The Donovan Law Group

The Need to Establish a Natural Disaster Trust Fund

Posted in Interchange Fee, Natural Disaster Trust Fund by renergie on October 18, 2009

By Brian J. Donovan
October 18, 2009

New Orleans: A Case Study
During President Obama’s recent trip to New Orleans, a member of the audience asked the President, “Why is it four years after Katrina, we’re still fighting with the federal government for money to repair our devastated city?” Obama said many people in New Orleans were “understandably impatient” and said he had inherited a backlog of problems. “What is also true is that there are all sorts of complications between the state, the city, and the feds in making assessments on the damages,” Mr. Obama said.  “So we are working as hard as we can, as quickly as we can.” He added, “Now, I wish I could just write a check.”When someone shouted, “Why not?” Mr. Obama replied, “There’s this whole thing about the Constitution and Congress.”

New Orleans will lose approximately $1 billion in allocated GO Zone bond financing at the end of this year. The Gulf Opportunity Act of 2005 gave Louisiana the authority to issue approximately $7.9 billion in tax-exempt private activity bonds (“GO Zone Bonds”) that could be used for acquisition, construction, reconstruction, and renovation of nonresidential real property, qualified residential rental projects, and public utility property in 31 parishes across southern Louisiana. The State Bond Commission set aside approximately $1.3 billion for projects in New Orleans. Although $497 million has been earmarked to developers who hope to complete financing of their projects in the near future, only $55.6 million of GO Zone bonds has been issued for projects in New Orleans.

Unlike traditional tax-exempt bonds that are issued for public projects such as streets, utilities and public schools, GO Zone bonds are not payable from taxes or any other public funds whatsoever, but instead are payable solely by the private developer for whom the bonds are issued. The developers must arrange to sell or place the GO Zone bonds for their project based solely on their own creditworthiness and collateral. There is absolutely no public guarantee, subsidy or investment of public money. Since interest on GO Zone Bonds is tax-exempt to investors, the program reduces the borrowing costs to the developers, usually by about 2%. This is the only “incentive” that the GO Zone bond program offers.

While GO Zone bonds would be attractive to investors during a healthy economy, tight credit markets and difficulty finding investors willing to buy the GO Zone bonds have made it virtually impossible for developers to use the bonds. Stephen Moret, Louisiana Economic Development Secretary, further notes that higher costs of doing business in New Orleans, most notably insurance and labor, have limited business development and interest in GO Zone bonds.

At the end of 2009, unused bond allocations set aside specifically for New Orleans will go into a competitive pool. Projects in New Orleans will remain eligible but must compete with proposals from around the state, including areas less damaged by hurricanes Katrina and Rita.

How will New Orleans be able to maximize job creation and stimulate economic development during the current economic downturn?  Comprehensive, standardized, simplified, and transparent credit card reform legislation may be the answer.

The average interchange fee in the U.S. is seven times the interchange fee set by Visa and MasterCard in countries throughout the rest of the world. Using 2008 figures, if the interchange fee charged by credit card issuers was decreased (via comprehensive credit card reform legislation) from the current 2.10% to 0.60%, the result would be an annual savings of approximately $34.3 billion for U.S. merchants and consumers. Credit card issuers could retain 0.3% as a processing fee, the remaining 0.3% could be a “tax” used to fund a Natural Disaster Trust Fund (NDTF). In 2008, this would have generated $6.86 billion in funding for a NDTF.

Let’s be clear. The interchange fee is a hidden tax, just not a tax subject to political control or for which there is any discernible social benefit. Decreasing, and imposing a transparent tax on, the interchange fee would have the same stimulus effect of a tax break, but without an impact on the federal budget.

The following article discusses how comprehensive, standardized, simplified, and transparent credit card reform legislation may fund a Natural Disaster Trust Fund.

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