Headline:  Almost everybody likes a nice TAN.

Date: 1/27/2021

Body: Many people invest a crazy amount of money to achieve a nice, even tan. The tanning industry is almost $3 Billion per year.  Good to know, but, this is not the tan I am speaking of.   The TAN at issue stands for a Tax Anticipation Note.  The TAN is an interesting beast.   This security is floated by a municipality (usually a city or county) in an attempt to achieve some level of revenue before the taxes are actually collected.   When the taxes are collected, these notes are paid off, with some degree of interest.  Not too many people know about these investments, and one might have to look carefully for them.

What Is a Tax Anticipation Note (TAN)?

A Tax Anticipation Note is a debt security used by a state or local government to obtain funds for an emergent  program or project.   These debt securities will be paid back from tax receipts, usually within one year.  The agreement between the issuer and investor typically includes:

• First Claim:  when tax revenues are obtained, the resources are to be used to pay back the note before using the money for any other purpose.
• Project / Expense:  the debt is collected for a specific purpose, and the funds cannot be diverted to pay for any other project or expense.
• Maturity: There is a definite date at which this debt must be paid back.  Remember, the indenture underlying the notes is essentially a contract.  Consequently, this date cannot be changed.

For instance, a City might have a major river next to it, with a large bridge across it.   If this bridge is damaged, it has to be fixed quickly, or the economic activity of the city could be significantly decreased.   In this case, to fund the repairs of the bridge, the City would float a tax anticipation note (the interest rate is usually quite low because the term is quite short.)  This interest is generally paid by offering the notes at a discount: When they are redeemed, they are paid off at face value.   The difference is effectively the same as interest.  (a zero-coupon bond, sort of.)  Even though the interest rate is quite low, it is tax exempt on both the State and Federal levels.

This sounds like a great boon to a cash-strapped local government.   Why is it not used all the time?

The financial circumstances of a city or town are not constant.   There are boom times where there is plenty of tax revenue.   At other times, there is a disruption in the business landscape, businesses either die or move, and there is much less revenue as a result.   The TAN will help smooth out the pattern of this funding.   In consequence of this funding though, they face a few considerations:

The financial circumstances of a city or town are not constant.   There are boom times where there is plenty of tax revenue.   At other times, there is a disruption in the business landscape, businesses either die or move, and there is much less revenue as a result.   The TAN will help smooth out the pattern of this funding.   In consequence of this funding though, they face a few considerations:

1.  The notes WILL mature on the maturity date, and they MUST  be paid off.   This puts the municipality in somewhat of a fragile position.
2. Monies received upon issue of the TAN must be used first for that particular project.  If there are remainder funds, these can then be invested for other purposes.

Said another way:  In return for obtaining their money early, the municipality must give up a degree of financial freedom.  TANs are one of several types of anticipation notes that state and local governments can use to fund a short-term need; others include Revenue Anticipation Notes (RANs), Bond Anticipation Notes (BANs) and Grant Anticipation Notes (GANs).

How can I invest in these vehicles?

Sorry to say, folks, but the homework required is quite extensive.   But, if I were looking for a TAN to invest in, I would do something like the protocol below.  (Please note, I live near Rockville, MD in Montgomery County.)

1.   I would make a list of the municipalities that might be using the TAN as a type of financing.  In my case, that list would include MD, Baltimore, Annapolis, Montgomery County, Prince George’s County, Anne Arundel County, Wheaton and Rockville.
2. Each government mentioned has a finance function of some type.   You can call somebody in this function and ask them about any such opportunities to invest.   Alternatively, each government mentioned has a good website, and you can do research on your own.
3. When you find an opportunity, there is usually a Public Meeting concerning that TAN, and the Public is invited to attend (they rarely do) or they might offer a recording of this session on their website.
4. Once you make a selection, there will be instructions on how to invest in the TAN on whatever website you found the initial information.  First though, ensure that you read the indenture and understand what you are signing up for.

I found a great example within the New York Law.  A few things are noteworthy:

1. The Note, this time a Bond anticipation note, is legally restricted to fund only one purpose.
2. “The faith and credit of the issuing unit are hereby pledged for the payment of each note issued…” This appears in the second section.  In essence, remember, this is a government.  They can levy taxes, they have a law-enforcement division and they have a motivation to stay independent from the level of government above them.  The upshot of this is that the risk of this investment is quite low (related to the very low level of interest.)
3. The details of the presentation of the note are laid out in detail.   The terms have to be spelled out explicitly, and New York Law determines which public officials need to  sign each security.
4. Something I did not know, this NY Law area allows either Public  or Private Sale of this TAN.   Wait, this is important.    The question is, “Who benefits?”  The idea is that any project, the Public should equally benefit from this expenditure.  But, it can also be Privately-done sale.  Though pretty rare, this raises the possibility of government funding of a project that could benefit just a few.        

The Verdict

This could be a good investment, if it is part of a balanced portfolio.   When you do find an opportunity, please do your homework and review all paperwork.   This is generally a safe investment, but, you must exercise care.   Also be aware that there are usually other opportunities for investment that could provide you with a MUCH better rate of return.                                                            

REFERENCES

Tax Anticipation Note (TAN) Definition (investopedia.com)

Tax-Anticipation Note (TAN) (money-zine.com)

Article_9.pdf (ncleg.gov)

Editor’s Note: Please note that the information contained herein is meant only for general education: This should not be construed as Tax Advice.   Personal attributes could make a material difference in the advice given, so, before taking action, please consult your tax advisor or CPA.