Industrial Revenue Bonds

Source: Encyclopedia of Banking & Finance (9h Edition) by Charles J Woelfel
(We recommend this as work of authority and you can order it here)

A special classification of MUNICIPAL BONDS, also called lease rental bonds, typically issued by a municipality to provide funds, for example, for the building of a plant to the specifications of a particular private company, that is granted a long-term lease to the plant at rental designed to be adequate for interest and principal payments on the bonds by the municipality.  Motivation for such issues has been to attract desirable industry to particular locations for economic development, and thus another term for such type of bonds has been Industrial Development Bonds, or IDBs.

After the state of Mississippi led the way in 1936, with its "Balance Agriculture with Industry" state legislation authorizing such issues for municipalities, issues of this type was relatively rare until the 1960s, when volume substantially increased to a reported 1968 total of 10% of all long-term tax-exempt state and municipal bond issues.  By that time, over 40 states were reported to have passed legislation authorizing such issues; as of 1982, all 50 states and the District of Columbia had enacted laws pertaining to Industrial Revenue Bonds and Small Issue Industrial Development Bonds.

Faced with the rising volume of such IDBs, then exempt from federal income taxes in any amount, the Treasury Department in 1967 issued a ruling making IDBs subject to taxes in any amount, outstanding.  The Revenue and Expenditure Control Act of 1968, as amended in 1978, has replaced the Treasury ruling, but has provided tax exemption for specified "small issues" of Industrial Development Bonds in outstanding maximums issued by the municipality of either $1 million or $10 million.  The act further specified that substantially all of the proceeds from the small issues must be used to acquire, construct, or improve depreciable property.  Besides the "small issue" IDB exemption, the act provided federal tax exemption for issues in any amount for any amount of total capital expenditures on projects of specific types, privately owned, if they satisfy the public-use test, and involve what may be considered traditional municipal functions (sewage or solid-waste disposal facilities, pollution control, water, electricity and gas of a local nature, airports, docks, wharves, sports or convention facilities, mass commuting facilities, industrial parks, etc.).  But nontraditional functions also became common.

Tax-exempt bonds were also used to finance residential mortgages, to such an increasing volume in 1979-1980 that the Mortgage Subsidy Bond Tax Act of 1980 was passed prohibiting the issuance of any such bonds to subsidize single-family mortgages after December 31, 1983.

Most IDBs are of the "revenue" (limited liability) type, meaning that the full faith and credit and general taxing power of the issuer are not pledged, which would make them general obligation bonds subject to debt limits, if any, on the issuer.  Instead, these issues are dependent upon the receipt of revenue from the private parties financed, to cover interest and principal payments.

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