Members

of the

Advisory Commission on Intergovernmental Relations

(July 1990)

Private Citizens

Daniel J. Elazar, Philadelphia, Pennsylvania

Robert B. Hawkins, ,111, Chrrilmcn~, San Francisco, Calil‘ornia

Mary Ellen Joyce, Arlington, Virginia

Members of the U.S. Senate

Dave Dot-enberger, Minnesota

Carl Levin, Michigan

Charles S. Robb, Virginia

Members of the U.S. House of Representatives

Richard K. Armey, Texas

Sander M. Levin, Michigan

Ted Weiss, New York

Officers of the Executive Branch, U.S. Government

Debra Rae Anderson, Deputy Assistant to the Prcsidcnt, Director of Intcrgovcrnmcntal Affairs

Samuel K. Skinner, Secretary of Transportation

Richard L. Thornburgh, Attorney General

Governors

John Ashcroft, Missouri

Booth Gardner, Washington

George A. Sinner, North Dakota

Stan Stephens, Montana

Mayors

Victor H. Ashe, Knoxville, Tennessee

Donald M. Fraser, Minneapolis, Minnesota

Robert M. Isaac, Colorado Springs, Colorado

.Joseph A. Leafe, Norl’olk, Virginia

Members of State Legislatures

John T. Bragg, Enncsscc I-louse 01 Rcprescntalives

David E. Nething, North Dakota Senate

Ted L. Strickland, Colorado Senate

Elected County Officials

Harvey Ruvin, Dade Counly, Florida, County Commission

Sandra R. fjmoley, Sacramento County, California, Bc);\rd of Supcwisors

James J. Snyder, Cattaraugus County, New York, County Lcgislnturc
The Volume Cap

for Tax-Exempt

Private-Activity

Bonds:

State and Local

Experience in 1989

Dennis Zimmerman

Advisory Commission on

Intergovernmental Relations

M-l 71

July 1990
Preface

and

Acknowledgments

The interest income on debt obligations issued by state

and local governments for public purposes has been exempt

from federal income tasation since the adoption of the federal income tax in 1913. Beginning in the 196&, however,

the Congress began to be concerned that some of the tax

exempt issues were being used to support activities that,

although related to the governmental mission, were essentially “private.” Starting with the Revenue and Expenditure

Control Act of I968 and continuing to the present time, a

series of restrictions has been placed on the freedom of state

and local governments to issue bonds for what the federal

government defines as private activities.

One of the most important of these restrictions on

“private- activity” bonds is the unified state volume cap that

was adopted as part of the Tw Refit-m Act of 1986. Prior to

the adoption of the volume cap, local governments and their

various authorities issued private-activity bonds. Considerable concern was expressed by local officials that, under the

cap, local governments would lose their independence in

issuing private-activity bonds and would be required to petition the state for every private-activity bond allocation. Users were concerned that their activities would not receive a

fair share of the cap.

Three full years after implementation, very little is

known about the states’ operation of the volume cap or

about their allocation priorities. Nor is much known about

the volume of private-activity bonds in each state. The De@-

tit Reduction Act of2984 requires that a form be filed with

the Treasury Department for every private-activity tax-exempt bond issue. Treasury has not reported this information

since the data on 1986 issues were summarized in 1988.

In order to help close this information gap and learn

how the volume cap is operating, Dennis Zimmerman of the

Congressional Research Service, Library of Congress, and a

Visiting Fellow at The Urban Institute (Winter 1989~Spring

1990), surveyed the 50 states and the District of Columbia to

obtain tiormation regarding state and local experience under the volume cap during 1989. The results of the survey

are presented in detail in this ACIR report.

The report begins with a brief review of the history of

the limitations on tax-exempt issuance, and then details the

priorities established by each state to allocate private-activity

bonds between state and local authorities. the volume and

composition of the bond allocations, and suggestions from

the states for reform of the existing volume cap rules.

The Commission wishes to acknowledge the assistance

of many persons in successfully completing this project,

especially those individuals in the 50 states who responded in

great detail to our survey request. Others who were helpful

in designing and/or criticizing the survey include Carol Cohen and Robert W. Rafusc, Jr., of ACIK; William G. Colman, consultant; Joyce Corry and Robert Dinkelmeyer of

the U.S. General Accounting Office; Bruce Davie of Arthur

Anderscn and Company; Richard Geltman and Michael

Decker of the Public Securities Association: and Catherine

Spain of the Government Finance Officers’ Association.

Anita McPhaul at ACIR provided secretarial assistance.

John Kincaid

Executive Director

Robert D. Ebel

Director, Public Finance

ii
Contents

PurposeandScope ................................................................................... 1

Limiting State and Local Bond Issuance ................................................................ 3

Taxable and Tax-Exempt Private Activities ........................................................... 3

VolumeCaps .................................................................................... 4

How the Unified Volume Cap Works ................................................................... 7

Who Administers the Volume Cap? ................................................................ 7

Allocation Priorities .............................................................................. 11

State Initiatives to Reform Priorities ................................................................... 1 5

Bonds Issued by Type of Activity and Year of Volume Cap. ................................................ 1 5

Has the Cap Reduced the Use of Private-Activity Bonds? ................................................. 1 7

BondsIssued~y States ............................................................................ 18

Is There Unused Volume Cap? .................................................................... 18

Volume Caps and the $150 Million Cap for Small States .............................................. 24

DeniedorDelayedProjects ........................................................................... 2 7

State Suggestions for Reform of the Volume Cap .............. .......................................... 2 9

Problems with Cap Allocation among States ......................................................... 29

Problems with Sunset ............................................................................. 29

Problems with Carry-Forward ...................................................................... 29

Problems with Activity Definition .................................................................. 29

Miscellaneous Suggestions ........................................................................ 30

SummaryofFindings ................................................................................ 31

Glossary ............................................................................................ 33

Appendix-Survey of State Experience with Private-Activity Bond Volume Cap .............................. 34

Figures and Tables

Figure I-Tax-Exempt Private-Activity Bonds Issued in 1989 Using 1989 and Prior Years’ Volume Cap Authority:

Ranked by Volume of Issues Using 1989 Authority . . . . . . .*.................................... 21

Figure 2-Percentage of 1989 Private-Activity Volume Cap Not Used in 1989, by Bonds Claiming 1989 Authority . . . 22

Figure 3-Percentage of 1989 Private-Activity Volume Cap Not Used in 1989. by Bonds Claiming 1989

or Prior Years’ Authority . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 3

Tuble 1 -Private-Activity Bond Volume for Sclcctcd Private Activities. as a Percentage of Bond Volume, 1975-86 . . . 4

Table d-volume Caps on Private-Activity Bonds, 1980-88 . . . . . . . . . . . . . . . . . . . . . . . . . . . . ...*..........*..*.. 4

Table 3-State Private-Activity Bond Volume Caps, Total and Per Capita, 1989 and 1990.. . . . . . . . . . . . . . . . . . . . . 8

.. . 111
Tuble I-State Agencies Responsible for Administering the Allocation of 1’1.i\,c\tc-Activity Bond Volume Cap, 1989 . . 9

Table 5-Allocation Priorities for the Volume Cap on Tax-Exempt Private-Activity Bonds in 1989:

Division between State and Local Govcrnmcnts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . , . . . . . . . . . . . 10

Table 6-Allocation Priorities for the Volume Cap on Tax-Exempt Private-Activity Bonds in 1989:

Division among Types of Activities and USC of Economic Measures as Selection Criteria . . . . . . . . . . 12

Table 7-New-Issue Tax-Exempt Private-Activity Bonds Issued in 1989 Subject to the Volume Cap:

By Type of Activity and Year of Authority . . . . . . . . . . . . . . . . . . . . . . . . ..*....*.,...,.........,... 16

Table 8-The Effect of the Volume Cap on New-Issue Private-Activity Bonds: 19S9 Volume Compared

to Average for 1984-86 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

Table 9-Tax-Exempt Private-Activity Bonds Issued in 19S9: By State and Type of Activity . . . . . . . . . . . . . . . . . . . . 19

Table IO-Number of States with Unused Volume Cap and Total Unused Volume Cap after Adjustment

for Short Planning Horizon and Irrevocable Carry-Forward Election e..........,....,........... 2 4

TabZe II-States with Unused Volume Cap in 1989, by Type of Cap Allocation: Number of States

and Percentage of Cap Unused . . . . . . . . . . . . . . . . . . . . . . . . .I.....................,............. 2 5

Table 12-Denied or Delayed Requests for Volume Cap in 19S9. Divided between State Reporting Exhausted

andUnusedVolumeCap . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28

iv
Purpose

and Scope

This report presents the results of a survey of state

and local government experience in calendar year 1989

with the volume cap on state and local issuance of taxexempt private-activity bonds. The volume cap was institutcd by lhc Tax Rejorm Act of 1986 and represented a

continualion of federal policymakers’ efforts to restrict

state and local use of tax-exempt bonds for “private”purposes that began with the Revenue andExpenditure Control

Act qf 1968.

Prior to the adoption of the volume cap, local governments and their various authorities issued private-activity

bonds independently of state control. Considerable concern was expressed by local officials that, under the cap,

local governments would lose their independence in issuing private-activity bonds and would be required to petition the slate for every private-activity bond allocation.

Proponents of the various private activities subject to the

volume cap also were concerned that their activities

would not receive a fair share.

Three full years after implementation, very little is

known about the states’ operation of the volume cap or

about their allocation priorities. Nor is much known about

the volume of private-activity bonds issued in each state.

The Dejlicit Reduction Act oj.2984 required that a formbe

filed with the Treasury Department for every privateactivity tax-exempt bond issue, although no requirement

was imposed on Treasury to summarize and publish this

information. Nonetheless, the information on these

forms is summarized in a report that appears periodically

in the SOI Bulletin, a quarterly report of the Internal

Revenue Service. Unfortunately, no report has appeared

since the data on 1986bond issues were summarized in the

Summer 1988 issue.

This survey was designed to close some of the information gaps noted above. Three types of information

were obtained. One set of questions asked about the priorities established to allocate the cap: that is, the priorities

used to allocate the cap between state government and

local governmental units; the priorities used to allocate

the state and local shares by types of activities; and pending or proposed changes in these priorities.

The second set of questions requested data on: (1) the

total volume of bonds issued in 1989 requiring a volume

cap allocation: (2) the division of this total volume between issues using an allocation from the 1989 cap and

those using an allocation carried forward from volume cap

authority unused in previous years; (3) the division of

these two categories (current year and carry-forward) by

type of private activity; and (4) bond volume by type of

activity that had to be denied or delayed due to the unavailability of authority under the volume cap. These data

are useful for assessing the decrease in private-activity

bond volume since the cap’s adoption in 1986. The data

also show the presence in some states of unused volume

cap available to finance exempt private-activily bonds in

1989 and, in other states, of insufficient volume cap to

finance all rcqucsts for volume cap allocations in 1989. No

information was collected on the total amount of prior

years’ unused volume cap that was available to finance

bond issues in 1989.

1
A final question requested suggestions for reform of

the existing volume cap rules that have been imposed by

the federal government.

The survey was prepared jointly by staff at ACIR and

The Urban Institute, and was mailed to all 50 states and

the District of Columbia. Responses were received from

all 50 states. Only the District of Columbia did not respond. The bond volume data from Alabama could not be

rcconcilcd and is no1 included in the numerical tables,

although its information on priorities is included in the

tables explaining allocation priorities. Thus, the numerical data in this report cover 49 states.

Before reporting the survey results, a brief history of

federal limitations on state and local bond issuance and an

explanation of how the private-activity bond volume cap

works are presented in the next section.
Limiting

State and Local

Bond Issuance

The federal effort to limit bond issuance has taken

many dil’l’crcnt paths, two of which are described here: (1)

defining what constitutes taxable and tax-exempt private

activity bonds; and (2) imposing a cap on the volume of

tax-exempt private-activity bonds.

TAXABLE AND TAX-EXEMPT

PRIVATE ACTIVITIES

The intcrcst income on debt obligations issued by

state and local governments has been exempt from federal income taxation since the adoption of the federal income tax in 1913. Denial of this interest exemption for

some state and local debt began with the Revenue and

Expenditure Control Act of 1968, which declared that certain bonds had an unacceptably large portion of the proceeds being used for private purposes and were therefore

taxable as industrial development bonds (IDBs).

Taxable IDBs were defined by two tests: 25 percent or

more of the bond proceeds were used in a trade or business

and 25 percent or more of the debt service was secured by

property used in or derived from a trade or business. Some

of the activities excluded from tax exemption by these tests

were thought to produce sufficient public benefits to merit

tax-exempt status and were granted a special exception to

the IDB tests. These activities were: (1) residential real

property; (2) sports facilities; (3) facilities for a convention or

trade show; (4) airports, docks, wharves, mass commuting

facilities, parking facilitics, or facilities for storage or training

directly related to any of the foregoing; (5) sewage or solid

waste disposal facilities and facilities for the local furnishing

of electric energy, gas, or water; (6) air or water pollution

control facilities: and (7) acquisition or development of land

for industrial parks. In addition, any IDB issue of $1 million

or less (what came to be known as the small-issue IDB) was

exempt if the proceeds were used for the acquisition, construction, or improvement of land or depreciable property.

More restrictions followed over the next 20 years.1

The Dejkit Reduction Act of 1984 defined a taxable consumer-loan bond as one in which 5 percent or more of the

proceeds are used, directly or indirectly, to make loans to

persons for nonbusiness purposes (because such loans

were not used in a trade or business, they had never

passed the 25 percent trade or business tests, and were

therefore tax exempt). Exceptions were made for mortgages and student loans. The Tw: Reform Act of 1986

dropped the term IDB, substituted private-activity bonds,

and lowered to 10 percent both parts of the private business test. Bonds failing the private business test are

tcrmcd governmental bonds and are tax exempt. Those

passing the test are termed taxable private- activity bonds

(including consumer-loan bonds, which were renamed

private-loan bonds in 1986). All exempt private activities

arc reclassified as tax-exempt private-activity bonds, including bonds issued for mortgages, student loans, and

nonprofit organizations (so-called 501(c)(3) organizations). The original list of tax-exempt private activities has

changed over time. Some activities have been eliminated

from the list, such as sports stadiums, convention centers,

and private pollution control facilities; and others have

3
Table 1

Private-Activity Bond Volume

for Selected Private Activities,

as a Percentage of Total Bond Volume, 197586

(billions)

Private Share of

Actlvitv Total Volume

Year Amount Percent

1975 $6.2 20.6%

1976 6.4 24.0

1977 13.1 27.9

1978 15.8 32.2

1979 24.6 51.1

1980 29.4 53.6

1981 27.4 48.5

1982 44.0 51.7

1983 49.9 71.0

1984 65.8 72.7

1985 99.4 67.9

1986 17.2 20.0

Source: 1975-1982-Joint Committee on ‘lk?tion, E~II& in

the Use of Tax--Exempr Bomis t o Finance l%vote Activities, Joint Committee Print, June 13, 1983; 1983-1986

private-activity dnta-Gerald Aulen and Edward

Chung, “Private Activity %x-Exempt Bonds, 1986,”

SO1 Bulletin (Summer, 1988); 1983-1986 new issue

volume for share calculalion from Bond Buyer 1969

Yearbook.

Joint Committee dafa do not include such private activities as ports, airports, sports or convenlion facilities,

industrial parks, and the local furnishing of electricity

or gas. Auten and Chung data are comprehensive.

been added to the list. such as hazardous waste disuosal.

acquisition of investor-owned output (electric ani gasj

utilities, and high-speed intcrcity rail transit. Table 7 contains a list of tax-exempt private activities.

L

A

:

G

G

5

-

X

s

In addition, the proceeds of the bonds issued for some

tax-exempt private activities have been restricted to use in

selected locations or by persons possessing particular socioeconomic characteristics. Such restrictions are particularly important for mortgage revenue bonds, multifamily

rental housing bonds, student loan bonds, and qualified

redevelopment bonds.

VOLUME CAPS

Despite these efforts to define private-activity bonds

and to control the associated federal revenue loss, the

share of long-term tax-exempt bond volume devoted to

activities defined as private continued to grow. Table 1

shows this share increased steadily from 20.6 percent in 1975

to 72.7 percent in 1984. Congress reacted by instituting a

series of caps that placed a ceiling on the total volume of

private-activity bonds that could be issued in a yeare

These volume caps are summarized in Table 2. The

first volume restriction was enacted in the Morrguge Subsidy Bond Act of 1980. The annual volume of qualified

mortgage bonds in a state was limited to the greater of (1)

9 percent of the average annual aggregate principal

amount of mortgages executed during the three preceding years for single-family owner-occupied residences located in the state or (2) $200 million. In 1984, the Deficit

Reduction Act extended the concept to qualified veterans’

mortgage bonds, limiting their volume to an amount equal

Table 2

Volume Caps on Private-Activity Bonds, 1980-88

ctivity

[ortgage Revenue Bonds

tterans' Mortgage Bonds

ireater of $150 per Person or $200 Million

Exempt Private Activities Not Included in the Cap:

Mortgage Revenue Bonds

Veterans’ Mortgage Bonds

501(c)(3) Bonds

Multifamily Rental Housing

Airports, Docks, Wharves’

Convention and Trade Show’

Mass Commuting’

1980 1984 1986 1987 1988

X STOP

X

X STOP

ireater of $50 per Person or $150 Million’

Exempt Private Activities Not Included in the Cap:

Veterans’ Mortgage Bonds

501(c)(3) Bonds

Ailports, Docks, Wharves’

Solid Waste Disposal’

X

Private Activities Given Exempt Status and Subjected to the Cap:

Takeovers of Investor-Owned Utilities X

High-Speed Intercity Rail Transit-25% of Prc~eecls X

01(c)(3) Organizations Limited to $150 Million of Outstanding Tax-Exempt Bonds x

:-year cap adopted.

TOP-year cap terminated.

‘Exception applies to facilities owned by or on bchnlf of govcrnmcntal cnlities.

*Effective 1988; through 1987, was greater of $75 per person or $250 million.
to (1) the aggregate amount of such bonds issued by the

state during the period from January 1, 1979, through

June 22, 1984, divided by (2) the number (not to exceed

five) of calendar years after 1979 and before 1985 during

which the state actually issued qualified veterans’ bonds.

The Deficit Reduction Act of 1984 also extended volume caps beyond housing. The Act imposed a volume

limitation on certain categories of IDBs and on student

loan bonds set at the greater of $150 per state resident or

$200 million. The object was to reduce the growth of

private-purpose bonds while allowing the state and local

sector to make decisions about what types of activitiesbest

serve public purposes and should be allocated part of the

scarce private-purpose volume cap. The Congress, however, retained some allocative control and exempted

some IDBs from the cap: multifamily rental housing and,

if owned or operated on behalf of a governmental entity.

convention or trade show facilities, airports, docks,

wharves, and mass commuting facilities. This Act also

introduced the first cap based on the outstanding stock of

tax-exempt bonds rather than on the annual volume of

bond issues. Any beneficiary’s use of small-issue IDBs was

limited to $40 million of outstanding bonds.

The 1986 Tax Reform Act made the most important

move away from public-purpose definition. It set avolume

cap for each state equal to the greater of $50 per capita or

$150 million, effective in 1988 (for 1987, the cap was set

temporarily at the greater of $75 per capita or $250 million). The only private-activity bonds not subject to the

cap are those issued for nonprofit organizations: for governmentally owned airports, docks, wharves, and solid

waste disposal facilities; and for qualified veterans’ mortgages (which remain subject to their own cap). The separate cap for mortgage revenue bonds was eliminated. A

cap of $150 million was imposed on a nonprofit organization’s outstanding stock of tax-exempt bonds, with an exception allowed for hospital facilities.

Many critics argued that all of these efforts to define

taxable private activities and to limit issuance of bonds for

tax-exempt private activities were unconstitutional because the exemption was protected by the Tenth Amendmcnt and the doctrine of intergovernmental tax immunity. The U.S. Supreme Court took the opportunity, when

deciding a challenge to the constitutionality of the requirement to issue tax-exempt bonds in registered rather

than bearer form, to settle this issue. Speaking for the

Court, Justice William J. Brennan said that any protection

for state and local interest income on tax-exempt bonds

must be statutory rather than constitutional.

We see no constitutional reason for treating persons who receive interest on governmental bonds

differently than persons who receive income

from other types of contracts with the government, and no tenable rationale for distinguishing

the costs imposed on States by a tax on State bond

intcrcst from the costs imposed by a tax on the income from any other State contract. South Curolina v. Baker, 56 USLW 4311 (April 20, 1988).

Thus, any relaxation of the numerous restrictions on

tax-exempt bond issuance imposed in the last 20 years is

likely to be motivated by economic or political factors

rather than legal considerations. This makes it important

to understand how the volume cap has worked.

How the

Unified Volume Cap

Works

Under current law, each state has the authority to

issue tax-exempt private-activity bonds in an amount

equal to $50 per resident of the state, calculated using the

most recently released Bureau of the Census state population estimates. If a state’s population results in the authority to issue less than $150 million, the state allocation

is automatically raised to $150 million.3 Table 3 contains

the private-activity volume caps and the corresponding

per capita amounts that prevailed in 1989 and to which the

states are subject in 1990. The table shows that 22 smaller

states plus the District of Columbia received a 1989 allocation far in excess of $50 per capita in 1989, topped by

Wyoming with $318 and Alaska with $292.

As a spur to state legislation, the volume cap legislation

imposed a 50150 split of the volume cap between state and

local issuing authorities that was to prevail until the governor issued a proclamation or the state legislature passed a

statute concerning an alternative allocation. No restrictions

were placed on the states’ latitude in changing this 50/50

allocation between state and local units of government or

reserving a portion for various types of private activity.

Volume cap that is not used during the year in which it

is received may be carried forward for a period of three

years. At the time of carry-forward, the state must make

an irrevocable election of the type of activity (but not the

specific project) for which the unused volume cap will be

used, such as qualified mortgage revenue bonds or student loans. Small-issue industrial development bonds

may not be financed with carry-forward authority, nor may

any of the portion of governmental bonds that may be

used for private purposes (10 percent governmental bond

proceeds). Any carry-forward assigned to mortgage revenue bonds must be used before the exemption for mortgage revenue bonds expires in September 1990.

The states are not required to report to the Internal

Revenue Service on their compliance with the volume

cap. As with most aspects of the tax-exempt bond law, IRS

relics primarily on voluntary compliance implemented by

bond counsel, who offer opinions that a proposed bond

issue conforms to the provisions of the tax code. If the

volume cap is exceeded and it comes to the attention of

the tax authorities, those bond issues that placed the

state’s volume over the cap are deemed to be taxable.

WHO ADMINISTERS THE VOLUME CAP?

“Diverse” is an apt characterization of the state agencies responsible for allocating the volume cap. A few

states have retained total control of the voiume cap within

the governor’s office. Some states have placed the responsibility with the state offices responsible for the financial

aspects of the state’s operations, usually the offices dealing with budget and finance, or with the office responsible

for issuing public debt, usually the treasurer’s office. Other states have given the responsibility to the agencywhose

mandate seems most closely to approximate the purpose

for which the bonds are issued, usually a department of

commerce or a department of economic and community

development. A few states have created an entirely new

entity to allocate the cap, giving it a title such as “bond

allocation committee.” A list of the responsible state

agencies is presented in Table 4.

7
Table 3

State Private-Activity Bond Volume Caps

Total and Per Capita, 1989 and 1990

1990VolumeCa~1 1989VolumeCao

Total Total

State

Alabama

Alaska

Arizona

Arkansas

California

(thousands) Per Capita

$205,900 $50

150,000 285

177,800 5 0

150,000 6 2

1,453,150 5 0

(thousands) Per Capita

$206,350 $50

150,000 292

173,300 5 0

150,000 6 2

1,408,400 5 0

Colorado 165,850 5 0 164,500 5 0

Connecticut 161,950 5 0 162,050 5 0

Delaware 150,000 223 150,000 227

District of Columbia 150,000 248 150,000 242

Florida 633,550 5 0 618,850 5 0

Georgia 321,800 5 0 320,050 5 0

Hawaii 150,000 135 150,000 137

Idaho 150,000 148 150,000 150

Illinois 582,900 5 0 577,200 5 0

Indiana 279,650 5 0 278,750 5 0

Iowa 150,000 5 3 150,000 5 3

Kansas 150,000 6 0 150,000 6 0

Kentucky 186,350 5 0 186,050 5 0

Louisiana 219,100 5 0 22 1,000 5 0

Maine 150,000 123 150,000 124

Maryland

Massachusetts

Michigan

Minnesota

Mississippi

Missouri

Montana

Nebraska

Nevada

New Hampshire

234,700 5 0 232,200 5 0

295,650 5 0 293,550 5 0

463,650 5 0 465,000 5 0

217,650 5 0 215,300 5 0

150,000 5 7 150,000 5 7

257,950 5 0 256,950 5 0

150,000 186 150,000 187

150,000 8 3 150,000 9 4

150,000 135 150,000 142

150,000 136 150,000 137

New Jersey 386,800 5 0 386,000 5 0

New Mexico 150,000 9 8 150,000 9 9

New York 897,500 5 0 894,900 5 0

North Carolina 428,550 5 0 326,300 5 0

North Dakota 150,000 227 150,000 226

Ohio 545,350 5 0 543,600 5 0

Oklahoma 161,200 5 0 163,150 5 0

Oregon 150,000 5 3 150,000 5 5

Pennsylvania 602,000 5 0 601,350 5 0

Rhode Island 150,000 150 150,000 151

South Carolina 175,600 5 0 174,650 5 0

South Dakota 150,000 210 150,000 210

Tennessee 247,000 5 0 245,950 5 0

Texas 849,550 5 0 839,000 5 0

Utah 150,000 8 8 150,000 8 9

Vermont 150,000 265 150,000 270

Virginia 304,900 5 0 299,800 5 0

Washington 238,050 5 0 230,950 5 0

West Virginia 150,000 8 1 150,000 8 0

Wisconsin 243,350 5 0 242,900 5 0

Wyoming 150,000 316 150,000 318

Total $149387,450 $14,178,050

Source: ACIR-Urhn Instilute, Privntc-Activity Bond Survey.

8
State’ State Administering Agency

Alabama

Alaska

Arizona

Arkansas

California

Industrial Development Authority

State Bond Committee

Department of Commerce

Development Finance Authority

Debt Limit Allocation Committee

Colorado

Connecticut

Delaware

Florida

Georgia

Department of Local Affairs, Division of Local Government

Private-Activity Bond Commission

Department of Finance

Department of General Services, Division of Bond Finance

Department of Community Affairs

Hawaii

Idaho

Illinois

Indiana

Iowa

Department of Budget and Finance, Finance Division

Department of Commerce

Office of the Governor

Employment Development Commission

Iowa Finance Authority

Kansas

Kentucky

Louisiana

Maine

Maryland

Department of Commerce

Private-Activity Bond Allocation Committee and office of Financial Management and Economic Analysis

State Bond Commission and Office of the Governor

Finance Authority of Maine

Department of Economic and Employment Development

Massachusetts

Michigan

Minnesota

Mississippi

Missouri

Executive Office for Administration and Finance

Department of Treasury

Department of Finance, Cash and Debt Management Division

Department of Economic Development

Department of Economic Development

Montana

Nebraska

Nevada

New Hampshire

New Jersey

Department of Administration, Office of the Director

Investment Finance Authority

Department of Commerce

Housing Finance Authority and Industrial Development Authority

Department of the Treasury

New Mexico

New York

North Carolina

North Dakota

Ohio

State Board of Finance, Department of Finance and Administration

State Budget Division

Federal Tax Reform Allocation Committee

Office of the Governor

Director, Department of Development

Oklahoma

Oregon

Pennsylvania

Rhode Island

South Carolina

Department of Commerce

State Treasury and Private-Activity Bond Committee

Department of Commerce, BUr8aU of Bonds

Public Finance Management Board

State Budget and Control Board

South Dakota

Tennessee

Texas

Utah

Vermont

Office of the Governor

Department of Economic and Community Development, Division of Community Development

Department of Commerce

Department of Economic and Community Development, Division of Community Development

Emergency Board

Virginia

Washington

West Virginia

Wisconsin

Department of Housing and Community Development

Department of Community Development

Department of Community and Industrial Development

Department of Development, Housing and Economic Activity Development Authority,

and Building Commission

Wyoming Office of the Governor

‘The District of Columbia did uot respond lo the suwcy.

Source: ACIR-Urban Institute, Private-Activity Uond Stuvey.

Table 4

State Agencies Responsible for Administering the Allocation

of Private-Activity Bond Volume Cap, 1989

9
Table 5

Allocation Priorities for the Volume Cap on Tax-Exempt Private-Activity Bonds in 1989:

Division between State and Local’Governments -

(dollar amounts in millions)

State’

All

to State

Alabama

Alaska

Arizona

Arkansas

California

Colorado

Connecticut

Delaware

Florida

Georgia

Hawaii

Idaho

Illinois

Indiana

Iowa

Kansas

Kentucky

Louisiana

Maine

Maryland

Massachusetts

Michigan

Minnesota

Mississippi

Missouri

Montana

Nebraska

Nevada

New Hampshire

New Jersey

New Mexico

New York

North Carolina

North Dakota

Ohio

Oklahoma

Oregon

Pennsylvania

Rhode Island

South Carolina

South Dakota

Tennessee

Texas

Utah

Vermont

Virginia

Washington

West Virginia

Wisconsin

Wyoming

Divided between State and Local Governments

At least 25% to municipalities

20% to state, 42% to nonurban areas, and 38% to urban areas

50% to state, 25% to larger local governments based on population,

25% available to other local issuers

72% to state, 18% to municipalities and their authorities

$75 to state, $26.3 to New Castle County, $18.8 to City of Wilmington,

$15 each to Kent and Sussex Counties

40% to state, 60% to 16 regions (groups of counties) in proportion to population

50%tostate,37.55% toCityandCountyof Honoluluand5.03%to Hawaii,2.41%toKauai,and5.01%

to Maui counties

50% of 5/l 1 of cap to state, 50% of 5/l 1 of cap to non-home rule local governments, and

6/l 1 of cap to home rule local governments

38% to state, 62% to local governments

53% to state, 5% to local governments, remainder open

At least 60% to local governments

70% to state

47.5% to state, 40% to counties in proportion to population, 2.5% to municipalities

40% to state, 60% to local governments

$105 to state, $45 to local governments

50% to state, 50% to local governments in proportion to population

60% to state, 40% to local governments

One-third to state, one-third to local governments, and one-third reserved for all issuers

$225 to state, $130 to local governments

24% to state, 56% to local governments

$127.5 to state, $22.5 to local governments

After a set-aside for housing and small issues, 50% of remainder to counties for small issues

40% to state, 60% to local governments

$25 to state, remainder to counties in proportion lo population

15% to state, remainder available to all issuers

25% to state, 50% to cities and counties with 30,000 population and 4-year total bond issuance

of $12 million, and 25% to other cities and counties

86% to state, 14% to local governments

$115 to state, remainder to local governments

Note: All to State-No set-asides for local governments.

Divided between State and Local Governmenis-Set-nsicles for local governments for nt least part of the year.

‘The District of Columbia did not respond to the suwey.

Source: ACIR-Urban Institute, Private-Activity I3ond Survey.

1 0
These agencies are responsible for keeping track of

private-activity bond issues that draw on the cap, and most

also prepare an annual report on their activities. Some of

these agencies are also responsible for processing applications for cap allocations and making decisions about which

applications will receive a cap allocation based on priorities enacted by legislative statute or proclamation of the

governor; the remaining agencies seem to perform primarily a pass-through function in which they allocate the

year’s allowable bond volume to other agencies or authorities (such as housing, education, or development finance

authorities) according to predetermined amounts. Thcsc

recipient agencies or authorities then assume the responsibility for choosing among the requesters for shares of

the volume cap.

ALLOCATION PRIORITIES

Two types of priorities have been cstablishcd. Some

states set aside fixed proportions or dollar amounts of the

cap for state authorities and local authorities. Some states

also dedicate a fixed proportion or dollar amount of the

cap for a particular type of activity. The material presented here is based entirely on the information provided

by the survey respondents, so it is subject to the range of

errors common to responses to such instruments.

Division between State and Local

Issuing Authorities

The results of state legislation to allocate the cap are

divided into two categories in Table 5. The “Xl1 to State”

category lists those states reporting that 100% of the cap is

nominally in state hands. Local governments in these

states must ask the state for cap allocations and compete

with state usage in all cases. Some states in this category

are explicit in stating that the cap is available to all state or

local issuers on an equal basis, subject of course to any

priorities established for favored activities, which are discussed in the next section. Others are not explicit about

equal access for state and local issuers, but the implication

seems to be that the cap is available to both state and local

issuers on an equal basis.

The “Divided between State and Local” category lists

those states that divide the cap into portions for state use

and for local use and describes the allocations. The divisions are not absolute, however. The usual procedure is to

reserve an allocation forat least nine months of the calendar year. It is not even clear in all cases that a portion

reserved for the state is necessarily used by the state. For

example, a portion allocated to a state housing finance

agency may mean simply that its share of the cap is protected from local development or student loan authorities

but is available to be allocated by the state housing finance

agency to local governments seeking funding for multifamily rental housing. Consequently, the allocation listed

in the “Divided between State and Local” column is very

likely not an accurate rellection of which government

actually issues the bonds that use the cap.

The allocation among governmental units in most

states is further muddied if the reserved allocation is not

used by a set date during the year, which for most states

lies somewhere between September 1 and December 21.

When this date arrives, any unused cap usually reverts to a

central pool available to other issuers, sometimes restricted to issuers at the same level of government that

has not used the cap, but often including both state and

local issuing authorities.

Illinois’ allocation between the state and its local

governments is unique. The 1986 Act established a system

of direct allocations to units of home-rule government in

states that have a home-rule unit system. The only state to

which this system applies is Illinois. This “home-rule” rule

has the effect of bypassing any allocation system established by state legislation or proclamation. The resulting

allocation gives 6111 of the Illinois volume cap to the 109

home-rule units of local government (because these governments comprise 6/11 of the state population), and 501

to the state. Half of the state’s share is reserved for the

state, and half is reserved for non-home-rule units of local

government. Needless to say, since the 109 home-rule

governments act entirely independently of the state allocation system, the data on cap allocations in the remainder of this chapter include only the portion of the Illinois

cap controlled by the state (which happens to include a

small portion of the home-rule allocation that a few local

governments return to the state).

Table 5 indicates that 28 of the 50 states have reserved

portions of the cap for local issuers. The allocation is

nonspecific in most states, usually saying that no more than x

percent goes to the state and y percent goes to local govemments. A few states get very specific. Tennessee divides the

nonstate share among counties in proportion to their population, and Utah reserves 50 percent of the cap allocation for

cities and counties having at least 30,000 population and a

four-year total bond issuance of at least $12 million.

Division between Types of Exempt Activities

and Selection Criteria

The 1986 Act subjected most exempt private activities

to the volume cap, and many states decided to set aside a

portion of the cap to be used exclusively for a subset of

these activities. The states also had to establish criteria for

selecting among competing prqjects. These priorities and

criteria are summarized in Table 6. States that report no

priorities among competing activities and allocate the cap

on a first-come first-served basis, with an occasional restriction on the maximum size of the allocation for a

project, are listed under the “No Priorities” column. Only

18 states fall in this category. The remaining 32 states have

either established priorities among activities or have allocated the cap among competing projects according to

some set of economic criteria, most often the number of

jobs crcatcd or number of low-income persons benefited.

A statement of intent to use the private-activity bond

volume to promote economic growth and job creation is

nearly universal in the states’ enabling legislation orproclamations that established the private-activity bond programs. Unless these economic growth and job creation

criteria have some element that is unique. they are not

included in the description in Table 6. Several of the

priority systems are described below.

11
Table 6

Allocation Priorities for the Volume Cap on Tax-Exempt Private-Activity Bonds in 1989:

Division among Types of Activities and Use of Economic Measures as Selection Criteria

(dollar amounts in millions)

State’

Alabama

Alaska

Arizona

Arkansas

California

N o

Priorities Priorities

25% housing, 10% student loans, 35% small issues, and 15% exempt facilities

0

l

$15 multifamily housing, $50 industrial development, $25 single-family housing, $15 student loans, and the balance for all other bonds; allocated in

chronological order

Top priority is low-income multifamily and single-family housing, small issues ranked by number of new jobs created (relocated jobs receive lower

priority), and priority of all other activities depends on benefits to lower income households

Colorado

Connecticut

Delaware

Florida

6

Georgia

Hawaii

Idaho

Illinois

Indiana

Iowa

Focus on housing, agricultural development, postsecondary education facilities, health facilities, and student loans; choices made based on job

creation and retention

42% of state share to housing, 32% economic development

.

62.5% of state share to housing

40% to housing, 40% to economic development (must have one job created per $125,000 of bonds)

.

.

l

28% of state share to housing, 1% student loans, 8% economic development; local share not specified by activity

30% single-family housing, 12% economic development, 16% student loans, 5% small issues for first-time farmers, and all other activities on a

chronological basis

Kansas

Kentucky

Louisiana

Maine

Maryland

Massachusetts

Michigan

Minnesota

$5 student loans, $25 small issues, $5 for private-use portion, approved in chronological order

.

.

Priority order is small issues, housing, student loans, all others; small issues allocation based on economic impact

60% housing (35% to counties on a per capita basis), and 15% to non-housing (to counties on a per capita basis)

.

Chronological, but can adjust based on economic impact and leverage of other capital sources

Priority to manufacturing, housing, and public facilities; Minneapolis and St. Paul and other first-class cities guaranteed percentage of cap

(choices made by lot if cap is insufficient)

Mississippi

Missouri

l

No activity favored, but priority based on ability of beneficiary to locate project outside state, impact on local businesses, number of persons,

families, or businesses which will benefit from project
State’

Montana

Nebraska

N o

Priorities

Nevada

New Hampshire

New Jersey

New Mexico

New York

North Carolina

North Dakota

Ohio

Oklahoma

Oregon

Pennsylvania

Rhode Island

South Carolina

South Dakota

Tennessee

Texas

Utah

Vermont

Virginia

Washington

West Virginia

Wisconsin

Wyoming

Table 6 (cont.)

Allocation Priorities for the Volume Cap on Tax-Exempt Private-Activity Bonds in 1989:

Division among Types of Activities and Use of Economic Measures as Selection Criteria

(dollar amounts in millions)

Priorities

40% of state share to housing, 25% student loans, and remainder for other activities on chronological basis

30% housing, 20% student loans, 20% all otheractivities, and30% at the governor’s discretion; choiceamong projects within category based on job

creation and retention

l/3 housing and 2/3 all other activities

Largest shares usually go to housing and economic development; a small amount to environmental protection activities; $20 set aside for private-use

portion

Single-family housing and small issues allocated on a chronological basis

20% to small issues

$60 of state share to housing, $60 economic development, and $7.5 energy

First priorities are housing and student loans; 50% of the remainder for small issues and 50% for exempt facilities

Chronological order with some discrimination by job creation

Priority 1 - manufacturing and other activities that export more than half of their output, or produce goods more than half of which are used to produce

exported products, or more than half their output substitutes for imports intoTennessee. Priority 2-single-family housing, multifamily housing,

and other activities that have a secondary impact on Tennessee economy. Priority 3-other eligible areas.

33% single-family housing, 10% small issues

State share used for single-family housing and student loans

Housing, industrial development, and student loans

41% housing, 41% industrial development, 8% student loans, and 10% at governor’s discretion. Allocation based on chronological order.

Apportionedforhousing, student loans, exempt facilities (sewage treatment, masstransit, local utilities,etc.), public utility districts, and small issues.

The decreasing order of priority is single-family housing, small issues, multifamily housing, and all other activities. Allocation based on chronological

order.

$90 for single-family housing.

Note: No Priorities-No set-asides for specific activities or allocation based on economic criteria.

Priorities-Set-asides for specific activities or allocation based on economic criteria..

Qhe District of Columbia did not respond fo the survey.

Source: ACIR-Urban Institute, Private-Activity Bond Survey.
California makes low-income multifamily rental housing its top priority, followed by single-family housing with

special emphasis on low-income applicants. Small-issue

IDBs are the next priority, with the choice among competing

projects based on the number of jobs created. Within the

jobs criterion, preference is granted to new jobs over relocated jobs, and to jobs created in enterprise zones over other

locations. The choice among all other types of activities is

based on the extent to which low-income households are

benefited. California stands almost alone among the states

in the extent to which it attempts to focus its private-activity

bond volume on low-income households.

Tennessee claims to choose among competing projects entirely on the basis of their projected impact on the

state economy. The first priority goes to manufacturing

and other activities that (1) export more than half their

output, (2) produce goods more than half of which are

used to produce exported products, or (3) produce goods

more than half of which substitute for imports into Tennessee. The second priority is for single-family housing,

multifamily housing, and other activities that have a secondary impact on the Tennessee economy. The third

priority is all other eligible uses.

Georgia takes a numerical approach. It requires that

private-activity bonds issued for economic development generate at least one job for every $125,000 of bonds issued.

14
State Initiatives

to Reform Priorities

Seven states report some degree of interest in changing

their allocation priorities in response to their experience

with the volume cap. Arkansas is considering changing from

a first-come first-served basis to a system of as yet unspecified priorities. Nevada has recently introduced criteria for

allocating the state share of the cap, among them the number of new jobs created and jobs retained, and any known

environmental impact from the project. Minnesota also is

considering changes in its priority system, but the changes

are not yet public information. Oklahoma is increasing its

share allocated to small issues, and is adding shares for

student loans and exempt facilities. South Carolina may shift

from a predominantly first-come first-served basis to a more

explicit consideration of economic impact. Wisconsin reports

some legislative interest in setting more explicit shares for

the activities currently considered priorities. Illinois plans to

set an earlier date (July 15) when the unused volume cap of

home-rule units (except Chicago) reverts to a common pool

available for all issuers.

Bonds Issued

by Type of Activity

and Year

of Volume Cap

The 49 states that provided internally consistent survey data issued $15.182 billion in private-activity bonds in

1989 that were subject to the unified volume cap. Note

that current refundings are not included in the data. The

division of this bond volume among eligible private activities is presented in Table 7, Column 1. Each activity’s

share of the total is presented in Column 2. By far the

largest volume, $5.606 billion (36.9 percent of the total),

was issued for mortgage revenue bonds, followed by

small-issue IDBs with $3.228 billion (21.3 percent), solid

waste disposal, $1.633 billion (10.8 percent), multifamily

rental housing, $1.292 billion (8.5 percent), and student

loans, $1.250 billion (8.2 percent). Very small or zero

amounts of bonds were issued in 1989 for four exempt

activities: mass commuting vehicles ($1 million), local district heating and cooling ($4.3 million), high speed rail

transit ($O), and takeover of investor-owned utilities ($0).

The “Other” category includes bonds for which survey

respondents were uncertain as to activity classification or

that were issued for activities whose exemption has been

removed but for which a few transition rules continue to

generate some bond issuance. By far the most important

of these transition-rule activities is pollution control. It is

included as a separate category in this table ($309 million

of bonds were issued in 1989).

Not all tax-exempt private-activity bonds issued in 1989

used borrowing authority from the 1989 volume cap. The

1986 Tax Rejorm Act, following the precedent established in

the 1954 Deficit Reduction Act, allows unused volume cap to

be carried forward for a period of three years. Due to these

rules, many bonds issued in 1989 used volume cap authority

from as far back as 1986. Columns 3 and 5 divide the $15.182

billion of bond volume in Column 1 between those bonds

using 1989 volume cap and those using volume cap carried

forward into 1989. Of the total volume, $9.773 billion used

1989 volume cap and $5.409 billion used prior years’ volume

cap. Each activity’s share of the 1989 and prior years’ volume

cap issuance is presented in Columns 4 and 6.

15
Studt%Loans

Small Issues

Multifamily Housing

Qualified Redevelopment

Mass Commuting Vehicles

Furnishing of Water

Local Furnishing of Electricity or Gas

Local Distribution of Heating or Cooling

Hazardous Waste Disposal

Sewage Disposal

Solid Waste Disposal

Takeover of IOUs

High-Speed Rail

Pollution Control

Private-Use Portion

Other Categories

Total

Volume

Activity Amount Percent

Mortgage Revenue Bonds $5,606 36.9%

1,250 8.2

3,228 21.3

1,292 8.5

173 1.1

1 0.0

162 1.1

777 5.1

4 0.0

85 0.6

422 2.8

1,633 10.8

0 0.0

0 0.0

309 2.0

137 0.9

104 0.7

All Activities $15,182 100.0%

Note: Columns may not total due to rounding.

Source: ACIR-Urban Institute, Private-Activity Bond Survey.

1989 Carry

Cao Forward

Amount Percent Amount Percent

$3,491 35.7% $2,115 39.1%

592 6.1 658 12.2

3,228 33.0 0 0.0

817 475 8.8

45 Z:S 128 2.4

1 0.0 0 0.0

34 0.3 128 2.4

389 4.0 388 7.2

4 0.0 0 0.0

81 0.8 3 0.1

250 2.6 173 3.2

463

;:li

1,170 21.6

0

0 0.0 0 0 i::

153 1.6 156 2.9

137 1.4 0.0

88 0.9

$9,773 100.0% $5,4G 102%

Table 7

New-Issue Tax-Exempt Private-Activity Bonds Issued in 1989 Subject to the Volume Cap:

By Type of Activity and Year of Authority

(millions)

16
Has the Cap

Reduced the Use

of Private-Activity

Bonds?

This question is somewhat more complicated than it

appears to be. The normal approach would be to compare

the estimates in Table 7 with thebond volume issued in 1986,

the year prior to the volume cap instituted by the TaxReform

Acr 41986. New-issue private-activity bond volume in 1986

was $17.2 billion, an 83 percent decrease from the preceding

year. This 1986 volume, however, may not accurately reflect

the actual demand for pre-volume cap private-activity bond

issuance. Gerald Auten and Edward Chung (1988) argue

that this volume reflected two things: (1) the issuance in 1985

of many bond issues that were originally planned for 1986, in

anticipation of restrictions included in the House bill that

were to go into cffcct on December 31.1985; and (2) a delay

of bond issues originally planned for 1986 due to uncertainty

during the fist nine months of 1986 about passage of the Tar

Reform Acr and in the last three months about regulations

that would be written to implement the new law. For these

reasons, the comparison in this section uses an average of

new private-activity bond issues for the three years preceding the 1986 Act, 1984%.

New issues of private-activity bonds in 1984-86 were

$65.8, $99.8, and $17.2 billion, respectively. However,

these totals include bonds issued for nonprofit entities

and for airports, docks, and wharves, all of which are

exempt from the volume cap imposed in 1986.4 After

deducting bonds issued for these activities, the average

private-activity bond volume from 1984 to 1986 was $45.9

billion. In contrast, the volume cap for all 50 states and the

District of Columbia was a mere $13.9 billion in 1989. If

$45.9 billion is a fair representation of what unconstrained

demand for private-activity financings would have been in

1989, the volume cap in 1989 was restrictive indeed, imposing a 69.7 percent decrease in private-activity bond

volume (assuming the entire volume cap was used).

Table 8 provides some insight into how the states spread

the pain among private activities. It compares average

new-issue volume for 1984-86 and 1989 by type of activity.

The 1989 volume totals $15.182 billion, an amount greater

than the $13.899 billion volume cap due to carry-forward

authority from prior years. It is not clear how much of this

carry-forward-based volume would have been issued using

1989 authority if carry-forwards were not permitted. Ideally,

one would want to scale the $15.182 billion of 1989 issues

back to the total dollar value of the volume cap, but it is not

clear how the scaling back should be shared among eligible

activities. Instead, Bble 8 uses all 1989 issues, in effect

understating the magnitude of the decrease caused by the

volume cap. This makes little difference, since it is the

relative decrease among activities that is of interest here. It

also is important to note that the percentage changes in the

last column reflect more changes than simply imposition of

the volume cap. Some of the activities that remained exempt

over the period have been subjected to targeting and defiiitional changes. Some activities havebeen removed from the

list of exempt activities while others have been added; all are

included in this table in the “Other” category, with the

exception of bonds issued for nonprofit organizations and

airports. docks, and wharves. And many transition rules

were enacted in 1986 that grandfathered projects in the

planning stage that might otherwise have required a volume

cap allocation.

17
Table 8

The Effect of the Volume Cap

on New-Issue Private-Activity Bonds:

1989 Volume Compared to Average for 1984-86

(millions)

Average Percent

Activity 1984-86 1989 Change

Student Loans $1,956 $1,250 -36.1%

Mortgage

Revenue Bonds 9,593 5,606 -41.6

Small Issues 13,602 3,228 -76.3

Multifamily Housing 10,668 1,292 -87.9

Sewage and

Waste Disposal 4,231 2,140 -49.4

Pollution Control 4,701 309 -93.4

Other 1,146 1,357 18.5

Total $45,918 $15,182 -66.9 %

source: ACIR-Urban Institute, Private-Activity Bond Survey,

and Auten and Chung (1988).

Table 8 shows that private-activity bond volume subject to the volume cap has declined by 66.9 percent. The

activities suffering the least reduction are student loans,

36.1 percent, and mortgage revenue bonds, 41.6 percent.

The activity suffering the biggest hit (that remains eligible

for an exemption) seems to be multifamily housing, with a

reduction of 87.9 percent. The multifamily housing number may be overstated, however, for two reasons: (1) the

arbitrage-driven multifamily housing deals uncovered in

the Matthews-Wright and related scandals suggest that a

significant portion of this pre-Twc Reform Act volume may

not have been housing deals at all; and (2) tax-exempt

bond-financed housing projects became considerably less

attractive due to the restrictions imposed in 1986 on the

ability of twayers to offset income from one economic

activity with losses generated from another activity, the

so-called passive loss restrictions.

BONDS ISSUED BY STATES

The total volume of bonds issued in 1989 for each type

of private activity (Table 7, Column 1) is disaggregated by

state inTable 9. Several activities are supported by most of

the states. Forty-three states issued private-activitybonds

for single-family housing (mortgage revenue bonds), 43

for small-issue IDBs, 26 for multifamily housing, and 19

for student loans. The number of states issuing other

types of bonds declines substantially.

Figure 1 separates each state’s total volume according

to whether its borrowing authority came from the 1989 volume cap or unused authority carried forward from prior

years. Eighteen states used prior years’ authority to fund

more than 50 percent of their private-activity bond issues.

Clearly, the ability to use carry-forward authority substantially reduced many states’ need to USC the 1989 volume cap.

IS THERE UNUSED VOLUME CAP?

This is a difficult question to answer. First, it’ volume

cap were to be unused, it must be understood that this

unused cap would be smaller or even nonexistent without

the restrictions on the list of activities for which state and

local governments can issue bonds. Second, the threeyear carry-forward provision suggests that large capital

projects occur irregularly, and use of the cap should be

averaged over several years. Unfortunately, our data are

for 1989 issues only. Using these data, Figure 2 shows that,

in 41 of the 49 states, bonds issued in 1989 that were

subject to the 1989 volume cap did not use all of the ca~.~

The unused share of volume cap ranged from 94.4percent

in Rhode Island to 1.9 percent in Texas. These shares

represent each state’s 1989 volume cap that has been carried

forward to finance bond issuance through 1992. ?btal unused

1989 volume cap for these 41 states amounted to $3.741

billion, 36.3 percent of their volume cap and 27.7 percent of

the volume cap available to all 49 states.

Unused Volume Cap and Carry-Forward Authority

The above numbers probably represent an upper

bound on unused 1989 volume cap authority. Some of the

projects funded in 1989 with unused prior years’ volume

cap would have been funded with 1989 volume cap had the

carry-forward authority not existed. This 1989 issuance

from carry-forward authority can be used to set a lower

bound on excess 1989 volume cap. Suppose that no

carry-forward of unused prior years’ volume cap existed,

and that all projects funded with carry-forward authority

requested allocations from the 1989 volume cap, then unused volume cap would equal the 1989 volume cap minus all

private-activity bonds issued in 1989. Figure 3 uses this estimate of unused cap to calculate for each slate the percentage of volume cap that would not have been used in 1989.

States whose volume cap would not have been exhausted if all of its 1989 tax-exempt private-activity bond

issues (under cap authority from 1986 through 1989) had

been funded from the 1989 cap decrease in number from

41 (Figure 2) to 20 (Figure 3). Rhode Island again has the

greatest share unutilized, 81.4 percent. The average unused cap for all states declines from $91.2 million to $57.7

million. The total dollar value of unused cap decreasesby

more than two-thirds, to $1.154 billion from the $3.741

billion when only issues using 1989 cap authority were

included. This unused cap represents 28.4 percent of the

cap available to these 20 states, and only 8.5 percent of the

cap available to all 49 states.

Unused Volume Cap and Spending Priorities

The true picture of volume cap utilization probably

lies somewhere between the data summarized in Figures 2

and 3. It is clear that as of 1989 the use of private-activity

bond issues (constrained to those activities allowed by

law) fell short of volume cap availability in some states.

Two other factors should be considered when assessing the extent to which unused volume cap exists in any

given year. First, as noted in TAbles 5 and 6. most states

establish priorities by allocating set shares of the cap for

state versus local governments and for selected activities.

These shares are reserved for those governments and

activities for a portion of the year, ranging from 9 to 11

months, after which any unused cap allocation usually

becomes available for all types of exempt activities for any

18
Table 9

Tax-Exempt Private-Activity Bonds Issued in 1989:

By State and Type of Activity

(millions)

State’

Mortgage

Revenue

Bonds

Alaska $77.2

Arizona 96.2

Arkansas 50.0

California 642.4

Colorado 101.5

Connecticut

Delaware

Florida

Georgia

Hawaii

184.0 17.4

85.4 12.0

419.2 67.1

92.1 164.7

G Idaho

Illinois

Indiana

Iowa

Kansas

147.9

104.6

99.0

104.9

Kentucky

Louisiana

Maine

Maryland

Massachusetts

159.0

24.5

129.7

59.0

Michigan 69.9

Minnesota 94.7

Mississippi 52.4

Missouri 215.0

Montana 25.0

Nebraska

Nevada

1.5

73.0

New Hampshire 150.4

New Jersey 268.0

New Mexico 35.0

Student Small

Loans Issues

$31.2

25.0

50.0

80.2

$21.7

78.7

151.3

23.5

85.1

50.0

31.2

63.0

170.8

48.2

36.0

75.0

30.0

119.0

12.5

37.2

32.9

43.0

8.7

105.8

240.4

90.4

60.8

98.7

8.0 18.5

22.6

10.6

112.0

18.0

Local

Multi- Qualified Furnishing Hazardous

Family Redevel- Furnishing of Electricity Waste Sewage

Housing opment Water or Gas Disposal Disposal

$8.1

467.7

6.7

52.0

201.1

27.2

120.1

10.0

0.6

1.0

20.2

108.5

14.9

17.1

19.6

6.1

12.5

$2.0

$20.0

$46.7

147.0

29.0

87.0

$16.0 31.9

40.5 23.5 20.0

1.3

7.8

20.0

75.0

1.6

$30.5 25.6

2.2

0.7

2.5 22.9

18.9

Solid PrivateWaste Use

Disposal Portion Other

$55.3 $4.0

523.9 $67.1 26.5

10.1

3.2 16.3

6.0

6.0 224.9

0.5

21.5

65.0

90.3 84.3

275.0 20.0

Total

$108.4

151.0

227.4

1,408.4

211.8

312.7

117.4

1,333.g

381.1

120.1

179.1

310.6

305.3

168.1

148.7

119.0

247.5

81.9

183.3

246.5

581.5

221.7

134.7

341.9

195.8

28.0

176.7

349.7

731.1

55.2
State’

Mortgage MultiRevenue Student Small Family

Bonds Loans Issues Housing

New York 200.0

North Carolina 106.0

North Dakota 100.0

Ohio 426.2

Oklahoma 119.6

Oregon

Pennsylvania

Rhode Island

South Carolina

South Dakota

69.9

113.0

19.5

ki Tennessee

Texas

Utah

Vermont

Virginia

141.0

349.0

89.9

111.4

49.2

197.0

24.0

122.3

32.0

8.6 1.0

5.0 18.9

98.1

Washington

West Virginia

Wisconsin

Wyoming

63.7

71.5

14.8

68.8 12.4

11.1 50.0

125.2 40.1

35.0

us $5,606.2 $1,250.4 $3,227.6 $1,291.9

Number of States 43 1 9 4 3 26

106.0

65.3

9.0

47.2

224.0

Table 9 (cont.)

Tax-Exempt Private-Activity Bonds Issued in 1989:

By State and Type of Activity

(millions)

213.1 64.3 7.1 20.0 350.0

163.0 12.0

0.9 59.4

217.2 10.0 0.8 47.5

37.3 6.2

55.1 7.0

113.0 4.0

8.4

147.3

5.4

Local

Qualified Furnishing Hazardous

Redevel- Furnishing of Electricity Waste

opment Water or Gas Disposal

34.0

25.0 18.8 25.0

100.0

7.0

Solid PrivateSewage Waste Use

Disposal Disposal Portion Other

79.2 9.4

124.0

50.9

4.2

9.9

150.0

200.0

15.0

0.3

7.4

28.0

45.0

12.0

168.9

0.7

$172.6 $161.8 $777.0 $84.5 $422.2 $1,633.0

5 1 0 10 7 1 0 1 4

Total

952.7

405.0

311.2

771.3

172.1

137.7

380.0

27.9

194.5

231.4

298.2

857.0

168.3

135.3

286.3

156.8

230.0

237.5

49.8

$136.5 $417.8 $15,181.5

7 1 0

Nate: “OLher” in this table includes the following categories fromlhble 3: mas~commutingvehicles, local district heating andcooling, high-speed rail transit, takeover of investor-owned utilities, pollution

control, and the “other” category.

I Data for Alabama are not included. The District of Columbia did not respond to the survey.

Source: ACIK-Urban Institute, Private-Activity Bond Survey.
California

Texas

New York

Florida

Ohio

Michigan

Georgia

Illinois

Missouri

Indiana

New Jersey

Minnesota

Pennsylvania

Wisconsin

Virginia

Tennessee

North Carolina

Massachusetts

Oklahoma

Louisiana

West Virginia

New Hampshire

South Carolina

Arizona

Washington

Connecticut

Utah

Maryland

Kansas

Arkansas

Kentucky

Oregon

North Dakota

Iowa

Colorado

Mississippi

Montana

South Dakota

Vermont

Delaware

Nevada

Hawaii

Maine

Wyoming

Alaska

Idaho

Nebraska

New Mexico

Rhode Island

Figure 1

Tax-Exempt Private-Activity Bonds Issued in 1989

Using 1989 and Prior Years’ Volume Cap Authority:

Ranked by Volume of Issues Using 1989 Authority’

0 100 200 300 400

1989 Cap m

500 600 700 800

(millions)

900 1000 1100 1200 1300 1400

Prior Years’ Cap -1

-

1500

1 Data for Alalmna are not included. The District of Cohnbin did not rcspontl to the suwey.

Source: ACIR-Urban Institute, Privale-Activity Bond S~rvcy.

21
Rhode Island

New Mexico

Nebraska

Idaho

Alaska

Wyoming

Maine

Hawaii

Nevada

Delaware

Vermont

Pennsylvania

South Dakota

Montana

North Carolina

Maryland

Colorado

Massachusetts

Mississippi

New Jersey

Washington

Virginia

Kentucky

New York

Louisiana

Iowa

Tennessee

North Dakota

Oregon

Arizona

Michigan

Wisconsin

Connecticut

South Carolina

Arkansas

Kansas

Indiana

Utah

Illinois

Florida

Texas

New Hampshire

Missouri

West Virginia

Minnesota

Georgia

California

Oklahoma

Ohio

Figure 2

Percentage of 1989 Private-Activity Volume Cap Not Used in 1989

by Bonds Claiming 1989 Authority’

0 1 0 2 0 30 40 50 60 70

Percentage of Volume Cap Unused

80 90 100

1 Data for Alnbama me not included. The District of Colunhi:~ did not ~qm~tl to the survey.

Source: ACIR-Urban Inslitute, Private-Activiiy Bond Suwcy.

2 2
Rhode Island

Nebraska

Wyoming

New Mexico

Maine

Pennsylvania

Kentucky

Washington

Alaska

Delaware

Maryland

Hawaii

Arizona

Massachusetts

Mississippi

Vermont

Oregon

Wisconsin

Vriginia

Kansas

Indiana

Illinois

Connecticut

Montana

Missouri

Idaho

West Virginia

Nevada

New Hampshire

New Jersey

Minnesota

Colorado

Michigan

Texas

Georgia

South Dakota

South Carolina

Florida

California

Louisiana

Oklahoma

Tennessee

Ohio

Utah

North Dakota

North Carolina

New York

Iowa

Arkansas

Figure 3

Percentage of 1989 Private-Activity Volume Cap Not Used in 1989

by Bonds Claiming 1989 or Prior Years’ Authority’

L

0 1 0 2 0 30 40 5 0 60 70

Percentage of Volume Cap Unused

80 90 100

‘Dntn for Alabamn are not inclutled. The Dislrict of Columbin did tlot rcsponcl to the survey.

Source: ACIR-Urban Institute, Private-Activity Bond Suvey.
Table 10

Number a4 States with Unused Volume Cap and Total Unused Volume Cap

after Adjustme nt for Short Planning Horizon and Irrevocable Carry-Forward Election

(millions)

Calculated Using 1989 Auth lority:

Number of States

Amount of Cap Unused Adjus aed for Short Planning Horizon

Calculated Using 1989 and ( Zarry-Forward Authority:

Number of States

Amount of Cap Unused Adjusted for Short Planning Horizon

and Carry-Forward Electk In

Source: ACIR-Urban Institute, IPrivate-Activity Bond Survey.

Percentage

of Volume Cap Adjusted

Tefi Twenty Thirty

$3,382: $2,99:: $2,d55

1 5 1 1 8

$1 J38.8 $0.923 $0.808

Total for

States with

Unused Cap

$3.7404:

2 0

$1.154.2

issuer. This is a relatively short planning horizon, which

undoubtedly frustrates some ei”forts to take advantage of

the unutilized capacity that crop )s up at the end of the year.

Absent these reserved set-asic Ies, some of this unused

volume cap probably would ha ve been used in 1989, so

that the unused volume cap SUI ~ply suggested in Figure 2

would be overstated. Second, ststtes must elect the activity

t3n which to spend unused vohlme cap at the time it is

carried forward. It is possible thlat some of this available

c.arry-forward authority was not used in 1989 because the

state’s carry-forward election dicl not conform to the activi ties for which it needed the at lthority in 1989.

The last column of Table 10 c:ontains the total number

of states with unused volume caI) and the amount of their

unused volume cap. The top ha1 f of the table is based on

1989 issues using 1989 cap author-ity. Focus on the column

labeled “Thirty.” Suppose that ul? to 30 percent of unused

volume cap was attributable entilrely to the short planning

horizons that are the inevitable side effect of establishing

spending priorities; that is, the dlesire to use exempt private-activity bond financing was iztually 30 percent high-

(:r during 1989 than actual issues. If it is assumed that with

t,etter planning or a more flexible allocation system this

unused cap would otherwise havt: been used, the number

o.f states with unused caps would decline from 41 to 25

(eliminating the 16 states whose iunused cap was less than

311 percent). The dollar value of u nused cap would decline

from $3.741 billion to $2.618 billicon (calculated as 70 perce.nt of total unused cap in the host column, since the 30

pe,rcent planning penalty also allplies to the states with

urn lsed caps above 30 percent). Now look at the column

lab,eled “Ten.” If 10 percent is clonsidered to be a more

rea!sonable threshold for the amount of activity inhibited

by tile bond allocation priorities, the number of states with

unused cap would decline only to 38 (eliminating the

thre e states whose unused cap was less than 10 percent).

Unused cap would decline only to $3.367 billion (calculatecl as 90 percent of total unused cap in the last column).

lrhe second panel repeats these calculations using the

same method employed for Figurle 3-unused volume cap

based on all 1989 issues, whatever the source of their

volum e cap authority. In this case, the source of the frustrated use of volume cap is both the short planning horizon and the requirement to make an irrevocable election

of private-activity use at the time the unused cap was

carried forward. If 30 percent of the unused cap is attributable to these factors, the number of states with unused cap

would decline from 20 to 8, and the dollar value of unused

cap would decline from $1.154 billion to $808 million. If 10

percent is considered to be a more reasonable threshold, the

number of states with unused cap would decline only to 15,

and the unused cap would decline only to $1.039 billion.

VOLUME CAPS AND THE $150 MILLION CAP

FOR SMALL STATES

It is possible that this picture of unused volume cap is

somewhat skewed by the special treatment that the 1986

Act gives to small states, which are guaranteed at least

$150 million of volume cap even if the product of $50

times their population produces a smaller cap allocation.

If the demand for tax-exempt private-activity bond usage

is a constant function of population, as is implied by the

per capita allocation applied to most states, then these

small states might be expected to have a greater amount

of unused volume cap on average than do other states.

Indeed, this turns out to be the case.

Table 11 breaks out the unused volume cap data by type

of cap allocation-per capita and $150 million. The first four

columns of the first row array the states with unused volume

cap by the percentage unused. Columns 5 and 6 record the

number of states with unused cap and all states. The last two

rows separate the states into those with a per capita volume

cap and those with a $150 million cap. Forty-one of the 49

states have unused volume cap. Of the per capita allocation

states, 21 of the 27 have unused volume cap. Eleven of these

21 states have unused capacity that exceeds 30 percent of the

volume cap (52.3 percent of per capita states with unused

cap). Eighteen have unused capacity that exceeds IO percent

of the volume cap.

Of the 22 states with a $150 million cap, 20 have

unused borrowing authority. Fourteen of these 20 have

unused borrowing authority that exceeds 30 percent of the

cap (70 percent of $150 million states with unused cap).

All 20 states have unused capacity that exceeds 10 percent

of the volume cap.

24
Table 11

States with Unused Volume Cap in 1989, by Type of Cap Allocation:

Number of States and Percentage of Cap Unused

Percentage of Volume Cap Unused

<lo 1 O-20 20-30 >30

Total States

With All

Unused Cap States

Percent of

Cap Unused

States with Unused Cap 3 7

Per Capita Allocation

i

4

$150 Million Allocation 3

Source: ACIR-Urban Instituie, Private-Activity Bond Survey

6 25 4 1 49 36.3%

3 1 1 21 27 27.9

3 1 4 20 22 56.7

The last column of Table 11 presents the average

percentage of unused volume cap for states with unused

volume cap. The 36.3 percent unused cap for all 41 states

overstates the magnitude of the unused volume cap for

those states receiving a per capita allocation. When disaggregated by type of allocation, the unused volume cap

share for the 20 states with a $150 million allocation, 56.7

percent, is double the 27.9 percent share for the 21 states

with a per capita allocation.

25

Denied

or Delayed

Projects

Slates were asked about requests for volume cap allocations that had to be denied or delayed to a subsequent year

due to unavailability of volume cap. Respondents in a few

states were questioned about the methodology and procedures used in preparing the numbers. The answers to these

queries indicated two things: (1) states excluded from the

data projects unlikely to be funded no matter how much

funding was available; and (2) projects not even proposed to

the bond allocation agency because of prior knowledge of

inadequate volume cap are not included in these data because no one had good estimates of their magnitude.

Twenty-seven states reported denied or delayed projects. The first column of Table 12 lists $6.015 billion of such

projects by type of aclivity. The largest amounts were $2.147

billion for mortgage revenue bonds and $2.109 billion for

solid waste disposal. The amount for the next largest activity,

small issues, was considerably smaller at $518.5 million.

The next four columns divide these amounts between

states that used all their volume cap and those that reported

unused volume cap. Columns 2 and 3 are based on unused

volume cap calculated using only 1989 authority (see Figure

2). States that did not use all their volume cap account for

62.9 percent of these denied or delayed projects ($3.783

billion), and they account for more than 50percent of it in all

but four of the 11 categories for which unsatisfied allocations

are reported. Columns 4 and 5 are based on unused volume

cap calculated using both 1989 and prior years’ carry-forward

authority (see Figure 3). The share of denied or delayed

projects reported by states that have not used all their volume cap declines to a still hefty 31.5 percent ($1.895 billion),

but now these states account for more than 50 percent of

unallocated projects in only one category (student loans).

How can it be that somewhere between $3.783 billion

and $1.895 billion of denied or delayed tax-exempt private-activity bond financing exists in states which have

between $3.741 billion and $1.154 billion of unused volume cap available for funding? Several explanations are

plausible. First, the survey is an imperfect instrument for

collecting data. Some of the states have undoubtedly

overreported excess demand by assigning projects to 1989

that may not have been ready for funding until a later

year, by including some projects that may not have been

eligible for the tax exemption, or simply by making unrealistically high estimates.

Second, the states’ priority systems and the need to

make irrevocable elections for the use of unused volume cap

at the time of carry-forward often make it difficult to switch

unused volume cap from one government or activity whose

priority allocation is high compared to demand for financing

to another government or activity whose priority allocation

eitherwas too low or nonexistent. Third, some of the unused

volume cap from priority allocations is actually pledged as a

carry-forward to high-ranking projects whose timing did not

quite coincide with the allocation cycle. As a result. less

preferred projects get rejected. It is not clear why the less

prcl’crrcd projects did not receive the 1989 allocation and

why the most preferred were simply assigned part of the

1990 allocation. It may be that projects that take a long time

to develop, such as a resource recovery plant. seek a pledge

of current year cap in the initial phase of dcvelopmcnt

planning that will then be carried forward to be used some

time during the next three years.

27
Table 7 2

Denied or Delayed Requests for Volume Cap in 1989,

Divided between States Reporting Exhausted and Unused Volume Cap

(millions)

Unused Cap Status of States

Calculated Using Calculated Using

1989 Authority 1986-89 Authority

Excess Demand All Used Some Unused All Used Some Unused

Private Activity Amount Percent Percent Percent Percent

Mortgage Revenue Bonds $2,146.9 64.3% 35.7% 82.5% 17.5 %

Student Loans 404.0 0.0 100.0 28.5 71.5

Small Issues 518.5 28.2 71.8 83.1 16.9

Solid Waste Disposal 2,109.o 22.5 77.5 56.7 43.3

Multifamily Housing 222.8 59.6 40.4 72.8 27.2

Qualified Redevelopment 20.0 0.0 100.0 100.0 0.0

Furnishing of Water 157.1 0.0 100.0 89.8 10.2

Local Furnishing

of Electricity or Gas 315.6 0.0 100.0 50.6 49.4

Hazardous Waste Disposal 8.0 0.0 100.0 100.0 0.0

Sewage Disposal Private-Use Portion 112.3 0.5 100.0 891 10.90 100.0 FL:

Total $6,014.7 37.1% 62.9% 68.5% 31.5%

Source: ACIR-Urban Institute, Private-Activity Bond Suwey.

2 8
The states were asked if they had suggestions for

improving the way in which the volume cap functions.

They were not asked whether the volume cap should be

retained. Responses were received from 22 states. These

responses focused on several issues.

PROBLEMS WITH CAP ALLOCATION

AMONG STATES

State Suggestions

for Reform

of the Volume Cap

Concern was expressed that the allocation of the volume cap among the states is unfair. The cap is allocatedby

population (except for the small states that receive $150

million). It was noted that the distribution of demand for

the various private activities included under the cap also is

affected by factors other than population. Mortgage revenue bonds were cited as an example-states with high

housing costs cannot provide as much housing for a given

population as states with low housing costs. It was suggestcd that the cap formula be adjusted to take economic

and demographic factors into account.

PROBLEMS WITH SUNSET

The continual debate over sunset of mortgage revenue bonds and small-issue IDBs has caused allocation

problems. Survey respondents claimed that the uncertainty created by post-dated sunsets causes demand that

would have been expressed some time after the sunset

date to be accelerated and expressed in the year prior to

the sunset date, creating problems in the allocation of the

volume cap. With many states having assigned a fixed

proportion of the cap to small issues and mortgage revenue bonds, this forces projects for other activities to do

without an allocation until a later year.

PROBLEMS WITH CARRY-FORWARD

It was suggested that the way carry-forwards are handled should be changed. Requiring carry-forwards to be

allocated to a particular issuer or activity reduces the

state’s flexibility to adjust to annual changes in demand

among eligible activities. Respondents suggested that the

carry-forward reside with the state administering agency

without allocation to specific users or activities, thereby

increasing flexibility. Another respondent suggested that

the time frame for reporting to IRS on the allocation of

the carry-forward is too short.

PROBLEMS WITH ACTIVITY DEFINITION

The major concern in this area is investment for environmental and conservation purposes. Many states believe that such activities as solid waste disposal, hazardous

waste disposal, sewage treatment plants, and similar facilities, which are not governmentally owned, should not be

included in the volume cap because they have a large

component of public consumption no matter what their

form of ownership. These states report substantial backlogs of projects in this area, and expect the backlog to

continue to grow at a rapid rate. One state expressed

concern that if mortgage revenue bonds and small-issue

IDBs are ever allowed to sunset, then Congress might

reduce the volume cap. It was suggested that this cap will

29
be needed to fund the rapidly growing need for environmental and conservation projects.

Two other suggestions related to environmental issues. One recommendation was that growing concern

about the environment might be addressed by again making pollution control bonds an exempt activity. Another

concern was that the restriction of land acquisition costs

to 25% of bond proceeds is too low for some projects, such

as sanitary landfills.

Several small and primarily rural and agricultural

states suggested that restricting the eligibility for smallissue IDBs to manufacturing facilities is unfair. Because

these states have little in the way of manufacturing, the

economic engines of their states receive little of this

low-cost debt financing. They wonder what is so magical

about manufacturing. In contrast, a large urban state suggested that the restriction of small issues to manufacturing is most desirable, and should not be extended to other

types of economic activity.

Another state considers the 10 percent use of proceeds and security interest tests to be unrealistic with

respect to the presence of public benefits. The state believes that governmental bonds should be allowed to have

more than 10 percent private use and security interest,

which would in turn reduce pressure on the volume cap.

MISCELLANEOUS SUGGESTIONS

Although responses seemed to indicate some acceptance of the need for the federal government to set a cap

on private-activity bond volume, no such positive views

were expressed about the second part of the volume cap

program-the creation of a list of exempt activities to be

included under the cap. It was suggested that the list be

eliminated, thereby allowing the states to determine the

activities on which to allocate the cap.

One state objected not so much to the adoption of a

volume cap, but rather to the administrative costs of complying with the volume cap. It considers the volume cap to

be one more example of mandates being imposed by the

federal government without any compensation to help

implement the federal goals.

30
Summary

of Findings

The states have set priorities for use of the volume

cap. Twenty-eight states have reserved portions of the cap

for local issuers; 32 states have reserved portions of the

cap for specific private activities.

$15.2 billion of private-activity bonds subject to the

volume cap were issued in 1989. This represents a 67

percent decrease in the average volume of private-activity

bonds issued from 1984 to 1986. The 1989 total volume

was dominated by mortgage revenue bonds ($5.6 billion,

37 percent of the total) and small-issue industrialdevelopment bonds ($3.2 billion, 21 percent of the total).

$5.4billion of the $15.2 billion of private-activity bond

issues in 1989 were financed with unused volume cap

authority from prior years that was carried forward for use

in later years. Only 8 states used their entire 1989 volume

cap authority in 1989. The unused 1989 volume cap

amounted to 36 percent of the total volume cap for the 41

states.

The 36 percent unused volume cap masks a considerable difference between states that receive cap authority

equal to $50 per resident (the large states) and the states

that receive $150 million of cap in lieu of the smaller

authority generated by $50 per resident. Unused cap for

the larger states is 28 percent of their total cap, and for

smaller states is 57 percent of their total cap.

The states reported $6.0 billion of projects were denied

or delayed due to unavailability of volume cap authority.

States reporting unused 1989 volume cap were responsible

for 63 percent of these denied or delayed projects.

NOTES ’ For a detailed account of the twists and turns of tax-exempt

bond legislation from 1968 to 1989, see Dennis Zimmerman,

Private Use of Tar-Eyenlpt Bonds: Conttvllitg Public Subsidy of

Ptivate Activity (Washington, DC The Urban Institute, forthcoming 1990).

* Although the language in this report refers to a volume capon

bond issues, the restriction applies to any state or local contractual arrangement that involves the payment of interest income or its equivalent. Thus, short-term notes and such longterm financial arrangements as sale-leaseback, leasepurchase, and inslallment sales contracts also require a volume cap allotment if they are used for exempt private activities.

3 Because some US. possessions have such small populations,

the allocation of those with populations less than the least

populous state are restricted to the percapita amount actually

received by the least populous stale.

4 Non-governmentally owned airports, docks, and wharves

were subject to the volume cap in 1989, but Table 7 indicates

that no bonds were issued for these purposes in 1989.

‘Arbitrage bonds are issued primarily to generate interest

earnings rather than to build capital facilities. The proceeds of

the bond issue are invested by the state or local government in

taxable securities that earn a higher yield than the tax-exempt

yield that must be paid by the state or local government on its

tax-exempt bonds. Arbitrage bonds were first restricted in

1969, and were subjected to increasingly more comprehensive

rebate requirements beginning in 1984(and modified in 1989).

An account of the multifamily housing arbitrage deals that occurred prior to the Tar Refom Act of 1986 is available in numerous issues of C/edit Matkets from 1987 through 1989.

6 Any state that had less than $500,000 of volume cap remaining

was considered to have exhausted its cap.

31
32
Glossary

This glossary provides de, finitions for selected terms

used in this report. When the ) definitions refer to current

law, the appropriate Internal & tevenue Code sections are

included.

Carry-Forward-The election to use current-year private-activity volume cap aut hority some time over the

next three years for a partic ular type of private activity. Section 146(f).

Consumer-Loan Bond-Beginni. ng in 1984, bonds for

which 5 percent or more oft he proceeds are used to

make loans to individuals.

Governmental Bond-Beginning ir 11986, bonds for which:

(1) either 10 percent or less o. f the proceeds are used

in a trade or business or 10 pel rcent or less of the proceeds are secured by property used in a trade or business; or (2) 5 percent or les:; of the proceeds are

loaned to an individual. Sc:ctioln 103(a).

Mortgage Revenue Bond-Privattz-actlivity bonds whose proceeds are used to finance Imort[;ages for single-family

owner-occupied housing. St:ction\ 143(a).

Multi[amiIy Rental Housing Bored-F’rivate-activity bonds

(formerly IDBs) whose proceeds; are used to finance

the construction of multif’amily rental housing targeted to lower income farrlilies. 5;ection 142(d).

Small-Issue IDB-Any industrial clevelopment (private-activity) bond issue of $10 mill ion or less used for

manufacturing facilities or first-tir,ne farmers (up to

$250,000), not restricted 1.0 any pbarticular type of

manufacturing activity. Seiztion 144,(a).

Student-Loan Bond-Private-ac:tivity bo nds whose proceeds are used to finance student Loans for higher

education. Section 144(b).

Tavable Industriul Development Bond (IDL3) -From 1969

until 1986, bonds for which. more than’ 25 percent of

the proceeds were used in a trade or bu siness and for

which more than 25 percent of the proo eeds were secured by property used in a ltrade or bu: siness.

Taxable Private-Activity Bond-Beginning in 1986, bonds

for which more than 10 percent of the p roceeds are

used in a trade or business and for which m ore than 10

percent of the proceeds are secured by prc, tperty used

in a trade or business. Section 141(b).

Taxable Private-Loan Bond-Name change ac lopted in

1986 for consumer-loan bonds. Section 14h (c).

Tax-Exempt Industrial Development Bond-An o therwise

taxable industrial development bond for whit *h an exception to permit issuance as a tax-exempt I bond is

provided in the Code.

Tux-Exempt Private-Activity Bond-An otherwise ti uable

private-activity bond for which an exception top, ermit

issuance as a tax-exempt bond is provided in\ the

Code. Sections 142-145.

UniJied State Khme Cap-Passed in 1986. imposed al. imit

beginning in 1988 on the volume of private-actilvity

bonds issued within a state equal to the greater’ of $?5O

per person or $150 million. Section 146.

Wterans’ Mortgage Bond-Private-activity bonds whos’e

proceeds are used to finance mortgagc:s fair

single-family housing owned and occupied by veterans. Section 143(b).

33
Appendix

Survey of State Experience

with Private-Activity Bond Volume Cap

For purpose of follow, -up, please provide the name and phone number of the person completing the survey:

Name:

Phone number: ( )

I. RULES TO ALL0 CATE THE VOLUME CAP

According to Fedc:ral ktw, bonds that pass nongovemmcntal (private) use and security interest tests are taxable unless the

activity being financed is or,\ a list of exempt activities. Most of these exempt activities are subject to a volume cap. Each State’s

exempt private-activi1.y bond volume is to be allocated among the various governmental units within the State that are

authorized to issue tax-exe:mpt private-activity bonds. This allocation can either be done via the statutory method dictated by

the Federal Govemrrtent (one half of the bond volume to the State and its agencies and one half to local governmental units

having bond issuing :Authority), or by State legislation that can allocate the volume cap in any way desired.

A. What agency adnninisters the allocation of the volume cap in your State?

B. What rule. is usecl to allocate the share of the volume cap dedicated to the State and its agencies versus the

share ded .icated to local governmental units having issuing authority? (If a statute, handbook, or document

describin g the miles is available, a copy would be sufficient).

C. What ru’les are used to allocate the volume cap among the eligible private activities? (If a statute, handbook,

or document describing the rules is available, a copy would be sufficient).

II. AMOUNT ‘TO BE ALLOCATED

A. What was the 1!%9 volume cap for allocation within your State?

B. Acco,rding to Federal law, all private-activity bonds issued in 1989 are subject to the 1989 volume cap except

for: ’ (1) those private-activity bonds issued in 1989 that utilized unused volume cap carried forward from any

of tl ne three preceding years; and (2) 501(c)(3) bonds (for nonprofit organizations), veterans’ mortgages, and

gov !ernmentall!{ owned airports, docks, wharves, and solid waste disposal facilities. In addition, the privaf .e-use portion of governmental bonds (up to 10 percent) is also subject to the cap.

1 . What was the total volume ofprivate acrivity bonds issued within your State in 1989 subject to the volume

cap? (Include in this total those bonds issued under 1989 volume cap authority, those issued under unused volume cap carried forward from previous years, and the private-use portion of governmental

bonds. Do nor include in this total bonds issued for nonprofit organizations, veterans’ mortgages, and

governmentally owned airports, docks, wharves, and solid waste disposal facilities.)

2 . What was the total volume of private-activity bonds issued within your State in 1989 based upon carryforward authority (using unused volume cap borrowing authority carried forward from previous years)?

3 . If you have such information, what was the total volume of private-activity bonds issued within your State

in 1989 for nonprofit organizations, veterans’ mortgages, and governmentally owned airports, docks,

wharves, and solid waste disposal facilities?

HI. BREAKDOWN BY TYPE OF ACTIVITY

Please complete the private-activity bond volume table on the next page. The list includes all activities classified as

ex emIn private activities by the Tax Reform Acr of 2986 and subsequent additions to the list, even those few private

ac:tivit ies that are not subject to the volume cap. Note that the sum of the numbers entered in column (1) for private

a ctivit ies subject to the volume cap should equal the number entered in question II.B.l. Columns (2) and (3) separate

1Jonds reported in question II.B.l between those issued under the 1989 cap allocation and those issued under prior years’

cap alJ.ocations that have been carried forward. The sum of column (3) for activities included in the cap should equal the

numbler you recorded in question II.B.2. The sum of the numbers you record in column (4) for private activities not

includled in the cap should equal the number you recorded in question II.B.3.

34
Example: Suppose $100 million of bonds were issued for nonprofit organizations (501(c)(3)s. For the “nonprofit

organizations” category, enter $100 million in column 4.

Example: Suppose $100 million of bonds were issued for multifamily rental housing during 1989, of which $24

million was from carry-forward authority. Enter $100 million in column 1, $76 million in column 2, and

$24 million in column 3.

Example: Suppose $2 billion of governmental bonds were issued, and $75 million of the proceeds were used for

private purposes under the 10 percent rule. Enter $75 million in column 1 and $75 million in column 2.

A string of Xs indicates “not relevant” for that private activity.

Private-Activity Bond Volume in 1989

(enter numbers in $ millions)

Activity

(1) (2) (3) (4)

Total 1989 Authority Carry-Forward Private Activity But

Volume Included in Cap Authority Excluded From Cap

UNDER VOLUME CAP:

Qualified mortgage revenue

Student loans

Small-issues

Multifamily rental housing

Qualified redevelopment

Mass commuting

Furnishing of water

Local furnishing of electric & gas

Local district heating & cooling

Hazardous waste disposal

Sewage disposal

Takeover of investor-owned utilities

High-speed intercity rail transit

Private-use portion

of governmental bonds xxxxx

NOT SUBJECT TO CAP:

Veterans’ mortgages

Airports, docks, wharves

Solid waste disposal

Nonprofit organizations

xxxxx xxxxx xxxxx

xxxxx xxxxx xxxxx

xxxxx xxxxx xxxxx

XXXXX xxxxx xxxxx

XXXXX

xxxxx

xxxxx

xxxxx

xxxxx

xxxxx

xxxxx

xxxxx

xxxxx

xxxxx

xxxxx

xxxxx

xxxxx

xxxxx

3 5
N. DEMAND FOR PRIVATE-ACTMTY BONDS

Did you have to deny or delay requests for bond issues in 1989 due to insufficient volume cap? YES NO -. If

you did, please list the volume of bonds affected by private-activity category. If you have reason to believe these numbers

understated demand (for example, if knowledge of exhausted volume caps kept issuers from requesting allocations),

please make a note of this understatement beside the numbers entered.

Activity Volume Denied or Delayed

Qualified mortgage revenue bond

Veterans’ mortgage bonds (has its own cap)

Student loans

Small issues

Airports, docks, wharves

Solid waste disposal

Multifamily rental housing

Qualified redevelopment

Mass commuting

Furnishing of water

Local furnishing of electricity and gas

Local district heating and cooling

Hazardous waste disposal

Sewage disposal

Takeover of investor-owned utilities

High-speed intercity rail transit

Private-use portion of governmental bonds

Questions V and VI elicit opinions about what may occur with respect to the volume and allocation of the privateactivity bond cap in your State and solicit suggestions for Federal government policy changes. If a different office or

agency in the State is responsible for such issues, please do not hesitate to share this survey with them.

v. LOOKING AHEAD

A. How do you expect 1990 volume to compare to 1989 volume?

B. Do you expect to consider a change in allocation method or priorities. 3 If so, please describe the options being

considered.

VI. SUGGESTIONS FOR CHANGE

Please provide any suggestions you may have for restructuring the cap at the Federal level, e.g., size of the cap,

activities to be deleted from the cap or added to the cap, etc. Please note that any discussion of these suggestions in the

survey results will maintain respondent anonymity.

36
Recent Publications of the

Advisory Commission on Intergovernmental Relations

1988 State Fiscal Capacity and EfTort, M-170, 8/90. 128 pp.

Significant Features of Fiscal Federalism, 1990 Edition, Volume 1, M-169, l/90, 152 pp.

Volume II, M-169-11, 7/90, 220 pp.

State and Local Initiatives on Productivity, Technology, and Innovation, A-114. 6/90, 180 pp,

Local Revenue Diversification: Rural Economies, SR-13, 4/90,60 pp.

State Taxation of Banks: Issues and Options, M-168, 12189. 48 pp.

A Catalog of Federal Grant-in-Aid Programs to State and Local Governments:

Grants Funded FY 1989, M-167, 10189. 40 pp.

Local Revenue Diversification: Local Sales Taxes, SR-12,9/89, 56 pp.

Changing Public Attitudes on Governments and Tases: 1989, S-18. 9/89, 36 pp.

State Constitutions in the Federal System: Selected Issues and Opportunities

for State Initiatives, A-113. 7189, 128 pp.

Residential Community Associations: Questions and Answers for Public Officials, M-166, 7/89, 40 pp.

Residential Community Associations: Private Governments in the Intergovernmental System?

A-112, 5189. 128 pp.

Readings in Federalism-Perspectives on a Decade of Change, SK-11, 5/89. 128 pp.

Disability Rights Mandates: Federal and State Compliance with Employment Protections

and Architectural Barrier Removal, A-111. 4189. 136 pp.

1986 State Fiscal Capacity and Effort, M-165. 3/89. 128 pp.

Hearings on Constitutional Reform of Federalism: Statements by State and Local

Government Association Representatives, M-164, l/89,60 pp.

State and Federal Regulation of Banking: A Roundtable Discussion, M-162. lU88, 36 pp.

Assisting the Homeless: State and Local Responses in an Era of Limited Resources,

M-161. 11/88, 160 pp.

Devolution of Federal Aid Highway Programs: Cases in State-Local Relations and Issues

in State Law, M-160, 10/88. 60 pp.

State Regulations of Banks in an Era of Deregulation, A-l 10, 9/88, 36 pp.

State Constitutional Law: Cases and Materials, M-159, ?/SS, 480 pp.

Local Revenue Diversification: Local Income Taxes, SR-IO, 8/88, 52 pp.

Metropolitan Organization: The St. Louis Case, M-158, 9/88, 176 pp.

Interjurisdictional Competition in the Federal System: A Roundtable Discussion, M-157, 8188, 32 pp.

State-Local Highway Consultation and Cooperation: The Perspective of Statr Legislators,

SR-9, Y88, 54 pp.

Governments at Risk: Liability Insurance and Tort Reform, Sli-7, 12/87, 42 p!’

The Organization of Local Public Economies, A-109. 12/87, 64 pp.

Is Constitutional Reform Necessary to Reinvigorate Federalism? A Roundtablt Discussion,

M-154. 11/87, 39 pp.

Local Revenue Diversification: User Charges, SR-6, 10/87, 64 pp.

The Transformation in American Politics: Implications for Federalism, B-911. 10/87. 88 pp.

Devolving Selected Federal-Aid Highway Programs and Revenue Bases: A Critical

Appraisal, A-108. 9187, 56 pp.

Estimates of Revenue Potential from State Tasation of out-of-State i%tail Order Sale%

w-5. 9/x7, 10 pp.

Fiscal Discipline in the Pederal System: National Reform and the I<sperience of the States,

A-107. 8187. 58 pp .

Federalism and the Constitution: A Symposium on G’nrrin, M-152, 7/87. 88 pp.

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