Northwest Indian Law & Business Advisor : Northwest Indian & Tribal Lawyer & Attorney : Williams Kastner Law Firm : Tacoma, Seattle, Portland

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In February 2009, the U.S. Congress passed the American Recovery and Reinvestment Act of 2009. The intent of the $2.5 billion allocated to Indian Country through the ARRA was to spur domestic economic growth within Indian Country and mitigate the negative effects being experienced by the American economy at large – the likes of which had not been witnessed since the Great Depression of the 1930s.

Federal funding allowed under the Recovery Act would be delivered to its intended recipients utilizing current federal program delivery systems administered by federal agencies. Thus, any person, organization, or state, local or tribal government that desired to receive federal Recovery Act funds would have to apply for the funds directly with the federal agency charged with its delivery. Within Section 1511 of the Act, Congress placed provisions in the measure which would instill transparency and provide oversight for the responsible use of allocated federal recovery funds.

To those ends, Section 1512 requires that recipients of Recovery Act funds provide a report to the federal agency that granted them the funds, which details the projects and activities for which the funds were spent by the grantee. Under Section 1512(g), federal agencies are directed to coordinate with the Director of the Office of Management and Budget (OMB) in that regard. In February of 2009, the OMB Director issued a letter detailing the procedures that federal agencies would have to utilize in order to satisfy Recovery Act reporting requirements. The OMB takes the position that the Single Audit Act of 1984, 31 U.S.C. 7502(h) (2008) and a related OMB Circular, would require non-federal entities who receive ARRA funds, including tribal governments, to complete and file Single Audit reports with the Federal Audit Clearinghouse (FAC).

The OMB also stated that all Single Audit reports filed with the FAC for fiscal years ending September 30, 2009, would be made publicly available for inspection on the Internet through a link from www.recovery.gov. The OMB directed federal agencies to ensure that any award of Recovery Act funds would be contingent upon a recipients successful reporting under Section 1512.

What this means is that if a tribal government is awarded federal funds under the Recovery Act, it will be required to report its projects and activities according to Section 1512, file a Single Audit with the FAC, and shockingly, allow the FAC to publish all of the tribe’s Single Audit reports on the Internet.

Tribal financial statements and audits have always been guarded with the utmost confidentiality. Disclosing the financial affairs of a tribal government has disastrous implication, in terms of outside scrutiny and backlash. Not to mention there is no identifiable business interest which outweighs the necessity for tribal financial confidentiality. Unlike Wall Street firms who received ARRA monies and thus must stand accountable to the American People, tribes are governments.

Indian Country should be alarmed. Individual tribal governments receiving Recovery Act monies should immediately discuss the reporting requirements with the federal agency grantors, to determine whether and to what extent they are (or should be) satisfying OMB’s reporting, auditing, and publishing directives. Moreover, tribes should band together to challenge OMB’s assertion that highly sensitive and proprietary tribal governmental financial information be disclosed on the Internet or otherwise be made publicly available. Indian Country should insist that FAC publish only the information that is detailed in Section 1512, meaning only relative to the activities for which Recovery Act funds were received and used.

Tribal concerns should be immediately communicated to OMB Director Peter R. Orszag, and each Tribe’s Congressional Delegation.
 

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As a means of protecting tribes, the Indian Gaming Regulatory Act requires, among other things, the National Indian Gaming Commission (“NIGC”) Chairman’s approval of management contracts for the operation and management of Indian gaming operations. The NIGC defines a “management contract” as “any contract, subcontract, or collateral agreement between an Indian tribe and a contractor or between a contractor and a subcontractor if such contract or agreement provides for the management of all or part of the gaming operation.” Even if a consulting, development, lease or financing agreement says it is not a management contract, yet contains terms which provide the contracting entity with management of the tribe’s gaming operations, the NIGC might consider it a management contract subject to the Chairman’s approval.

Management encompasses many activities, such as planning, organizing, directing, coordinating, and controlling. In some cases, the NIGC has found that certain consulting, development, lease and financing documents confer management authority to the consultant, developer, landlord or lender, as the case may be, thereby constituting a management contract that is void unless approved by the NIGC. These agreements provided that if the tribe defaults, the contracting party will control the use of pledged security, usually future gross gaming revenues.

The current NIGC takes the position that an agreement containing a security interest in a gaming facility’s future gross revenues, without further limitation, authorizes management of the gaming facility. Why? Because in the event of a default, a party with a security interest in a gaming facility’s gross revenues has the authority to decide how and when operating expenses at the gaming facility are paid, which is itself a management function. Further, a party that controls gross revenue potentially can control everything about the gaming facility by allocating or putting conditions on the payment of operating expenses. Therefore, agreements with such a security interest might, in the eyes of the NIGC, constitute management contracts that are void unless and until they are approved by the Chairman.

Several limitations can be drafted into any consulting, development, lease or financing agreement to provide comfort to the NIGC, and the parties to the deal, that the agreement is not a management contract. One such limitation is to designate net—not gross—gaming revenues as security. The designation of net revenues ensures that the tribe maintains control of operating expenses, while providing the contracting party with a source of revenue to secure its interest. The agreement should also be carefully drafted such that it does not provide the contracting party with considerable authority to plan, direct, organize, coordinate or control the gaming operation, including: making personnel decisions, establishing policies and procedures of the casino, controlling the placement of gaming machines on the casino floor, and determining payment of operating expenses of the gaming facility, to name a few. Tribes should make sure such protections are drafted into any agreement whereby the tribe pledges its gaming revenues as security to the contracting party. In turn, the NIGC should stay out of the tribe’s business.

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After months of anticipation, the IRS explained last week how tribes can take advantage of the new tax exempt Tribal Economic Development Bonds in its Notice 2009-51. Announcing a $2 billion volume cap, the IRS explained how it will allocate bond volume under IRC § 7871, and outlined the procedure and requirements for tribes to take advantage of the American Recovery and Reinvestment Act of 2009.

Most of the news is good. Traditionally, tribal governments have been hampered by the requirement that tax exempt bonds be used only to finance essential government functions. New § 7871(f) expands the scope of tax-exempt bond financed projects to most tribal economic development projects. Notably, the bonds may not be used to finance gaming facilities, or projects located outside of Indian reservations. The geographic requirement will prevent some tribes from being able to finance some off-reservation economic development, which will adversely impact those tribes with small land bases. That, however, might be the policy goal behind both the geographic requirement and the gaming exception.

Tribes need to have their applications in by August 15, 2009, to take advantage of the first $1-billion-tranche. The first allocation, of no more than $30 million per tribe, must be issued by December 31, 2010. In other words, those tribal governments wishing to take advantage of the Recovery Act should be filling out the bond applications now. Unless projects are relatively well-formed, it will be difficult to take advantage of the financing plan disclosure requirements.

Such financing plans must include:

• A reasonably detailed description of the plan of financing for the project, including all reasonably expected sources (e.g., a public offering through a named underwriter or a private placement to a named institution) and uses of financing, including financing from the Tribal Economic Development Bonds and from other sources;
• The status of all financing, including the name and addresses of all entities expected to provide any financing;
• The anticipated date of issuance of the Tribal Economic Development Bonds and any expected purchasers of the Tribal Economic Development Bonds;
• The sources of security and repayment for the Tribal Economic Development Bonds;
• The aggregate face amount of Tribal Economic Development Bonds expected to be issued for the project; and
• The issuer’s reasonably expected schedule for spending proceeds of the Tribal Economic Development Bonds.

Presumably, those tribes who have anticipated being able to take advantage of the first allocation will be positioned to provide the above information (and other required disclosures) ahead of the August 15 deadline. For those tribes who require more time, the deadline for the second allocation, which will include any amount of the first $1 billion in volume cap remaining, is January 1, 2010.