Projects
Buyers and sellers of the debt of non-tribal governments have access to substantial information systems but no such system exists for tribal governments. This situation works to the disadvantages of tribes, credit insurers and rating agencies, and investors, none of whom can form a complete picture of the tribal finance market.
We have initiated a number of research projects addressing various aspects of the tribal finance marketplace. While each of these projects is designed to improve the awareness and effectiveness of tribal financial decision makers, they address different types of barriers to capital access and evaluate distinct research problems.
- Racism in the tax code
- Tribal Financial Information Clearinghouse
- Liquidity premium for tribal debt
- Tribal Financial Digital Library
- Publications and presentations
Racism in the tax code
Much of the unmet capital need in Indian Country is due to the restrictions imposed on tribal access to the capital markets, specifically the ability of tribal governments to issue tax-exempt debt. Section 7871 of the Internal Revenue Code requires tribal tax-free bond proceeds to only be used for Òessential governmental functions,Ó a restriction not applicable to state and municipal bonds. Section 7871(e) further limits the scope of available tax-exempt bonding authority by stating that Òthe term Ôessential government functionÕ shall not include any function which is not customarily performed by State and local governments with general taxing powersÓ without providing any guidance as to when a particular activity becomes ÒcustomaryÓ for a municipal government.
These restrictions were designed by a powerful congressman known for anti-Indian views and they have severely limited tribal abilities to access the capital markets. Although American Indians make up more than 1.5% of the population, tribes issued less than 0.1% of the tax-exempt bonds between 2002 and 2004. These restrictions harm the poorer tribes the most, as the differential between tax-exempt and taxable interest rates often determines the feasibility of a project. Without access to tax-exempt rates, poorer tribes simply cannot afford the debt service required to begin to make a dent in the more than $50 billion in unmet capital needs.
Tribal governments are also victims of a disproportionate number of enforcement actions by the Internal Revenue Service (IRS). Only approximately 1% of the more than 15,000 tax-exempt municipal offerings are audited by the IRS each year, but direct tribal tax-exempt bond indentures have a 25% chance of being audited during their lifetime,
When the capital markets face uncertainty, their logical response is to charge a price premium. The ambiguity in the statute coupled with the IRS 's extreme interpretation of that statute causes such uncertainty, and results in higher interest rates for tribal projects. Additionally, IRS actions have effectively destroyed the market for tax-exempt conduit bonds for tribal projects, even if those projects could have been financed by other conduit borrowers.
At present, statutes, the tax code, and the IRS systematically discriminate against tribal governments relative to state and local governments. Congress has the opportunity to rectify this differential treatment simply by rewriting section 7871 to treat tribes as states for all tax purposes, without qualification. Our models suggest that the impact on tax revenues of such a change would likely be positive, or at least revenue neutral.
Tribal Financial Information Clearinghouse
To counteract factors that constrain tribes from tapping capital markets effectively, tribes and their supporters in the academic and policy-making communities need a more thorough understanding of modern tribal finance marketplace. Academics studying the capital markets related to non-tribal governmental entities have access to substantial information systems, but no such system exists for tribal governments. Not only are tribes at an informational disadvantage, but credit insurers and rating agencies also cannot form a complete picture of the tribal finance market. Thus, tribes must pay a significant penalty on tribal financings because of the uncertainty due to the lack of data. Data generated during our research will provide empirical support for ongoing efforts by the NCAI and others working to remove these barriers through legislative and regulatory changes.
The Tribal Finance Information Clearinghouse (TFIC) project examines questions of technological empowerment that have economic, sociological, and legal implications. To conduct research on the tribal finance marketplace, we are collecting original data about tribal interactions with capital markets and will develop an information system capable of securing storing, analyzing, and disseminating that data.
The TFIC will ultimately contain three information sets covering the period since 1980, including an historical narrative of tribal finance and the seminal events in the marketplace, a database of tribal municipal financings, and a database of all tribal high yield financings for the same period.
These data will provide the indispensable empirical foundations for a comprehensive understanding of tribal interaction with the capital markets, specifically identifying those factors that are critical to the success or failure of tribes. Moreover, the completed project databases will offer academic researchers and policy-makers an unparalleled opportunity to analyze a complete data set related to a significant minority group and to determine which variables impact access to capital markets for tribes. In the instances of adverse treatment of tribal debt, the harm to tribal economies can be empirically quantified.
The TFIC project will be first an exercise in informational empowerment. For the first time, questions related to tribal interaction with the capital markets will be answerable based on a complete information set. The impact of greater data availability will be measurable relative to tribes and their interactions with investment bankers, credit insurers, and rating agencies. Additionally, pressing economic questions that have been previously unanswerable due to lack of data can be explored regarding the evolution of tribal finance.
Equally exciting is that the TFIC will also be an exercise in intergovernmental information sharing. More than 550 federally recognized tribes exist, yet almost no communication between tribes regarding capital market access has taken place. We will design a system to encourage tribes to disclose previously non-public information about privately-placed financial transactions because the value to them increases with the availability of data from multiple tribes (a network effect). We will also analyze social, demographic, economic, and cultural factors that encourage some tribes to contribute and lead others not to participate. Transaction-level confidentiality will be achieved through application of standard and best-practice approaches to data masking.
The TFIC will provide the empirical data needed to rigorously discern and test hypotheses regarding factors that limit minority access to capital markets. Not only will the outcomes of this research project directly impact Native Americans, but the results might be generalized to other minority enterprises both in America and in the developing world. The relatively small number of actors (i.e., 550 tribes) with durable presence in the data makes study of questions capital access by minority groups more manageable.
Liquidity Premium for tribal debt
The Securities Act of 1933 exempts municipal debt from SEC registration but does not similarly exempt tribal government's municipal debt. Due to market restrictions on unregistered debt, tribal debt is likely less liquid than comparable municipal debt, and tribal governments are likely forced to pay more in interest than similarly-situated state and local governments for the same activities. The existence and magnitude of this liquidity premium has never been empirically examined.
In order to circumvent data availability problems and issues of selection bias, we are developing a survey of institutional buyers of municipal bonds designed to elicit any liquidity price premium on tribal municipal bonds due to their lack of a registration exemption. Survey participants will be presented with two entities with identical financial attributes, default risks, and levels of disclosure. The two entities will be chosen from a set of three possible entities: a tribal government that is not registered with the SEC (Ònon-exemptÓ), a tribal government that is registered ("functionally exempt"), and one municipal government automatically exempted from SEC registration requirements. Each of the two chosen entities will be seeking to fund an identical project, and each respondent will be asked if they would require a higher coupon on either of the bonds, holding all relevant market factors identical except for the independent variables (exemption or functional exemption vs. non-exemption, and tribal vs. non-tribal issuer).
This research will formally test for the existence and magnitude of such a liquidity premium due to registration non-exemptions. In the process, the project will isolate other possible components of higher debt costs for tribes, including what might be referred to as a "racial risk premium" reflecting lenders' inexperience with and/or mistrust of tribal governments. To ensure an accurate tribal perspective for the survey, based on the suggestions of various tribal leaders, we have developed three scenarios of different sized offerings to control for issue size. We separately control for perceptions of default risk by assigning identical credit ratings to each issuer. To control for a new-issuer bias, both the tribe and the town will be presented as repeat issuers with good debt service histories.
Tribal Finance Digital Library
The Tribal Finance Digital Library (TFDL) project is an effort to develop, evaluate, and demonstrate a prototype database of financial information designed to meet the needs of Native Americans. At every level, individual, family, small business, large corporation, and government, many tribes suffer from a lack of access to capital and financial information as well as a lack of awareness about how to best access and develop financial literacy. Tribal communities have long been neglected by the financial services industry. Tribes today face a situation where limited financial expertise and inadequate financial education resources have significantly hindered the economic health of their communities. By integrating tribal-specific economic literacy programs, the TDFL will help tribal leaders and others manage their growing economic resources more successfully.
The School of Information at the University of Michigan has a longstanding partnership with the American Indian Higher Education Consortium (AIHEC), and for this project, we intend to work closely with a regional AIHEC member tribal college. This project will research and demonstrate how a digital library can contribute to financial awareness, literacy, and competence in Indian Country by developing and implementing a suite of online financial literacy tools.
The proposed project will enhance the potential of innovative and practical inter-tribal solutions to common problems of national importance using digital libraries for an important under-served community. While the outcomes of this research project will directly impact Native Americans, the results should be generalizable to other under-served communities that lack access to relevant financial information and where financial literacy is low.
Publications and presentations
| Author | Date | Document |
|---|---|---|
| Dr. Clarkson | May 15, 2007 | Capital and Finance Issues  |
| Dr. Clarkson | September 4, 2007 | Tribal Bonds: Statutory Shackles and Regulatory Restraints on Tribal Economic Development |
| Dr. Clarkson | February 21, 2007 | IRS Panel |
| Dr. Clarkson | February 21, 2007 | Selecting Your Financing Team |
| Dr. Clarkson | November 6, 2006 | Commentary on Proposed Rulemaking (IRS REG-118788-06) |
| Dr. Clarkson | November 6, 2006 | Tribal Bondage: Statutory Shackles and Regulatory Restraints on Tribal Economic Development |
| Dr. Clarkson | October 2, 2006 | Tribal Bondage: Statutory Shackles and Regulatory Restraints on Tribal Economic Development, John M. Olin Center for Law & Economics, University of Michigan |
| Dr. Clarkson | August 23, 2006 | Tribal Bondage: Discrimination Against Tribes in the Tax Code and the Capital Markets, NITA Annual Conference, Prior Lake, Minnesota (Updated slides - see 11/6/06) |
| Dr. Clarkson | August 21, 2006 | Results of Joint Research Effort by the Internal Revenue Service and the University of Michigan School of Information |
| Dr. Clarkson | June 20, 2006 | Tribal Finance: Discrimination Against Tribes in the Tax Code and the Capital Markets, NCAI Mid-Year Conference, Sault Ste. Marie, Michigan (Updated slides - see 11/6/06) |
| Dr. Clarkson | May 23, 2006 | Written testimony of Dr. Gavin ClarksonEncouraging Economic Self-Determination in Indian Country Senate Finance Committee, Subcommittee on Long-Term Growth and Debt Reduction |
| Dr. Clarkson | May 23, 2006 | Senate Testimony of Dr. Gavin Clarkson Real Player, WMV (part 1) |
| Various | May 23, 2006 | Senate Finance Committee, Subcommittee on Long-Term Growth and Debt Reduction  |
1 An earlier estimate of 40% was based on data provided by Thompson Financial. This estimate is being revised downward based on information provided by the IRS . Unfortunately, section 103(c) of the Tax Code defines “state or local bond” for IRS (and IRS enforcement) purposes as an obligation of a State or political subdivision, including bank loans, bond indentures, installment purchases or finance leases. We are currently working with the IRS to determine what percentage of tribal tax-exempt obligations are actually bond indentures. While a survey of the nation's leading tribal bond lawyers as to the ratio of bank loans to bond indentures provides some insight, at the time these materials were submitted to NCAI, the process of working with the IRS to get a more complete picture and understanding of the numbers is ongoing.
2 This estimate is similarly based on data provided by the IRS and the survey of tribal bond lawyers, but is also subject to revision as the research project with the IRS proceeds.