Pub. 6 2016 Issue 2

Anecdotally, this measure has been quoted by regulators from the Fed and OCC in CRA performance evaluations for a number of institutions: From the OCC 3 : “[Bank A] purchased 4 differ- ent blocks in the Payne County ISD #3 Municipal Bond total- ing $475 thousand. Proceeds were used to construct a new gym and purchase school furniture and fixtures…over 63 percent of the kids attend- ing qualify for free or reduced lunches.” Conceptually, free and reduced lunch percentages are a better test than census tract incomes. School boundaries do not follow census tract borders, so the location of a school in a distressed census tract does not necessarily mean it serves low income students. FDIC guidance supports the view that the incomes of students served by a district are the prime determinant of CRA qualification, even if the district is geographically located in a high income area 4 , “Activities that stabilize or revitalize particular low- or moderate-income areas…also qualify as community development, even if the activities are not located in these areas.” Indeed, institutions are often surprised at the number and geographic diversity of districts with more than 50% of stu- dents eligible for free lunches. In the Los Angeles metro area, for example, 62% of school districts would meet the CRA in- come test 5 . In some states, the number of districts that qualify for CRA purposes approaches 100% 6 . PURPOSE The agencies have opined in several interpretive letters that the provision of educational services to low-or-moderate income individuals is a qualified com- munity development purpose. Because most states explicitly restrict school district bond issuance to debt financ- ing capital projects, rather than deficit financing, almost all municipal bonds issued by or for school districts should qualify for CRA consideration. Unlike city and county issuance, bondholders can often point to a specific campus or set of facilities that benefited from the bond proceeds. Federal Subsidy Programs (ARRA and Others) INCOME In order to qualify for federal subsidies, American Recovery and Re- investment Act (ARRA) subsidy bonds must already meet stringent hurdles regarding the income of communities served. For example, Recovery Zone Economic Development Bonds (RZEDs) must be deployed in a recovery zone delineated by high poverty, unemploy- ment, or general distress. PURPOSE In addition to restrictions focusing ARRA development on low income individuals or distressed communities, ARRA bonds are also usually limited to qualified community development purposes. RZEDs, for example, must “…promote job creation and economic recovery” through “…expenditures for public infrastructure and construction of public facilities 7 .” Tax Increment Financing (TIF) Bonds INCOME Tax increment financing pro- vides a mechanism through which local governments can leverage future tax revenue growth to drive infrastructure development in a targeted area. TIF project sites are usually selected because of blight, urban decay, and the lack of private sector investment. Unsurprisingly, TIF districts are almost always located in low-to-moderate income census tracts. Even when a district isn’t located directly in a low-to-moderate income tract, the FDIC’s guidance provides some flexibility for a TIF to qualify as long as it benefits or stabilizes an adja- cent qualified area 8 : “One example [of a commu- nity development activity] is financing a supermarket…in a small strip mall located at the edge of a middle-income area, if the mall stabilizes the adja- cent low-income community by providing needed shopping services that are not otherwise available in the low-income community.” PURPOSE Funds raised through the issuance of TIF debt are generally used to promote economic development by spurring pri- vate and public interest in an otherwise blighted area. Bond proceeds help fund infrastructure development, finance removal of decrepit buildings, and allow for the construction of new commercial spaces – all qualified community devel- opment purposes. Tax Exempt Municipal Securities (TEMS) INCOME Given their comfort with traditional MBS securities, financial institutions often claim CRA credit on municipal 23 ISSUE 2 . 2016 CRA w Continued on page 24