Background of PABs

Background

Private Activity Bonds (PABs) are a special class of tax-exempt financing that benefits private entities, including businesses, developers, and nonprofit organizations. While Weld County acts as the conduit issuer of these bonds, it assumes no debt responsibility. PABs are allocated annually by the federal government to eligible entities such as states, counties, and cities, and provide an opportunity for local governments to prioritize initiatives that promote economic development, affordable housing, and other qualified projects. The interest on PABs is exempt from federal income tax, typically resulting in lower borrowing costs for project developers. 

A population-based formula establishes the maximum amount of PABs that a state can issue annually, which amount is referred to as “cap” or “volume cap.” Currently, the formula is $125 per capita, which allows $734,701,250 in PAB volume cap for Colorado in 2024. It is important to recognize that the allocation of volume cap to a state or local issuer is only an authorization to issue bonds and has no cash value. Traditional components of a bond issue including a source of repayment, collateral, and reserves, as well as eligible investors are all required to utilize PAB.

PAB has a specific expiration and generally must be issued the same year the volume cap is received. If the cap is not issued, the issuer can elect to carry-forward the cap for three additional years by making a special filing with the Internal Revenue Service. If the cap is not carried-forward or assigned to another eligible issuer, the issuing capacity is lost.

Why does Weld County offer these bonds?

The federal government allocates PAB authority to counties and municipalities to provide tax-exempt financing for various projects. By offering PABs, Weld County helps facilitate important initiatives that would otherwise be difficult to fund, while ensuring there is no impact on taxpayers. This is an exciting opportunity to support local development and improvement projects.

PABs in Colorado

In Colorado, the Department of Local Affairs (DOLA) through the Division of Housing (DOH) is the administrator of PAB cap. Colorado law requires that 50 percent of the volume cap goes to statewide authorities including CHFA (48 percent) and the Colorado Agricultural Development Authority (2 percent). Up to 50 percent of the remaining cap is allocated to local issuers (cities and counties - 47 percent) with a minimum population of 19,048 (equal to a minimum of $1 million in volume cap). Any remaining volume cap (3 percent) is retained by the DOLA for future allocations from a statewide pool (referred to as the Statewide Balance). Due to changes in population, volume cap allocated to local issuers can change annually.

Local issuers have several options for using their volume cap.

1. Local issuers can issue the bonds. Examples may include a manufacturing project or an affordable housing development located in the community. However, for local issuers who receive a relatively small amount of volume cap, acting as the issuer may not make economic sense.
2. Local issuers can assign their volume cap to another local issuer. It is not uncommon for local issuers to assign cap to another issuer or to combine cap within a city and county relationship. This creates the opportunity to support a larger project.
3. Local issuers can assign their volume cap to CHFA. CHFA provides funding for a wide variety of housing and economic development related projects. If they have a specific project in mind or would like to support projects in their jurisdiction, local issuers can assign to CHFA to be used for any eligible project, including a specific project. CHFA uses its best efforts to utilize a local issuer’s cap in their community, however utilization is based on project needs statewide.
4. Local issuers can do nothing and let their cap revert to DOLA’s Statewide Balance. Local issuers have until September 15 to decide what to do with their volume cap, which includes completing all the applicable assignment documents and notifying DOLA. For any local issuer who does not meet the September 15 deadline, the cap is automatically returned to the statewide pool.