i.4.2.6 Decision #6 – Decide whether the debt will be tax-exempt

Public agencies that issue debt on a tax exempt basis generally enjoy lower interest rates than they would if they issued taxable debt. The interest rate difference between taxable and tax exempt debt will vary depending on market conditions and other particulars, but it can be significant to the total cost of the financing. The federal tax exemption is conditioned on the satisfaction of certain requirements and limitations for the life of the debt. In addition to the federal tax exemption, interest on debt of California public agencies is exempt from California personal income taxes. California tax exemption only requires that the debt be issued by a California political subdivision.

When a public agency issues debt on a tax exempt basis, the public agency must comply with certain limitations and requirements on the use of the financed facilities and on the investment of the proceeds of the debt. Issuers must continue to monitor the use of bond financed properties and the investment of bond funds throughout the life of the bonds. The public agency must evaluate whether these limitations and requirements pose operational constraints that are untenable or problematic. See Chapter 4 – Federal and State Tax Law Requirements and Chapter 8 – Post-Issuance Debt Management Requirements Including Tax Compliance and Ongoing Disclosure Obligations.