Andrew J. Hamilton
May 2018
In the early 1990s the State of Illinois created several Regional Development Authorities (RDA). Theses were in addition to the state-wide authorities such as the Illinois Housing Development Authority (IHDA) and the Illinois Finance Authority (IFA) that provided bond financing for certain types of projects (i.e., IHDA bonded housing deals and IFA bonded manufacturing deals, etc.). The Illinois General Assembly thought there were certain areas of the state that needed extra tools for economic development, so they created smaller “mini” bonding entities that could help virtually any type of project, but only in a specific rural region. RDAs provide a lot of value to manufacturing, housing, and not for profit projects.
Illinois RDA powers allow them to build bridges, enter into certain types of intergovernmental agreements, but the main product they provide is bond financing to help a borrower get a lower interest rate. The RDAs don’t have a bucket that is full of money that they lend out. They create an instrument, a piece of paper (called a bond) that investors can buy. The major buyers of RDA bonds are banks, mutual funds and insurance companies that buy these investments because they are in the category of “tax-free bonds”.
When you hear the term “tax-free” the first thing that comes to mind is when money is donated to a church and the donation is deducted from your income for tax purposes. This is not what is meant by the term “tax-free” in this case. The “tax-free” part of a bond is related to the benefits or interest income that the investor (or buyer of the bond) would receive. An investor that buys a tax-free bond receives interest income on which it does not pay federal income tax.
An easy example is if a mutual fund buys an investment that pays a 6% return, but they have to pay 2% in federal income tax, then the net after-tax yield is 4%. However, if they buy a 4% “tax-free” bond, since they don’t have to pay any federal income tax, the after tax yield is the same 4%. So both these investments are identical. When all of the dust settles, both investments provide a 4% return. The only difference is on the flip side, one borrower gets to borrow at a 4% rate instead of a 6% rate, thus saving 2% on the cost of their financing.
The reason why this method of financing is available is because when Congress passed the Federal Tax Code, it felt there were certain activities that are so important to the United States economy, that they should be able to receive this type of favorable financing.
The first two Regional Authorities created in the late 1980s were the Southwestern Illinois Development Authority (SWIDA) www.swida.org that covered Madison and St. Clair Counties and the Quad Cities Regional Economic Development Authority (QCREDA) www.qcreda.com that covered Rock Island, Henry, and Mercer Counties. These first two Authorities received appropriations from the state to cover their start up operations, but this was a one-time appropriation. A few years later, another three Regional Authorities were created: the Upper Illinois River Valley Development Authority (UIRVDA) www.uirvda.com which covered five counties of Bureau, Grundy, LaSalle, Marshall and Putnam, the Will Kankakee Regional Development Authority (WKRDA), www.wkrda.com which covered the two counties of Will and Kankakee and the Tri-County River Valley Development Authority (TRVDA) which covered the three counties of Peoria, Woodford and Tazewell.
These three additional Regional Authorities lay dormant for several years due to lack of funding until the early 1990s, when UIRVDA became active issuing their first bond in 1994 and as of 2018 has issued $273 million and created over 2,900 jobs. In 1997, WKRDA became active and by 2018 has issued over $89 million and created 860 jobs. QCREDA, as of 2019 has issued $198 million in bonds and has created 2,400 jobs. TRVDA got a late start but issued their first bond of $7.5 million last year in 2016 that created 50 new jobs.
In the early 2000s there were minor changes to the RDA legislation. UIRVDA added Kendall, Kane and McHenry counties to become an eight county Authority, SWIDA added Bond and Clinton counties. QCREDA initially added Knox County and expanded to cover Carroll, Lee, Jo Daviess, Stephenson and Whiteside counties. In 2017 UIRVDA added Lake County.
Also during this time, several state-wide Authorities were consolidated. The Illinois Development Finance Authority (IDFA), the Illinois Health Facilities Authority, the Illinois Educational Facilities Authority, the Illinois Rural Bond Bank and the Illinois Industrial Park Authority were merged into the Illinois Finance Authority (IFA).
Based upon the earlier success, several new RDAs were formed and as of 2018 the Western Illinois Economic Development Authority (WIEDA) www.wieda.com has issued bonds and approve Enterprise Zone project of over $148 million, the Southeastern Illinois Economic Development Authority (SIEDA) www.siedail.com has issued $11 million, the Eastern Illinois Economic Development Authority (EIEDA) www.eieda.com has facilitated $119 million, the Central Illinois Economic Development Authority (CIEDA) www.cieda.co has issued bonds and facilitated over $148 million and the Southern Illinois Economic Development Authority (SIDA) remains dormant.
As of FY2017, ninety-one of l02 Illinois counties are geographically represented by a Regional Authority.
SWIDA is the only Regional Authority with full time staff. UIRVDA, QCREDA, WKRDA, SIEDA, EIEDA, CIEDA, WIEDA and TRVDA have part-time staff. SIDA is dormant. The Illinois RDAs do not have taxing powers, do not generally receive operational appropriations from the state and are operationally self-sufficient. They operate solely on fees they charge to borrowers to issue bonds that provide the borrower with an interest rate lower than conventional financing. Since the fees that are charged are much less than the benefit that the borrower receives, the borrower is delighted to pay the issuance fee.
Generally, the break-even point to the borrower on the cost of issuing a bond is within the first year. Most RDA annual budgets are lean, primarily covering the cost of staff and minor marketing activities.
When an RDA issues a bond on behalf of a borrower, they are NOT LIABLE for any type of repayment in the case of default. Most of the Regional Authority’s outstanding bonds are backed by a bank letter of credit or directly purchased by a bank. If there is a deficiency in collateral or debt service, the bank is the entity that takes the risk and would experience a loss. Banks do not generally view a Regional Authority as a competitor because the bank has to be part of the transaction. They either provide an irrevocable letter of credit to back the bond or they buy the bond under a private placement. The institutional buyers of bonds, like mutual funds and insurance companies generally require credit enhancement. The most common form of credit enhancement is a bank letter of credit.
To put it plainly, the institutional bond buyer could care less whether the borrower pays them or not because if the borrower fails to pay, then the bank will make the payment and then foreclose on the borrower. The bond buyer cares more about the financial strength of the bank than the borrower. In order to become part of an existing RDA or create a new one, there must be an Act passed by the Illinois General Assembly and signed by the Governor.