issued after June 30, 2014, will be 15 percent of the estimated annual levy.
The takeaway is that if you have new debt closing soon, if possible, plan to close prior to July 1, 2014.
The good news is that the ability to levy an operating balance for debt service was really a DLGF policy and was not always applied consistently by all field representatives across the state. This puts the ability to levy for an operating balance in the law.
If you have questions, please contact Jane Herndon
, Kristin McClellan
, Erik Long
or any member of the Ice Miller team.
This publication is intended for general information purposes only and does not and is not intended to constitute legal advice. The reader should consult with legal counsel to determine how laws or decisions discussed herein apply to the reader's specific circumstances.