Let’s Talk Municipal Finance – Tax Anticipation Notes and Bond Anticipation Notes

In this installment of the Let's Talk Municipal Finance series, I will discuss two short-term alternatives to the issuance of long-term bonds for municipalities to access needed funds. These alternatives have a shorter maturity period and are either anticipated to be repaid by long-term bonds or other municipal revenue.

Tax Anticipation Notes

Tax anticipation notes, commonly referred to as TANs, are a form of municipal borrowing with a maturity date often less than one year from the date of issuance, payable from anticipated tax revenues of the municipality. In Maine, the issuance of a TAN is authorized by 30-A M.R.S.A. § 5771. In addition to authorizing the issuance of a TAN, Section 5771 puts certain restrictions on both the amount and the maturity date – the amount of the TAN is limited in relation to the total tax levy of the municipality in previous years and the maturity date is generally limited to one month after the end of the municipal year in which the note was issued.

The interest on payments on TANs is excludable from gross income under section 103 of the Internal Revenue Code. Unlike bonds, most TANs are typically issued directly through a bank to which the payments of principal and interest will eventually be made. As the name suggests, the funds used to make those payments are limited by statute to those raised out of taxes paid to the municipality; however, unlike some bonds, the funds can be used for general municipal purposes and need not be tied to a specific purpose. Therefore, the process required for a municipality to issue a TAN is much simpler than that required of a long-term bond, although certain documents, including a legal opinion on matters such as the tax exempt nature of the interest paid on the TAN, are usually required by the bank.

Bond Anticipation Notes

Bond anticipation notes, commonly referred to as BANs, are also a form of municipal borrowing, but share more characteristics with long-term bonds than a TAN. The key difference between a BAN and a TAN is that the municipality usually cites a specific purpose for issuing the BAN, which must be the same purpose as the anticipated long-term bond that the municipality intends to eventually issue to repay the BAN. BANs are subject to statutory requirements under 30-A M.R.S.A. § 5772, including a maximum face amount of the BAN not exceeding the authorized amount of the anticipated bond and a maximum period of borrowing of three years. Some municipal charters may also contain additional requirements or limitations for the issuance of BANs.

Ethan Anderson practices with Preti Flaherty's Municipal Law and Business Law practice groups, focusing on public finance, mergers and acquisitions, and contract matters.

New Deadline for Calling Secret Ballot Elections in Maine

One of those deadlines municipal officials tend to know off the top of their heads is that referendum elections must be ordered at least 45 days in advance. This has now changed! The Maine Legislature in its last session changed the filing deadline for nomination papers from 45 days to 60 days prior to the election. Because the deadline for calling a referendum election is, under 30-A M.R.S.A. § 2528(5), the same as the deadline for filing nomination papers, both now fall on the 60th day prior to the election. This new deadline applies both to referendum questions ordered by the municipal officers and those requested by citizens’ petition. If your town has a different deadline under a local charter, that deadline will still apply regardless of this law change.

Maine Superior Court Upholds Refusal to Honor Citizens’ Petition

The Town of Brunswick recently prevailed in a case regarding the Town Council’s decision to sell a waterfront property that had been acquired through tax foreclosure. The plaintiffs, several citizens, had presented a petition to the Council which sought a referendum vote to enact an ordinance designating the property as a municipal park. However, the Council had already considered designating the property as a park and ordered instead to put it out to sale. Based on our advice, acting as the town's attorney, the Council chose not to put the question to referendum because it sought to overturn a Council order and there was no authority to do so under the charter. 

This case is a good reminder that municipal charters can strictly limit—or even eliminate—the right to citizens’ petition otherwise available under Maine law. Brunswick’s charter allows only ordinances, and not orders, to be overturned by petition. This makes sense because the Council needs to be able to transact the Town’s more routine business without concern that its every action might be overturned through referendum. Although the petitioners argued that they were seeking to enact a new ordinance, not to overturn an order, the Maine Superior Court justice found that the petition did seek to overturn a Council order and was properly barred. The Court also denied the appeal on the grounds that the Town had already sold the property by the time the case was heard.

What Is “Good Cause” for Granting an Abatement of Real Estate Taxes?

NHRSA 76:16, I(a) provides that “Selectmen or assessors, for good cause shown, may abate any tax, including prior years’ taxes, assessed by them or by their predecessors, including any portion of interest accrued on such tax. . . .” For many years, municipal attorneys and tax assessors in New Hampshire have proceeded in the belief that the only grounds for abatement of real estate taxes were disproportionality and poverty or inability to pay. A case decided by the New Hampshire Supreme Court in May 2017, Robert Carr et al. v. Town of New London, held that “good cause” for granting an abatement is not limited to those two grounds, that RSA 76:16 “provides selectmen a liberal tax abatement framework to promote equitable resolutions.” 

In that case, the taxpayers’ property had been struck by lightning and burned to the ground on July 1, 2014, so that the taxpayer could not use the property for 272 of the 365 days of the 2014 tax year (April 1, 2014 – March 31, 2015). The Town had denied the taxpayers’ timely filed application for abatement under RSA 76:16 on a number of grounds, including:

1. The condition of the property as of April 1, 2014, (before the fire) governed its assessment for the 2014 tax year; 
2. RSA 76:21, which allows prorated assessments for buildings damaged by fire, was the exclusive remedy for prorating or abating taxes on buildings damaged by fire; and 
3. Disproportionality and poverty/inability to pay were the only grounds for granting an abatement

The Court rejected all three arguments, finding:

1. Damages to property occurring after April 1 of the tax year may constitute “good cause” for an abatement;
2. RSA 76:21 is not the exclusive remedy for abating taxes on buildings damaged by fire during the tax year; and
3. Disproportionality and poverty/inability to pay were not the sole reasons for granting an abatement

The Court upheld the trial court’s decision that the taxpayers had shown “good cause” for an abatement under RSA 76:16. Thus, the Carr case established that selectmen have broad power to grant abatements—that “if justice requires an abatement, that would be good cause for the selectmen to [abate the property tax].” The Court failed, however, to set forth a bright-line test for determining when “justice requires an abatement” under RSA 76:16.

Future cases will provide guidance as to what is and what is not “good cause” for granting an abatement.

Maine Legislature Votes on Marijuana Bill Veto

Updating our previous post on the fate of LD 1650, Governor LePage last week vetoed the bill and set the stage for action at the State House on Monday, where the Legislature was deciding whether to override the Governor’s veto. A two-thirds vote in both the House and Senate was required to overcome a veto.

We now know the result: the veto has been sustained, with the House voting 74-62 to uphold the Governor’s action.

A vote to override the Governor’s veto would have meant that the bill, which provided a framework for implementing the legalization of recreational marijuana approved by voters last November, would have become law and provided some flexibility for municipalities to regulate recreational marijuana. Today’s vote at the Legislature, however, means that the legalization of recreational marijuana will continue to be in legal limbo for the foreseeable future.

Marijuana Bill Awaits Veto Decision

LD 1650, An Act to Amend the Marijuana Legalization Act, was passed in both the House and the Senate on October 23, 2017. Governor LePage has until November 2, 2017, to sign the bill, veto the bill or allow it to become law without his signature. The 77-page bill comprehensively rewrites the legalization bill enacted by Citizens’ Referendum now one full year ago. Legalization of marijuana has continued to be in a legal limbo. It is legal to grow and possess certain amounts of marijuana, but it is not legal to buy or sell it, even privately.

As a municipality there are reasons to be in favor of this amended law. It now contains an opt-in provision for municipalities rather than an opt-out provision. Because of this, some of the organizations backing legalization have actually opposed the bill because they argue that it is more difficult for a municipality vote to opt-in to a law than it is to opt-out. The bill also provides economic incentives to those municipalities who participate in the program and do not opt-out. The law provides for a number of different types of licensing, including retail sales, grow only and testing facilities. A licensee may hold the first two licenses, but the testing facility must be independent. If the governor does not sign the law, there will be a number of challenging legal issues arising.

The bill also sets more appropriate tax rates, limits properties to 18 plants growing, closes “gift” and “delivery” scams and allows employers to hire and fire based on adult use of legal marijuana.