North Dakota Passes Bill that Permits States and Counties to Borrow up to $500,000 from Banks

North Dakota Governor Dalrymple signed House Bill #1194 in April 2015, which may provide community banks an opportunity to increase their municipal loan portfolio.

A political subdivision (city, county, etc.) may borrow against its anticipated revenue, from a bank located in North Dakota, up to $500,000 at any one time, using expected state aid as collateral, with (but not limited to) the following terms:
 

• The loan must be paid in full within five years.
• The loan must be authorized by a resolution of the governing body for the political subdivision.
• The loan agreement must be signed on behalf of the president, chairman or equivalent officer of the political subdivision.
• The loan documents must describe the revenue from which the loan is anticipated to be paid.
• The political subdivision may be required to establish a separate fund of the repayment of the loan by the due date.

Not a Bond, Can be Used for Non-specified Purposes

This is not a bond that requires citizen vote and is different than loans authorized for a specific purpose in that the political subdivision can use these funds for a non-specified purpose. These loans should provide the political subdivision with greater flexibility with funding and budgeting.

Interest Anticipated to be Tax Exempt

It is anticipated the interest earned by banks on these loans would be tax exempt for federal income tax purposes and also North Dakota tax purposes.

However, the Internal Revenue Code provides that a state or local government obligation is not tax-exempt if it does not comply with certain information reporting requirements. The information reporting requirements are satisfied if the governmental entity files Form 8038 with the Internal Revenue Service on a timely basis.

Whether the loan is Bank Qualified depends on the issuer. Each issuer has an annual limit of $10,000,000 that they can designate as Bank Qualified. Governmental subdivisions need to be combined when looking at the limit. For example, a city fire unit needs to be included with the entire city government when looking at the $10,000,000 limit. Usually, the entities won't exceed the $10,000,000 annual limit.

For further information, please contact your local Eide Bailly professional.