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IRS Releases Final Public Hearing and Approval Regulations for Tax-Exempt Bonds

On December 31, 2018, the U. S. Department of the Treasury and the Internal Revenue Service (IRS) released Treasury Decision 9845, which sets forth final regulations on the public hearing and approval requirements that are prescribed for tax-exempt private activity bonds under Section 147(f) of the Internal Revenue Code of 1986.

These regulations, which come after two rounds of proposed regulations, in 2008 and 2017, represent a watershed in the guidance provided for the public hearing and approval requirement, replacing once and for all the “temporary” regulations that were promulgated in 1983 shortly after the original enactment of the public hearing and approval requirements in the Tax and Fiscal Responsibility Act of 1982 (TEFRA).  Because of this legislative provenance, the public hearing and approval rules governing tax-exempt private activity bonds are frequently referred to by public finance market participants as the “TEFRA regulations”.

The new TEFRA regulations will apply to bonds issued pursuant to a public approval occurring on or after April 1, 2019, and the 1983 temporary regulations will be removed at the same time.  In addition, issuers and borrowers of tax-exempt private activity bonds can apply the new post-issuance “TEFRA cure” provisions described below to bonds issued pursuant to a public approval occurring prior to April 1, 2019.

In most respects, the new TEFRA regulations maintain a good deal of continuity with the rules that have been in place for the last 35 years under the 1983 temporary regulations, and public finance market participants will be familiar with many of the requirements and practices that will be called for under the new TEFRA regulations.  The following is a brief summary of the most notable changes and developments provided in the new TEFRA regulations.

1. Public Hearing Notice Posting Period Reduced to Seven Days

Under the new TEFRA regulations, a notice of public hearing (or TEFRA notice) published or posted at least seven days prior to the public hearing will be presumed to give reasonable notice to members of the public who might wish to attend the hearing.  Under the 1983 temporary regulations, this presumption could be established only if the notice were published at least 14 days in advance of the hearing.

2. Website Posting of Public Hearing Notices

The new TEFRA regulations permit notices of public hearing to be posted on the website of the governmental unit approving the bond issue or, for “conduit bond” transactions, on the website of the conduit issuer.  This is a significant advance from the 1983 temporary regulations, which were released long before internet usage became commonplace, and is likely to provide cost savings compared to the publication of TEFRA notices in local newspapers, a practice that has predominated since the early 1980s.

In order to use website posting as a means of promulgating a TEFRA notice, the new TEFRA regulations require the notice to be posted on the governmental unit’s (or the conduit issuer’s) “primary public website” on a webpage that is used to inform residents about events affecting them.  In addition, apparently in recognition that websites are frequently updated and changed, the new TEFRA regulations state that issuers will be responsible for maintaining records (presumably for at least as long as the bonds remain outstanding, plus three years) showing that the TEFRA notice in fact was timely posted to an appropriate webpage.

3. Project Descriptions—Maximum Stated Principal Amount of Bonds

The new TEFRA regulations require a TEFRA notice and approval to include a maximum stated principal amount of bonds to be issued for each discrete “project” that is described therein.  A “project” is defined as “one or more capital projects or facilities, including land, buildings, equipment, and other property . . . that is located on the same site, or adjacent or proximate sites used for similar purposes.”  The new TEFRA regulations add that if capital projects or facilities are not located on the same site or at adjacent or proximate sites, they may nonetheless be treated as part of a single “project” if they are used in an “integrated operation”.  No guidance is provided as to what constitutes an “integrated operation”.

For some bond transactions, in which an issuer or a borrower with operations that are not closely integrated is financing multiple projects, it may be necessary to identify in the TEFRA notice and approval a separate maximum principal amount of bonds to be issued for each project.  This may necessitate effort on the part of such issuers and borrowers and their counsel to identify tailored “maximum amount” figures that represent their realistic expectations as to the costs of each such project that is to be bond financed.  For some, this may appear to be a new administrative imposition and a departure from TEFRA practices under the 1983 temporary regulations.

4. Timing Interval between Public Hearing and Public Approval

Consistent with the 1983 temporary regulations, the new TEFRA regulations are silent as to the maximum amount of time that may elapse between the date on which a TEFRA hearing is held and the date on which a public approval is secured.  However, the summary explanation accompanying the new TEFRA regulations states that, as general principle, a one-year interval between these two dates is reasonable and that an even longer interval may be reasonable in some cases. These statements appear to provide clarity for the first time that a gap of up to one year between TEFRA hearing and approval dates can be approved, though issuers will want to consult with bond counsel if the interval is anticipated to exceed one year, to determine whether a longer delay can satisfy the “reasonableness” standard implied in the summary explanation.

5. Timing Interval between Public Approval and Bond Issuance

The new TEFRA regulations clarify that bonds must generally be issued within one year after the date on which a TEFRA approval is secured.

6. TEFRA Procedures for “Blind Pools” of Qualified 501(c)(3) Bonds

The new TEFRA regulations permit issuers of so-called “blind pools” of qualified 501(c)(3) bonds (in which the 501(c)(3) organizations that will ultimately borrow the proceeds of the pool bonds are not identified on the issuance date of the bonds), to undertake a two-step TEFRA process. The first step, which must be completed prior to issuance of the pool bonds, is to secure an initial public approval (following a duly noticed TEFRA hearing) of the issue as a whole, from an “applicable elected representative” of the issuer (or of a governmental unit on whose behalf the pool bonds are being issued). The second step, when and as each pool loan is originated from bond proceeds to an identified 501(c)(3) organization, is to secure a supplemental public approval, including another issuer approval and a “host” approval in the jurisdiction in which the 501(c)(3) borrower’s project is to be located, prior to pool loan origination. Although “blind pool” bond transactions are not as common today as in the past (perhaps for market-based reasons), these provisions in the new TEFRA regulations might help facilitate such transactions in the future.

7. Post-issuance “TEFRA Cures”

The new TEFRA regulations offer issuers and borrowers a new and potentially useful tool, referred to as a “TEFRA cure,” which under certain circumstances will permit uses bond proceeds that would deviate substantially from the proposed uses of proceeds that were described in the original TEFRA notice and approval. For example, if an issuer described a hospital construction project to be located in City A in its original TEFRA notice and determined after bond issuance that because of a natural catastrophe in City A, it should instead allocate the bond proceeds to a separate hospital construction project in City B that was not described in the original TEFRA notice and approval, it could use the “cure” provisions in the new regulations to secure a new TEFRA approval for the newly identified project prior to reallocating the bond proceeds. This post-issuance procedure, which was not contemplated in the 1983 temporary regulations, is available to issuers and borrowers only if no substantial deviation with respect to the project (or the amount of bond proceeds to be allocated to the project) was reasonably expected at the time of the original TEFRA hearing and approval and only if the change in the proposed use of bond proceeds occurs as a result of unexpected events or unforeseen circumstances.


The preceding is a high-level summary of selected developments in the new TEFRA regulations. These regulations are likely to significantly affect the conduct of proceedings to secure TEFRA approvals. Issuers and borrowers of tax-exempt private activity bonds should consult counsel about how the specifics of the new TEFRA regulations might affect their preparations for upcoming bond transactions.


Please contact Antonio Martini at (617) 378-4136 or any other member of Hinckley Allen’s Public Finance Group if you would like more information about the new TEFRA regulations or if you have any other tax-exempt bond compliance matter you would like to discuss.

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