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Public Finance eficiary of the local government’s public funds and to provide citizens the opportunity to ask questions about the transaction structure and express their opinions. Fourth, the local government and the private developer must negotiate the financing structure for the transaction. The biggest risk to a local government in this phase is issuing long-term debt to subsidize a project which ultimately fails, leaving the local government to pay a debt many years after the purpose for which it was created cannot produce tax revenue. Consequently, the primary negotiating points are (1) Who borrows the money? (2) What revenues are pledged to secure the loan? and (3) Who pays the loan if the project fails? This is the most important phase of the negotiations. While both sides want to create a successful project which increases the tax base, local government officials must realize that the private developer’s interests are not their own. Local government officials must understand how to protect their general fund in the event that the project fails. Like the railroad barons of the late Nineteenth Century, private developers benefit from financing structures in which local governments (1) borrow money on their own credit to fund the project construction, (2) give a “general obligation” pledge to secure the loan and (3) continue to pay the loan even if the project fails or the private developer goes bankrupt. This developer-friendly structure puts the loan risk on the local government, exposes the local government’s general fund for the entire term of the loan (which can be as long as thirty years) and provides the local government with no recourse against the private developer in the event that the project does not produce a single dollar of tax revenue. A local government should hesitate to give a general obligation pledge for an Amendment No. 772 project. There are two better alternatives. First, if the local government is going to borrow the money on its own credit, the loan should instead be secured by a “limited obligation” pledge. This way, as opposed to a general obligation pledge where the local government’s entire general fund is exposed, only the tax revenues produced by the project may be used to pay the loan. If the tax revenues are insufficient to pay the loan, or, in the worst case scenario, the project fails completely and produces zero tax revenue, the local government’s risk is reduced or even eliminated. A local government may also require the private developer to guarantee all or a percentage of any shortfall between the difference on the loan payment and the tax revenues produced by the project. Second, instead of issuing long-term debt on the local government’s credit and simply giving it to the private developer, local government officials may insist that the private developer borrow all, or at least a substantial portion, of the money with the understanding that the local government will rebate a portion of the additional tax revenue generated by the project. This approach transfers the construction risk back to the private developer, incentivizes them to maintain the project and continue recruiting quality tenants. It also requires the private developer to produce tangible results before receiving any taxpayer subsidy, which at that point comes from expanded tax revenues as opposed to general funds already dedicated to typical governmental services. Local governments should also consider whether the project will cannibalize existing sales tax revenue. That is, relocating tenants or redistributing revenue will rearrange, not increase, a local government’s sales tax base. In conclusion, local government officials should not distrust private developers, but they should be aware of the risk that comes with the opportunity provided by Amendment No. 772. Indeed, there have been many successful Amendment No. 772 retail projects in Alabama which have utilized various financing structures. These are just some of the issues facing local government officials, many of whom are not bankers, accountants, lawyers or real estate professionals. Local government officials are in a difficult position. On the one hand they have private developers eyeing their general fund as a free capital source, and on the other hand they have their constituents pushing for economic growth and new jobs. While both sides are invested in the project’s success, local government officials must not forget to protect their general fund in their exuberance to recruit a popular business or accumulate political capital. G Contributor Lee Birchall ENDNOTES 1 ALA. CONST. art IV, § 94.01. 2 ALA. CONST. art IV, § 94 originally prohibited such lending and grants in aid of private corporations. 3 ALA. CONST. art IV, § 224 and § 225, as amended. 4 Taxpayers and Citizens of Town of Georgiana v. Town of Georgiana, 93 So.2d 493 (Ala. 1956). 5 Benjamin Barr, Why States Have Debt Limits, THE INSIDER, Winter 2010, at 16, 17. 6 ALA. CONST. art IV, § 94.01. 7 “Alabama 2013 Economic Forecast Released at 25th Annual Conference,” http:// cber.cba.ua.edu/news. 8 ALA. CONST. art IV, § 94.01. 9 ALA. CONST. art IV, § 94.01. Birmingham Bar Bulletin/ Spring 2013 13


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