Tribe issues bonds to finance growth

Gary Gentile

Thursday, July 10, 2003 | 9:50 a.m.

LOS ANGELES -- In a rare example of government and Indian tribes working together, a California band expects to receive $145 million Thursday from tax-exempt bonds issued by a state agency.

The bond, similar in style to those issued by cities, is the first of its kind in California and only the second in the nation. The bond is being issued by the California Statewide Communities Development Authority. Backed in part by casino revenue, money from the bond will be used to build a 12-story hotel and convention center -- part of a larger tribal plan that will include a second hotel, a golf course and a time-share development.

"At this point, basically the tribe is in a position to offer IOUs and that's very exciting," said Mark Nichols, chief executive of the Cabazon Band of Mission Indians. "It's a radical shift from having to take the back seat in every transaction."

The California bond is being watched closely by tribes around the nation because of the access it provides to lower-cost financing and the impact it has on the often-strained relationship between tribes and governments.

Tribes have fought hard to protect their legal sovereignty while the government has demanded more disclosure and accountability for the money many have reaped from gambling casinos.

"The tribe is being treated as a partner with other governmental units rather than an adversarial relationship," said Jeff Carey, a managing partner at Merrill Lynch, which will sell the bonds. "It does provide market access to a very deep group of investors who will loan money for longer periods and, we think, at more favorable terms than would be available in the taxable market."

Historically, tribes have privately financed their activities through partnerships, leasing land for development or borrowing at high interest rates.

Tribes already have the ability to issue bonds whose interest is exempt from federal taxes as long as the proceeds are destined for essential services, such as roads or schools -- an extra requirement not imposed on states, counties or municipalities.

But state laws differ when it comes to exempting interest on the bonds from state and local taxes. In California, a government entity must issue the bonds and then lend the proceeds to the tribe for economic development projects.

The so-called conduit funding option was first used by the Seminole Tribe in Florida to fund an expansion of their resorts.

To qualify for the special tax status, the Indio-based Cabazons agreed to form a public subsidiary and an independent board to oversee the project. The tribe also agreed to work through Riverside County and the cities of Indio and Coachella, which had to approve the deal.

The tribe agreed to pay what amounts to a room tax of about 10 percent that will generate about $20 million in fees to Riverside County during the 18-year life of the bonds. The tribe also will pay the two cities to help reimburse them for improvements to roads.

Because the bond is backed by revenue from all the tribe's resort activities, including its casino, the tribe has agreed to report gaming earnings on a quarterly basis. Tribes around the country have traditionally fought hard to keep from revealing that level of detail about its finances.