ENVIRONMENTAL FINANCIAL ADVISORY BOARD
   Members

  Vacant, Chair

 Helen Akparanta

 Gavin Ciarkson

  William Cobb

   Eric Draper

 Donna Ducharme

 James Gebhardt

  Rick Giardlna

  Ann Grodnlk

  Scott Raskins

 Philip Johnson

   Thomas Liu

 Mathllde McLean

  Karen Massey

 Lindene Patton

Sharon Dlxon Peay

 Tobias Rlttner

 Wayne Seaton

 Blanca Surgeon

 Lean ne Tobias

 Steve Thompson

 Chlara Trabucchi

  Eustace Uku

 Cynthia Williams
 Michael Shapiro
  Designated
 Federal Officer
                            JUL 2 6 2012

Honorable Lisa P. Jackson
Adminislralor
U.S. Environmental Proleclion Agency
Washington, DC 20460

Dear Administrator Jackson:

Since April 2011, EPA's Environmental Financial Advisory Board (EFAB) has
been working on a charge from EPA's Office of International and Tribal Affairs
(OITA) lo identify options for developing sustainable funding of tribal
environmental programs.  OITA has also requested EFAB's support to identify
options for developing suslainable funding of iribal environmental projecls.
Specifically, in both charges, the agency has asked EFAB to comment on whether
financial barriers exist, and if so, to identify mitigation options to minimize or
remove such barriers.

Although EFAB has not completed either assignment, the Board has become
aware of a significant barrier regarding funding of tribal environmental projecls
thai warrants timely response on the part of EPA. Under ihe current  federal Tax
Code, as enforced by the Internal Revenue Service (IRS), iribal govemmenls may
be denied access to the lax-exempt municipal bond markets under the following
iwo situations:

1.   Restricted Issuance Criteria for Governmental Debt. The first mechanism
    under which this denial can occur is known as the "essential government
    function" standard, a subjective criterion which restricls tribal issuance of
    governmental debt relative to the issuance privileges accorded stale and local
    governments. While there is no statutory dellnition of "essential government
    function,*' il has been inlerpreled as limiting iribal flexibility in how services
    arc provided and lo whom. In contrast, state and local jurisdictions are
    permitted to issue tax-exempt bonds if either of the following tests is met:

    (1) No more than 10 percent of bond proceeds arc used for private use; w

    (2) No more than 10 percent of bond proceeds is payable or secured from
      payments or property used for private use.

Under the above two-part lest, state and local governmental debt is more readily
quantifiable and able to be more easily administered than the "essential
                   Providing Advice on "How to Pay" for Environmental Protection

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             governmental function" standard imposed on tribal governments.  In addition, the
             state and local government test also permits the issuance of governmental debt for
             private purposes, a privilege not accorded to tribal governments.
2.     Prohibition of Tribal Issuance of Tax-Exempt Bonds. A second borrowing restriction
       facing tribal governments is the federal prohibition of tribal issuance of private activity
       bonds.  By contrast, state and local governments are permitted to issue private activity
       bonds to finance a wide array of improvements including many functions of interest to
       EPA such as water and sewage facilities, solid waste disposal facilities, local district
       heating and cooling facilities, environmental enhancements to hydroelectric generating
       facilities, and qualified green buildings and sustainable design projects.  Typically,
       private activity bonds are repaid by payments such as usage fees, rather than through
       general tax revenues. In general, the ability to place to private activity bonds affords
       governments a wider, diversified portfolio of financing options, as well as increased
       financial flexibility.

The EFAB has been made aware of at least two western tribes whose tax-exempt water treatment
facility bonds were challenged by the IRS due to these financing restrictions.  In each instance,
the tribes were providing capacity to both residential and nonresidential users in order to achieve
efficient sizes for the facilities; however,  this approach exceeded the tribe's "essential
governmental function" of providing water solely for tribal consumption.  It is likely that bonds
for such facilities would not have been challenged if issued by state or local governments.

As the Board understands, in December 2011, the Treasury Department sent to Congress a
Report and Recommendations regarding the  Tribal Economic Development Bond provision
under Section 7871 of the Internal Revenue Code. In this report, the Treasury Department made
four recommendations that are relevant to EFAB's charge from OITA:

   (1) For reasons of "tax parity, fairness, flexibility, and administrability," Congress should
       "adopt the State or local government standard for tax-exempt governmental bonds ... on
       a permanent basis for purposes of Indian tribal governmental eligibility to issue tax-
       exempt governmental bonds."
   (2) "The essential governmental function standard for Indian tribal governmental tax-exempt
       bond financing under Section 7871 (c)" should be repealed.
   (3) Congress should "allow Indian tribal governments to issue tax-exempt private activity
       bonds for the same types of projects and activities as are allowed for State and local
       governments."
   (4) Congress should allow Indian tribal governments to issue or use tax-exempt
       bonds to finance projects that are  located on  Indian reservations, together with
       projects that both: (i) are contiguous to, within reasonable proximity of,  or have a
       substantial connection to an Indian reservation; and (ii) provide goods or services
       to resident populations of Indian reservations.

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As an interim step in completing the work that OITA has requested of us, the Board has
concluded that the Treasury Department recommendations will eliminate a barrier currently
experienced by tribes on financing environmental projects.  We agree with Treasury's
conclusions that further work is needed to address the credit challenges that tribal governments
face with regard to accessing the tax-exempt bond market.

We believe that the proposed recommendations are appropriate from the perspective of ensuring
tax parity among tribes, states, and municipalities. If adopted, these recommendations can
increase the supply of capital for tribal environmental projects and support economic
development in locations with extremely high unemployment rates.

The Board recommends that EPA express its support for the Treasury Department's proposed
changes in the tax law.

                                        Sincerely,
                                        Michael Shapiro
                                        Designated Federal Official
cc:     Bob Perciasepe
       Deputy Administrator

       Michelle DePass, Assistant Administrator
       Office of International and Tribal Affairs

       Barbara Bennett
       Chief Financial Officer

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                UNITED STATES ENVIRONMENTAL PROTECTION AGENCY
                              WASHINGTON, D.C. 20460
                                  SEP 2 8 2012
                                                                           OFFICE OF
                                                                       INTERNATIONAL AND
                                                                         TRIBAL AFFAIRS
MEMORANDUM

SUBJECT:   Eliminating Barriers to Tribal Environmental Projects
FROM:      Michael Stahl, Acting Assistant Administrato
             Office of International and Tribal Affairs  /
TO:          Michael Shapiro, Designated Federal Official
             Environmental Finance and Advisory Board
I express my gratitude to you, Barb Bennett, and the Environmental Finance Advisory Board
(EFAB) for taking on the request from OITA to identify options for developing sustainable
funding of tribal environmental programs.

I also appreciate the time and cflbrt spent researching innovative ways to remove significant
financial barriers for tribes developing and implementing their own environmental programs.
The EFAB has recommended an immediate action that EPA express its support for the Treasury
Department's proposed changes in the tax law, and OITA strongly concurs.

Federal Agencies work with tribal governments on govemment-to-govemment basis. With that
in mind, agencies should seek to eliminate financial barriers for tribes and create as much parity
as possible for tribal governments issuing tax-exempt bonds to finance environmental projects on
Indian reservations, are contiguous to, or have a substantial connection to an Indian reservation.

Again,  thank you for the time and effort EFAB spent on this critical issue, and my Office of
International and Tribal Affairs looks forward to continued engagement and support on this
important effort.
cc: Barbara Bennett
   Chief Financial Officer

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