A provision in the House version of tax-reform legislation would end a financing strategy used by public broadcasters on large capital projects, such as NPR’s headquarters in Washington, D.C.
Tax-exempt bonds, also called private activity bonds, are popular among investors because income tax isn’t levied on the interest. Nonprofit organizations use the bonds on projects such as building hospitals and airports. In public broadcasting, stations have used such bonds to fund construction projects and signal expansions.
The House version of the bill, approved Nov. 16, would end use of all private activity bonds as of Jan. 1. The Senate tax reform bill, under debate Thursday, would preserve the bond financing. The two bills will be reconciled in committee.
Ending the tax break would generate $38.9 billion in revenues over the next decade, according to the nonpartisan Congressional Joint Committee on Taxation. That’s important to Republicans, who are looking for savings to pay for larger tax cuts in the legislation.
But the end of private activity bonds “would have a significant and long-lasting impact” on nonprofit deals, said Marc Hand, co–managing director of Public Media Co. “It would take a while to figure out other ways to replace that financing.”
Tax-exempt bonds offer a “unique form of financing” for nonprofits, said Hand, who has worked on many deals using the financing. One of the main benefits: Organizations can generally borrow in the tax-exempt market the full value of the financed asset. Other forms of commercial financing might fund just up to 60 percent or 85 percent of the financed asset, Hand said.
Private bonds also offer longer-term financing — for example, 20-year financing on major purchases such as transmitters. Typically, commercial financing provides terms of less than 10 years. Tax-exempt bond investors can also get a return of between 1.75 percent and 3.5 percent, Hand said.
Stations’ use of bond financing has declined, Hand said. Radio stations often used the approach during an active period of acquisitions several years ago. Public Media Co. has since developed other private foundation sources for financing. “But this is still a critical tool for public stations,” especially for large physical assets such as buildings, Hand said.
NPR used $165.8 million in tax-exempt bonds, issued with assistance from the D.C. government, to finance its headquarters that opened in 2013. That accounted for about 73 percent of the total financing package.
Those bonds offered “a better fixed interest rate, a longer amortization schedule and more flexible covenants” than traditional bank financing, said NPR CFO Debbie Cowan.
“In addition, partnering with D.C. to issue tax -exempt debt involved more community and neighborhood engagement for NPR, which aligns with our mission,” Cowan said.
Nashville Public Radio used $3 million in bonds to finance the purchase of a second station, WKDA-AM, from a local broadcaster in 2002. Colorado Public Radio also used bonds to purchase a commercial FM signal for $5.75 million in 2015. CPR had refinanced bonds from earlier signal expansions in 2012 into a single $12 million, 20-year bond.
Even if private activity bonds are repealed, financial markets may fill the gap with a new tool, Hand said, and states could also offer tax-exempt bonds.
Rep. Earl Blumenauer (D–Ore.), head of the Public Broadcasting Caucus, opposes the provision. “Tax-exempt financing tools are critical to improving all types of infrastructure, from transportation and education, to housing and health, and of course cultural — like public broadcasting stations,” he said in a statement to Current. “There is no justification for removing a tool with proven results of driving economic development, creating jobs and rebuilding and renewing America.”