Federal Tax Policy: Information on Selected Capital Facilities Related to the Essential Governmental Function Test
Published: 2006-09-13T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Unlike state and local governments, Indian tribal governments are in general restricted to using tax-exempt bonds for activities that are an "essential government function," where "essential government function" does not include functions not customarily performed by state and local governments. This restriction has been difficult to enforce by the Internal Revenue Service (IRS) and increased the tax compliance burden on Indian tribal governments. GAO was asked for information on the number of facilities that state and local governments finance, construct, and operate in eight categories: (1) Rental housing, (2) Road infrastructure, (3) Parking garages and lots, (4) Community recreational facilities, (5) Golf courses, (6) Conference centers, (7) Hotel and tourist accommodations, and (8) State-owned gaming support facilities. GAO did not find a comprehensive, reliable source of the number of facilities. Instead, GAO searched and found a variety of public and private sources that had limited information on the amounts of financing provided by state and local governments in related categories.
section_title: What GAO Found
paragraphs: Data sources showed state and local governments (municipalities) provided a wide range of financial support in the following types of facilities: (1) Rental housing: From 2000 through 2004 municipalities borrowed, in 2004 dollars, a total of $46.4 billion in 3,557 bond issues for multi-family housing projects. Over the period these borrowings accounted for 33 to 45 percent of debt issued for housing projects. (2) Road transportation: From 2000 through 2004 municipalities borrowed, in 2004 dollars, a total of $61.4 billion in 1,091 issues for toll roads and highways. Over the period these borrowings accounted for 27 to 38 percent of debt issued for transportation facilities. (3) Parking facilities: From 2000 through 2004 municipalities borrowed, in 2004 dollars, a total of $3.5 billion in 220 issues for parking facilities. In addition, about 73 percent of the U.S. population lived in metropolitan statistical areas (MSA) that reported positive user charges for parking facilities. (4) Park and recreation facilities: From 2000 through 2004 municipalities borrowed, in 2004 dollars, a total of $60.9 billion in 3,085 tax-exempt issues to build public facilities, including $0.6 billion in 29 issues for theaters; $6.1 billion in 723 issues for parks, zoos and beaches; $5.3 billion in 119 issues for stadiums and arenas; and $4.6 billion in 420 issues in other recreation facilities. In addition, about 75 percent of the U.S. population lived in MSAs that reported positive user charges for park and recreation facilities. (5)Golf facilities: In 2005 there were about 2,400 municipal golf courses, about 15 percent of total golf courses in the United States. Municipal golf courses exist in all states. At least 120 golf courses in 29 states have been identified as financed, at least in part, with tax-exempt bonds. About 5 percent of municipal golf courses are connected to resorts or real estate developments. (6) Convention centers: Over 300 government owned convention centers have been identified by government finance experts. In addition, from 2000 through 2004 municipalities borrowed, in 2004 dollars, a total of $11.1 billion in 236 issues related to convention centers. (7) Hotels: GAO identified 12 hotel projects related to convention centers or airports that were financed with tax-exempt bonds in recent years and additional data sources identify 39 tax-exempt financed hotel projects. (8) Gaming support facilities: According to financial and gaming reports all but 2 states have some form of legal gaming, and 41 states and the District of Columbia providing state lotteries. In addition, tax-exempt financing has been used for capital projects related to the gaming industry.

section_title: Letter
paragraphs: Congress supports public capital formation by allowing investors to  exclude from gross income for the purpose of federal taxes the interest  received on state and local government bonds. In 2005, this tax benefit  resulted in lower borrowing costs for about 55,000 active bond issuers but  it cost the federal government over $26 billion of forgone tax revenue. The  total value of outstanding tax-exempt bonds as of January 2004 was about  $1.8 trillion, or 11 percent of the domestic bond market.
In order to restrict the benefits of tax exemption to government purposes,  Congress has imposed limits on the amounts and types of facilities that  can be financed with tax-exempt bonds by state and local governments. In  addition, limitations are placed on the ability of Indian tribal governments  to use tax-exempt bonds. While state and local governments can use tax- exempt bonds for a variety of public and qualified private activities, the  Internal Revenue Code (I.R.C) restricts Indian tribal governments’ use of  tax-exempt bonds to obligations that are part of an issue substantially all  of which proceeds are to be used in the exercise of an “essential  government function.” The Revenue Act of 1987 added a provision to the  I.R.C to exclude from the definition of an “essential government function”  any function that is not customarily performed by state and local  governments with general taxing powers.
This restriction has been difficult to enforce by the Internal Revenue  Service (IRS) and has contributed to the tax compliance burden on Indian  tribal governments.
In order to support efforts to reduce the enforcement and compliance  burdens, you asked us to provide information on the gross number of  facilities that state and local governments finance, construct, and operate  in the following eight categories:  3.  Parking garages and parking lots  4.  Community recreational facilities  7.  Hotel and tourist accommodations  8.  State-owned gaming support facilities  We did an extensive review of possible data sources and did not find  comprehensive, reliable sources of the number of facilities. As agreed with  your staff, we provide instead limited data on the number and amount of  financings of a broader set of similar categories, describe tax-exempt  financings by selected state and local governments of certain facilities, and  present other indicators of public support for the types of facilities. The  information we provide is limited because state and local governments are  not required to report specific numbers of facilities financed with tax- exempt bonds or the funding details for each facility. According to bond  finance experts, states frequently finance with a single bond several  capital projects in broad categories that could be similar to the eight types  of facilities in your request.
Our data sources are Thomson Financial data contained in Bond Buyer  Yearbooks; the U.S. Census Bureau’s (Census) 2002 Census of  Governments; selected financial reports of state and local governments; a  National Golf Foundation database; an American Gaming Association  study; and testimonies, studies and interviews of experts in taxation and  government finance. The links between the information we provide and  the eight facilities in the request are the following.
Rental housing. We use Thomson Financial data to provide the number  of bond issues and amounts of borrowing for single-family and multi- family categories, which could include nonrental housing projects.
Road infrastructure. We use Thomson Financial data to provide the  number of bond issues and amounts of borrowing for toll roads and  highways and other transportation-related borrowings.
Parking garages and parking lots. We provide (1) the number of bond  issues and amounts of borrowing for parking facilities using Thomson  Financial data, (2) user charges for parking facilities in large  metropolitan statistical areas (MSA) reported in the 2002 Census of  Governments, and (3) tax-exempt financing of selected parking  facilities disclosed in government financial reports.
Community recreational facilities and conference centers. We  provide (1) the number of government-owned convention and civic  centers that have been identified by Akin Gump Strauss Hauer & Feld  LLP and (2) the number of bond issues and amounts of borrowing for  convention centers and other similar government facilities using  Thomson Financial data.
Golf courses. We provide information on approximately 2,400  municipal golf courses listed in a National Golf Foundation database  and tax-exempt financing details of golf facilities disclosed in selected  state and local government financial reports.
Hotels and tourist accommodations. We provide the number of hotels  financed with tax-exempt bonds identified by government finance  experts and details of tax-exempt financings of resort facilities  disclosed in selected state and local government financial reports.
State-owned gaming support facilities. We provide a summary of  gaming operations in 48 states. Gaming details provided include lottery  operations disclosed in state financial reports, other forms of gaming  summarized in a national study of the American Gaming Association,  and gaming trends reported in academic studies on gaming.
In addition to the above information sources, we interviewed experts in  the field of government finance from top law firms and investment  banks specializing in bond financing, officials of the Government  Finance Officers Association, a senior finance officer of a county  government, and officials of the Bond Market Association, and  reviewed studies in the field of taxation and government finance.
We determined that these data were reliable for the purpose of providing  limited information on the eight types of facilities. Appendix I has a  detailed description of the methodology, data sources, and limitations. We  conducted our work from February 2006 through August 2006 in  accordance with generally accepted government auditing standards.
subsections: section_title: Background
paragraphs: For federal tax purposes state and local government bonds are classified  as either “governmental bonds” or “private activity bonds.” In general,  governmental bonds are used to build public capital facilities and serve the  general public interest. Governmental bonds are tax-exempt and can be  issued for a variety of public facilities and projects. Tax exemption lowers  municipalities’ borrowing costs and provides higher after-tax yields to  investors. Private activity bonds, on the other hand, provide financing to  private businesses or individuals and are either tax-exempt or taxable  depending on two tests. Tax exemption is granted to certain qualified  private activity bonds, such as those for certain housing projects and  activities, but the borrowed amounts are limited and the interest earned by  investors can be subject to alternative minimum tax.
In addition, bonds issued by state and local governments can be structured  as general obligation (G.O.) or revenue bonds. G.O. bonds, also known as  full faith and credit obligations, are secured by revenues obtained from the  issuer’s general taxing powers, including sales taxes, property taxes, and  income taxes. Most G.O. bonds are used to build public infrastructure,  such as school buildings, jails, police stations, and city halls, and are  classified as governmental bonds for tax purposes. In contrast, revenue  bonds are issued to finance specific projects or enterprises and investors  get paid from the revenues generated by the financed projects. Revenue  bonds can be either private activity bonds or governmental bonds for tax  purposes.
In addition to the limitations and restrictions placed on the issuance of  tax-exempt bonds by state and local governments, there are additional  restrictions on tribal governments’ issuance of tax-exempt bonds.  Specifically, I.R.C. §7871 (c) provides that tribal governments may use tax- exempt bonds only if substantially all of the proceeds from those bonds  are used to exercise an essential government function. In 1987, I.R.C.  §7871 (e) was added to the I.R.C. to provide that “essential government  function” shall not include any function not customarily performed by  state and local governments with general taxing powers. With the  exception of certain manufacturing activities, tribal governments are not  eligible for the tax benefits of qualified private activity bonds.
No regulations have been issued yet addressing what is or what is not an  essential government function since the provision in 1987 was added.  Congress in the legislative history to I.R.C. § 7871(e) provided some  examples, such as schools, roads, and government buildings. This limited  direction for tribes’ use of tax-exempt bonds does not fully address the  types of activities that state and local governments are financing, a  principal criterion for determining an essential government function.
section_title: State and Local Governments Provide Substantial Financing for Housing
paragraphs: We were unable to determine the number of rental housing facilities that  were financed, constructed, or operated by state and local governments.  According to experts in state and local government financing, affordable  housing projects are commonly provided by state and local governments  to low-income individuals. We found the following details on debt  financing for multi-family housing.
From 2000 through 2004 municipalities borrowed, in 2004 dollars, a total  of $46.4 billion in 3,557 bond issues for multi-family housing projects,  according to Thomson Financial data. State and local governments  allocated from about 6 percent to 10 percent from 2000 through 2004 of  total bond issuances for housing. Of the municipal bonds issued over the  period for housing, 33 percent to 45 percent went to multi-family  dwellings. The bond issuances totaled from $7.2 billion to $12.2 billion in  constant 2004 dollars. Table 1 shows nominal amounts of borrowings by  category—single family and multi-family borrowings, and tax-exempt,  taxable and amounts subject to alternative minimum tax.
The magnitude of bond issuances suggests significant state and local  government support for both single-family and rental housing in the form  of multifamily dwellings. As can be seen in table 1, tax-exempt borrowings  provided less than 50 percent of total borrowings for housing. The I.R.C  includes housing financing as a “qualified private activity” subject to  volume caps.
section_title: Transportation Facilities Often Are Publicly Financed by a Variety of Methods
paragraphs: We were unable to determine the number of road infrastructure facilities  that have been constructed, financed, or operated by state and local  governments. According to experts in state and local finance,  transportation and schools are the largest categories of capital projects  financed by state and local governments. We found the following details  on debt financings of road projects.
According to Thomson Financial data, from 2000 through 2004  municipalities borrowed, in 2004 dollars, a total of $61.4 billion in 1,094  issues for toll roads and highways. In 2002, debt financing represented  about 10 percent of total state funding for highways. In addition to tax- exempt bonds, transportation facilities received federal support in the  form of highway credit programs and loans, and highway tax revenues.  We were able to provide some details on debt financing of transportation  facilities.
Thomson Financial data indicate that while state and local governments  allocated 9 percent to 13 percent of total bond issuances to transportation  facilities in the period from 2000 through 2004, between 27 and 38 percent  of those issues went toward toll roads and highways. These bonds  averaged about $12 billion in constant 2004 dollars over the period from  2000 to 2004. Table 2 shows the nominal amounts of borrowings by  category—air, sea, and road facilities, and tax-exempt, taxable and  amounts subject to alternative minimum tax. Categories in bold are closest  to the types of facilities that are the subject of this report. However, some  facilities of interest may have been bundled within the other categories.
section_title: Wide Prevalence of User Charges for Parking Suggest Customary Provision by State and Local Governments
paragraphs: We were unable to obtain the number of parking facilities constructed,  financed, or operated by state and local governments. According to  municipal finance experts parking facilities, like housing and  transportation facilities, are commonly financed with tax-exempt bonds by  state and local governments. We found the following details on debt  financing for parking facilities.
According to Thomson Financial data, from 2000 through 2004  municipalities borrowed, in 2004 dollars, a total of $3.5 billion in 220 issues  for parking facilities. Details on debt financing for parking facilities from  Thomson Financial data are listed in the previous section on  transportation facilities and in table 2. Total taxable and tax-exempt bond  issuances for parking facilities ranged from $0.5 billion to $1 billion in 2004  constant dollars, accounting for on average 2 percent of total (taxable and  tax-exempt) transportation bond issues. The data for parking facilities  bond issues do not provide a breakdown between taxable and tax-exempt  bond issuances.
According to government finance experts, determining the use of tax- exempt bonds to finance parking facilities can be difficult because a  variety of capital projects are often combined into one bond issuance. In  addition, state and local governments have relied on a combination of tax- exempt and taxable financing to construct parking garages that are meant  to promote economic development in specific districts. For example, the  City of Virginia Beach built several parking garages in two tax increment  financing (TIF) districts wherein the incremental real property taxes  above a base level are used to pay the revenue bonds issued to build the  garages. As of December 2005, the city had issued $34.9 million tax-exempt  and $4.7 million taxable revenue bonds to build parking garages in the TIF  districts. In order to reduce the construction risk to the city, a private  developer built the garages and the city’s Development Authority  purchased them as they were built.
User fees received by state and local governments for providing parking  services are a direct indicator of the extent of their involvement in parking  facilities in the form of on-street metered parking, off-street parking  garages, or both. According to 2002 Census of Governments data, about 73  percent of the population of the United States lived in MSAs that reported  user charges on government-owned parking facilities. Table 3 lists the  largest 171 MSAs by their level of parking user charges. Figure 1 shows the  location of the largest 171 MSAs and their level of parking user charges.  These 171 MSAs accounted for about 75 percent of the population in the  United States in 2002 and include all MSAs with populations of 250,000 or  more. Ninety-two percent of the MSAs listed reported positive user  charges, and 97 percent of the population in the largest MSAs lived in  MSAs that reported positive user charges. The prevalence of user charges  suggests that most of the population is provided with some publicly  supported parking by state and local governments.
We examined selected government comprehensive annual financial  reports in large MSAs, and found that some cities report their parking  operations in business-type proprietary funds that disclose operating  results and debt levels. For example, in 2005 the City of Miami Beach’s  Parking Fund reported $30.5 million tax-exempt revenue bonds and $10.4  million in income from operating the city’s 68 parking lots and garages.
section_title: Governments Provide Financing for a Wide Variety of Recreational Facilities
paragraphs: We did not find readily available data that identify community recreational  facilities as a specific category and were unable to determine the number  of these facilities financed, constructed, or operated by state and local  governments. According to government finance experts, state and local  governments play a large role in the financing and construction of a  variety of recreational facilities. However, it is difficult to identify the  specific amount of financing for these facilities because available  information is presented in overlapping categories and single bond  issuances can be used for more than one purpose. We found the following  details on debt financing of different types of recreational public facilities.
From 2000 through 2004 municipalities borrowed, in 2004 dollars, a total  of $60.9 billion in 3,085 tax-exempt issues to build public facilities,  according to Thomson Financial data. This general category includes  several recreation-related facilities, including libraries and museums ($7.5  billion in 470 issues); convention centers ($11.1 billion in 236 issues);  theaters ($0.6 billion in 29 issues); parks, zoos, and beaches ($6.1 billion in  723 issues); stadiums and arenas ($5.3 billion in 119 issues); and other  recreation facilities ($4.6 billion in 420 issues). Table 4 shows nominal  amounts of borrowings by category—convention centers; parks, zoos, and  beaches; other recreation; and other public facilities; and tax-exempt,  taxable and amounts subject to alternative minimum tax. From 2000  through 2004, state and local governments devoted between 2 percent and  5 percent of total bond issuances to public facilities. Of the municipal  bonds issued over the period for public facilities between 6 percent and 13  percent were issued for facilities such as parks, zoos, and beaches, and  between 5 percent and 11 percent were devoted to other recreational  facilities. These bonds totaled from $0.6 billion to $1.7 billion in constant  2004 dollars.
Given that the recreational facilities category overlaps with some of the  other categories, such as golf courses and convention centers, additional  information relevant to recreational facilities is available in other sections  of this report.
Similar to parking facilities, we used the 2002 Census of Governments to  obtain an indirect indicator of the state and local governments’ support for  community recreational facilities. However, this indicator is less precise  than the Census indicator for user parking charges because Census  defines park and recreational facilities to include many community  recreational facilities, including swimming pools, marinas, golf courses,  tennis courts, and museums. Also, determining the number and amounts  of tax-exempt financings related to community recreational facilities was  difficult because state and local governments can include these facilities  with other capital projects in a single financing package.
According to the Census data, all of the largest 171 MSAs reported positive  user charges for parks and recreation. Thus, 75 percent of the population  has access to some form of publicly provided recreational facility, as  shown in figure 2.
section_title: Numerous Municipal Golf Courses Exist, Some with Lodging Facilities
paragraphs: According to National Golf Foundation data, in 2005 there were about  16,000 public and private golf courses in the United States. Of those, about  2,400 (15 percent) are municipal golf courses, that is, they are owned by  state and local governments. Municipal golf courses do not include daily  fee golf courses, about 9,000, that are not owned by a tax-supported entity  but provide at least limited public access. Table 5 shows the regional  distribution of municipal golf courses. All states have municipal golf  courses.
Three percent, or about 80, municipal golf courses have been constructed  with different forms of lodging, ranging from cabins to resort hotels with  convention facilities. In some cases, municipal resort golf courses have  been built with resort hotels and facilities and have been constructed both  as stand-alone courses and as part of park districts. These resort courses  may vary significantly in different ways, including lodging and dining  facilities and course design.  Figure 3 shows the trend in nonpark  municipal resort golf facilities. Over many years there has been a  consistent increase in the number of nonpark municipal resort golf  courses. In addition to the nonpark resort golf courses, there were an  additional 24 resort golf courses inside park districts as of 2005.
According the National Golf Foundation, there are also close to 70  municipal golf courses associated with real estate developments. These  courses, which are owned by municipalities, have been built together with  planning for private real estate abutting the course, or have been  purchased by the municipality from private real estate developments that  included golf courses. In some cases the private real estate development  was planned in order to cover part of the costs of building the municipal  course. Over the past 10 years an increasing number of golf courses have  been built as part of larger real estate developments. Figure 4 shows the  trend in municipal real estate development golf courses.
We did not find the full extent of tax-exempt financing of municipal golf  courses. According to data provided by Akin Gump Strauss Hauer & Feld  LLP, a major law firm, at least 120 golf courses in 29 states have been  financed, at least in part, with tax-exempt bonds. We identified, using  National Golf Foundation data, over 25 of these tax-exempt financed  courses as associated with resort or real estate facilities. According to  these data many more of these courses have banquet facilities and  conference centers.
An illustration of the use tax-exempt bonds to build a municipal golf  course is provided by the 27-hole municipal golf course in the City of  North Charleston. In the late 1990s the city issued $11.1 million in  mortgage revenue bonds to build a municipal golf course and $4.6 million  in general obligation bonds to finance the construction of roads and  infrastructure improvements in the surrounding area. In 2003 the city  refunded the outstanding golf-related bonds by issuing $11.7 million in  mortgage revenue bonds, for an estimated $1.6 million in debt service  savings. In 2005 the municipal golf course had a $1 million operating loss,  but the city expects that the course’s situation in the center of a residential  and commercial development eventually will contribute over $200 million  in taxable property value.
Daily fee courses, while not explicitly owned by state or local  governments could have been financed with municipal tax-exempt bonds.  For example, the Maryland Economic Development Corporation  (MEDCO) has issued about $176 million limited-obligation revenue bonds  to build two resorts that feature a hotel, a conference center, and a golf  facility. MEDCO owns the Hyatt Regency Chesapeake Bay Conference  Center, with 400 hotel rooms, 35,000 square feet of meeting and banquet  space, an 18-hole championship golf course and 150-slip marina. MEDCO  also owns the Rocky Gap Golf Course and Hotel/Meeting Center, with an  18-hole Jack Nicklaus signature golf course, a 243-acre lake, and a resort  lodge.
Some municipal finance experts believe state and local governments can  also provide indirect support to private golf courses through lower taxable  property values. Private golf courses may be subject to agricultural  assessment rules, which provide a tax break on property taxes, given that  golf courses also provide an open space. They also noted that there may  be other cases where land apportioned off by state and local governments  near residential property is transferred to private companies in order to  build golf courses.
section_title: Public Financing Is Provided to Numerous Convention Centers
paragraphs: Although the number of convention centers financed, constructed, or  operated by state and local governments is not known, we were provided  information on over 300 convention centers owned by state and local  governments by Akin Gump Strauss Hauer & Feld LLP. According to  government finance experts, most convention centers are financed with  tax-exempt bonds. We found the following details on debt financing of a  number of different types of recreational public facilities.
From 2000 through 2004 municipalities borrowed in 2004 dollars $11.1  billion in 236 issues for financing convention centers, according to  Thomson Financial data. (See table 4 for details of debt financing of  convention centers, in nominal amounts in billions.) The municipal bonds  issued for convention or civic centers totaled from $1.2 billion to $3.4  billion in constant 2004 dollars. Figure 5 shows the cumulative number of  major new bond issues for convention centers over the past 8 years.
According to some bond finance and convention industry experts,  convention centers have been mostly financed by city governments.  Experts we interviewed said that in order to promote urban economic  development, a growing number of cities have in recent years built  convention centers and also built hotels nearby in order to draw more  convention visitors to their communities. Even though convention centers  may operate at a financial loss, cities have financed them expecting to  generate additional spending in related businesses, including restaurants  and entertainment, and increased property values.
section_title: Different Sources Show Public Financing of Hotels and Related Facilities
paragraphs: According to lists we obtained from government finance experts, 39 hotels  associated with convention centers or airports or golf courses that have  been financed with tax-exempt bonds have been identified.  These  facilities may vary significantly in different ways. As table 6 shows, the  value of tax-exempt bond financing for hotels totaled in the billions.  According to selected government financial reports we examined, 12  hotels have been financed with tax-exempt bonds in recent years. Table 6  shows the location of these hotels and bond financing details.
section_title: State and Local Governments Support Gaming, but Extent of Public Financing Is Difficult to Estimate
paragraphs: We were unable to determine the number of state-owned gaming support  facilities. According to government finance experts, it is common for  states to issue large bond issuances for different capital projects.   However, data are not available to determine the extent, if any, that these  bonds have included facilities for public gaming activities and  infrastructure projects that benefit private gaming enterprises. Facilities  associated with lotteries are sometimes provided in some government  buildings and in convenience stores with lottery ticket terminals. We  found the following information on the prevalence of gaming throughout  the states.
According to states’ financial reports and gaming studies all but 2 states— Hawaii and Utah—have some form of legal gaming. Forty-one states and  the District of Columbia reported assets and revenues related to lotteries.  Some municipalities have provided tax-exempt and taxable financing to  build transportation infrastructure in localities that depend on private  gaming enterprises to generate employment and gaming revenues to  finance basic government functions.
The prevalence of lotteries is one indicator of state and local governments’  support of gaming facilities. Forty-one states and the District of Columbia  have lottery systems, with annual operating incomes ranging from $2  million to $2 billion and net assets from lotteries from -$12 million to $290  million. Similar to other facilities, the number of state-owned gaming  facilities that have been financed with tax-exempt bonds is difficult to  estimate because a single bond issue may finance several capital projects,  including lotteries’ offices and equipment.
In lieu of or in addition to a state-sponsored lottery, some states allow for  legalized private gaming, such as casinos. According to the American  Gaming Association, in 2004 16 states had legal operational casinos and  some states allowed gambling in the form of pari-mutuel activities, such as  horse or greyhound racing, and gaming machines. Seven of these states  have also introduced variations in gambling activities, such as racetrack  casinos or “racings,” which usually consist of slot machines associated  with racetracks. Seven states have video lottery terminals (VLT), which  are similar to slot machines.
State and local governments can issue tax-exempt bonds to finance the  infrastructure that directly benefits private casinos or gaming facilities. We  found three examples of tax-exempt financing related to gaming facilities.  New Jersey’s Casino Reinvestment Development Authority (CRDA) relies  on tax-exempt borrowings, casino parking fees, and investments to  finance eligible projects. In 2004 CRDA issued $93 million in tax-exempt  hotel room fee revenue bonds to finance Atlantic City casino expansion  projects and provide funds to the New Jersey Sports and Exhibition  Authority for horse racing purse enhancements.
Another example of tax-exempt financing that benefits private casinos is  the monorail in Las Vegas. The monorail was financed with a combination  of tax-exempt and equity funds and provides seven stations - MGM Grand,  Bally’s/Paris, Flamingo, Harrah’s/Imperial Palace, Las Vegas Convention  Center, Las Vegas Hilton, and the Sahara.
In 2005, California’s Del Mar Race Track Authority sold about $50 million  in tax-exempt bonds to refund existing debt and improve facilities at the  horseracing track.  In addition to concessions and racetrack revenues, the  bonds will also be backed by satellite-wagering receipts.
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If you or your staff have any questions about this report, please contact me  at (202) 512-9110 or brostekm@gao.gov. Contact points for our Office of  Congressional Relations and Public Affairs may be found on the last page  of this report. GAO staff who made major contributions to this report are  listed in appendix II.
section_title: Appendix I: Objective, Scope, and Methodology
paragraphs: The objective of this report was to provide information on state and local  governments’ financing, construction, and operation of the following eight  types of facilities:  3.  Parking garages and parking lots  4.  Community recreational facilities  7.  Hotel and tourist accommodations  8.  State-owned gaming support facilities  We performed an extensive review of possible data sources and did not  find a comprehensive, reliable source of data for the above facilities. We  provide instead limited data on the number and amount of financings of  broader categories of facilities, describe tax-exempt financings of selected  state and local governments, and provide other available indicators of  public support. The following provides detailed descriptions of the data  sources, limitations of the data sources we used, and the links between the  information and the eight facilities in the original request.
subsections: section_title: Rental Housing
paragraphs: We used a recognized source for bond information, Thomson Financial  data contained in the Bond Buyer Yearbooks to provide details on the  bond issuances for single- and multifamily housing according to the  category provided in the yearbooks as a related category to rental housing.  This data source provides 2000-2004 aggregate values and the number of  bonds issued. However, there are a number of limitations to these data.  The category for multi-family housing could contain more than just rental  housing, although bond experts have suggested that is unlikely. Because  municipalities can issue large combined bond issuances some bond issues  related to housing or rental housing could be contained in other  categories, thus the information provided relies on the categorization of  bond issues in the categories listed. The breakdown of bond issuances did  not allow us to determine the amount of multifamily housing issuances  that were tax-exempt, only the amount of total housing issuances that are  tax-exempt for the years covered.
This data source only provides information on a particular method of  housing finance and therefore does not provide information on the total  government rental housing expenditures; the number of rental housing  units constructed, financed, or owned by state and local governments; or  other forms of government financing for rental housing. However, the  magnitude of debt financing on multifamily housing is suggestive of  government provision of rental housing. Furthermore, we do not address  the ultimate purpose of the housing projects financed by state and local  governments, although bond experts stated these were almost always  designed to provide affordable housing to lower-income individuals.
section_title: Road Infrastructure
paragraphs: As with the rental housing category we used Thomson Financial data  contained in the Bond Buyer Yearbooks to provide details on the bond  issuances for a variety of transportation categories, including toll roads  and highways, bridges, and tunnels, according to the category provided in  the yearbooks as a related category to road infrastructure. This data  source provides 2000-2004 aggregate values and the number of bonds  issued. However, there are a number of limitations to these data. Because  municipalities can issue large combined bond issuances some bond issues  related to road infrastructure, such as capital, could be contained in other  categories—for example, economic development—and thus the  information provided relies on the categorization of bond issues. The  breakdown of bond issuances did not allow us to determine the amount of  toll road and highway issuances that were tax-exempt, only the amount of  total transportation issuances that are tax-exempt for the years covered.
This data source only provides information on a particular method of  transportation finance and therefore does not provide information on total  government transportation expenditures; the number of transportation  facilities constructed, financed, or owned by state and local governments;  or other forms of government financing for transportation. Particularly  with transportation finance, state and local governments rely on other  financing methods, including general funds and tolls. Furthermore, we do  not address the ultimate purpose of the transportation projects financed  by state and local governments or where they are constructed.
section_title: Parking Garages and Parking Lots
paragraphs: We used three main sources to provide information addressing state and  local governments’ construction, operation, and financing of parking  garages and parking lots. We use Thomson Financial data on bond  issuances, the U.S. Census Bureau’s (Census) 2002 U.S. Census of  Governments user charges, and selected comprehensive annual financial  reports to provide some case studies.
We used Thomson Financial data, contained in the Bond Buyer Yearbooks,  to provide details on the bond issuances for parking facilities according to  the category provided in the yearbooks as a related category to parking  garages and lots. This data source provides 2000-2004 aggregate values and  the number of bonds issued. However, there are a number of limitations to  these data. Because municipalities can issue large combined bond  issuances some bond issues related to parking garages and lots could be  contained in other categories, such as economic development, thus the  information provided relies on the categorization of bond issues. The  breakdown of bond issuances did not allow us to determine the amount of  parking facilities issuances that were tax-exempt, only the amount of total  transportation issuances that are tax-exempt for the years covered.
This data source only provides information on a particular method of  parking facilities financing and therefore does not provide information on  total government parking expenditures; the number of parking facilities  constructed, financed, or owned by state and local governments; or other  forms of government financing for parking. Furthermore, we do not  address the ultimate purpose or location of the parking facilities financed  by bond issuances.
We used the 2002 Census of Governments to provide user charges for  parking facilities for the top 171 metropolitan statistical areas (MSA).  There are some limitations to the use of these charges. User charges  received by municipalities for parking do not provide any information on  the number of existing facilities or the number of parking facilities  constructed or financed by state and local governments. Since the data  rely on user charges this source may not be representative of total parking  provide nationally, as it would not include free public parking. We also do  not provide total public expenditures on parking facilities.
There are also some limitations in the definition of the parking facilities  category. The Census category defines parking as the “provision,  construction, maintenance, and operation of local government public  parking facilities operated on a commercial basis.” These facilities include  parking meters, on-street parking, and parking lots, but exclude parking  facilities for the exclusive use of government employees and parking areas  connected to specific types of facilities, such as those for a public sports  stadium, which are reported with the function of the facility involved, such  as parks and recreation. The user charges, therefore, represent revenue  from on-street and off-street parking meters and charges and rentals from  locally owned parking lots or public garages.
Lastly, we used the selected state and local government financial reports  of cities and counties located in large MSAs that contained detailed  information to provide specific examples of parking facilities that have  been financed by state or local governments. As these are examples they  cannot be generalized to state and local financing, construction, and  operation of parking facilities.
section_title: Community Recreational Facilities
paragraphs: We used the 2002 Census of Governments to provide user charges for  parks and recreation facilities for the largest 171 MSAs. Community  recreation facilities easily overlap into a numerous other categories, and  we did not identify any data that specifically focused on this category.
There are some limitations with the use of user charges. User charges  received by municipalities for parks and recreation do not provide any  information on the number of existing facilities or the number of parks  and recreational facilities constructed or financed by state and local  governments. Since the data rely on user charges this source may not be  representative of the total park and recreational facilities provided  nationally, as it would not include free facilities. We also do not provide  total public expenditures on parking facilities.
There are also some limitations in the definition of the park and  recreational facilities category. The census category defines park and  recreational facilities as the “provision and support of recreational and  cultural-scientific facilities maintained for the benefit of residents and  visitors.” This category includes a variety of facilities, such as golf courses,  public beaches, swimming pools, parks, camping areas, recreational piers  and marinas, but excludes any recreational facilities operated as part of a  school system and marinas for commerce. It would also include support of  private facilities; galleries, museums, zoos, and botanical gardens;  auditoriums, stadiums, recreational centers, convention centers, and  exhibition halls; community music and drama facilities; and celebrations,  including those in public support of cultural activities. User charges  represent revenue of facilities operated by a government; auxiliary  facilities in public recreation areas (refreshment stands, gift shops, etc.);  lease or use fees from stadiums, auditoriums, and community and  convention centers; and rentals from concessions at such facilities.
section_title: Golf Courses
paragraphs: We used data from the National Golf Foundation to provide details on the  number and form of municipal golf courses in the United States. As  verification, we interviewed those who maintain the database about their  methodology for building and maintaining the database. A foundation  representative considered the database to be largely comprehensive, as  the foundation has measures in place to ensure its list includes all golf  courses, and did not express any concerns regarding the reliability of the  data.
This data source did limit the type of information we could provide. Data  were not available on the public financing of golf courses, via tax-exempt  bonds or other methods, or on any aid provided by state and local  governments to privately owned public golf courses. While the database  may be largely comprehensive, at any one time it may not include every  single golf course in the United States. Since municipalities can engage in  a variety of joint public and private golf courses establishments, the data  may not be representative of the total number of golf courses constructed  or originally financed by state and local governments.
We also used data on high-end golf courses provided by Akin Gump  Strauss Hauer & Feld LLP to provide estimates of the number of golf  courses financed with tax-exempt bonds. As verification, we interviewed  the official providing the data about the methodology for determining the  tax-exempt financing and golf course listings.
section_title: Conference Centers
paragraphs: We used two sources of data to provide information on the financing and  ownership of convention centers: bond issuance data and data on the  number of government-owned convention centers.
We used Thomson Financial data contained in the Bond Buyer Yearbooks  to provide details on the bond issuances for a variety of public facility  categories, including convention centers; parks, zoos, and beaches; and  other recreation, according to the categories provided in the yearbooks as  related to conference centers. This data source provides 2000-2004  aggregate values and the number of bonds issued. However, there are a  number of limitations to these data. Because municipalities can issue large  combined bond issuances some bond issues related to convention centers,  could be contained in other categories, such as economic development,  thus the information provided relies on the categorization of bond issues  into the categories. The breakdown of bond issuances did not allow us to  determine the amount of convention center issuances that were tax- exempt, only the amount of total transportation issuances that are tax- exempt for the years covered.
This data source only provides information on a particular method of  public facilities financing and therefore does not provide information on  total government public facilities, and thus convention center,  expenditures; the number of public facilities constructed, financed, or  owned by state and local governments; or other forms of government  financing for public facilities. Furthermore, we do not address the ultimate  purpose of the public facilities projects financed by state and local  governments or where they are constructed. However, bond experts have  stated that state and local governments finance convention centers to  attract outside revenue and stimulate economic development through  tourism.
We also relied on a list of government-owned convention centers provided  by Akin Gump Strauss Hauer & Feld LLP. We use this list as an estimation  of the number of government owned convention or civic centers. As  verification, we interviewed the responsible contact about the  methodology and obtained financing data on selected observations using  comprehensive annual financial reports (CAFR).
section_title: Hotels and Tourist Accommodations
paragraphs: We used four separate data sources to provide a combined listing of the  number of hotels financed by tax-exempt bonds that have been identified  by experts in the field of government finance. The individual lists came  from Orrick, Herrington & Sutcliffe LLP; HVS International; Piper Jaffray;  and Akin Gump Strauss Hauer & Feld LLP. Each of these data sources  provided a listing of hotels financed with tax-exempt bonds along with  estimates of the amount of financing. Because these lists were produced at  different times and multiple bonds can be issued for single projects, the  estimates of facilities from these lists may not represent all facilities  financed with tax-exempt bonds or include all the bond issuances prior or  since the date the data source. As verification, we conducted interviews to  assess the methodologies for determining the lists and provide a list of  hotels and their financing structure, which we determined from looking at  selected government financial reports. The combined estimate from the  lists may also not represent every hotel that has been financed in part or  whole by state and local governments, but rather provide the number of  identified hotels financed with tax-exempt bonds.
section_title: State-owned Gaming Support Facilities
paragraphs: We used three sources of data to provide limited information on state and  local governments’ support of gaming facilities: state lottery data, survey  data on private casino gaming, and specific examples of government aid in  connection with private gaming.
We used financial data on lotteries from state CAFRs to provide the  number of states with lotteries and the capital assets for those lotteries.  We use the level of capital assets for state lotteries as an indication of the  financing of state-owned gaming facilities. However, there are a number of  limitations to these data. The asset data do not provide information on  other state-owned gaming facilities. Because government facilities may  have multiple uses the asset figures may not represent the actual portion  of assets devoted to lottery use. These data may also not include all forms  of state-owned gaming facility assets, such as state gaming terminals.
We used information from the American Gaming Association’s 2005  Survey of the States to provide contextual information on the number of  states with legalized gaming. As verification we reviewed data from the  source listed in the survey for selected states. The survey data also provide  the number of states with publicly run video lottery terminals (VLT) at  racetrack casinos. This data source does not provide any information on  state and local expenditures related to either the public VLTs or private  gaming facilities or the number of state-owned gaming support facilities.
We used gaming articles identified through the literature searches on the  Internet and in finance and bond journals and testimony from bond  finance experts including officials from the Government Finance Officers  Association, and the Bond Market Association, to elaborate on examples  of states’ financing of projects directly related to or aiding private gaming.  As these data provide examples they cannot be generalized to total state  and local aid to private gaming.
We conducted our work from February 2006 through August 2006 in  accordance with generally accepted government auditing standards.
section_title: Appendix II: GAO Contact and Staff Acknowledgments
subsections: section_title: Acknowledgements
paragraphs: In addition to the contact named above, Jose Oyola, Assistant Director;  Robert Dinkelmeyer; Jennifer Gravelle; Cheryl Peterson; and Walter Vance  made key contributions to this report.