Tax Policy: Tax-Exempt Status of Certain Bonds Merits Reconsideration, and Apparent Noncompliance with Issuance Cost Limitations Should Be Addressed
Published: 2008-02-15T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: The outstanding amount of state and local government tax-exempt bonds has increased over the years. Congress is interested in whether the bonds are used for appropriate purposes since the federal government forgoes billions in tax revenues annually by excluding the bonds' interest from investors' federal gross income. Questions also exist over the bonds' borrowing costs as they can divert funds from the funded projects. This report (1) describes recent trends in tax exempt bonds, (2) provides information on the types of facilities financed with tax-exempt bonds, and (3) discusses borrowing costs considering the methods of selling bonds and compares issuance costs paid from bond proceeds for governmental and qualified private activity bonds. In addition to interviewing relevant officials, we analyzed IRS's Statistics of Income (SOI) data and data from Thomson Financial to address these objectives.
section_title: What GAO Found
paragraphs: In recent years, the volume of tax-exempt bonds issued annually for both governmental and private activity bonds has reached historically high levels. Generally, the volume of new money bond issues has been greater than bonds issued for refunding purposes. The volume of tax-exempt bonds issued, particularly bonds issued for refunding, tends to be highest when interest rates decline. Because the interest earned by investors who purchase tax bonds is generally excluded from federal income taxes, the federal revenue losses amount to billions of dollars annually. Tax-exempt governmental and private activity bonds are used to finance a wide range of projects and activities, with bonds issued for "educational purposes" generally being the largest category of governmental bonds annually. Nonprofit organizations are the largest issuers of qualified private activity bonds. Previous legislation prohibited using qualified private activity bonds for certain facilities, including professional sports stadiums, hotels, and private golf courses. However, many of these types of facilities are still being financed with tax-exempt governmental bonds. Congress has held hearings on this issue primarily focusing on sports stadiums. Although the evidence is not definitive, studies have generally shown that interest costs are lower for bonds sold when competition between underwriters exists compared to when bond sales are negotiated with underwriters after controlling for other factors. About half of all issuers of qualified private activity bonds reported paying issuance costs from bond proceeds from 2002 to 2005. IRS's guidance does not indicate what to report when no issuance costs are paid from bond proceeds. Of those reporting issuance costs, some private activity bond issuers reported paying issuance costs from bond proceeds that exceed statutory limits.

section_title: Letter
paragraphs: The outstanding volume of state and local government tax-exempt bond  debt grew significantly from about $1.4 trillion in 2000 to over $2.1 trillion  in 2006 in constant 2007 dollars. Because the tax exemption allows  taxpayers to generally exclude the bond interest from their federal gross  income, the federal government forgoes tax revenue. According to our  analysis of the Department of the Treasury’s (Treasury) estimates, forgone  federal tax revenues were about $32.0 billion in 2000 and were projected  to be about $37.0 billion in 2007. Congressional interest in the use of tax- exempt bonds has heightened because of the large dollar amounts of  bonds outstanding coupled with the large amounts of forgone federal tax  revenues.
State and local governments have broad discretion in using tax-exempt  bonds to finance public infrastructure and other projects. Although state  and local governments (and certain nonprofit entities) can use tax-exempt  bond financing to subsidize activities of private entities, Congress  previously placed limitations on the use of such financing for specific  private activities and, in general, has limited the annual volume on such  bonds. For example, Congress allows the use of tax-exempt bonds for  privately owned facilities such as airports, docks, and wharves subject to  annual state-by-state volume caps. In addition, there are special rules for  providing tax-exempt bond financing for private uses within certain  geographic areas (e.g., enterprise and empowerment zones, the New York  Liberty Zone, and the Gulf Opportunity Zone) to provide incentives for  economic development.
Because issuing bonds can be a complex process requiring specialized  services in planning and selling the bonds, congressional interest has also  focused on the borrowing costs, including interest costs and issuance  costs, that bond issuers pay when bonds are issued. Concerns have  focused on the methods of selling the bonds because this might affect the  interest costs paid by municipal governments and ultimately the amount of  federal forgone revenues. Further, issuance costs can divert bond  proceeds from the facilities and activities for which the bonds were  intended to be used.
To support Congress’s efforts to review the types of facilities and activities  that are financed with tax-exempt bonds and understand the factors  affecting the costs of issuing the bonds, you requested this study. Our  objectives were to    describe recent trends in the dollar volume of tax-exempt bonds;    provide information on the types of facilities and activities that are  financed with tax-exempt bonds, in particular, information on hotels and  municipal golf courses that were recently financed with tax-exempt bonds;  and    provide information on borrowing costs that bond issuers pay by  summarizing relevant research on whether bond interest costs vary by the  method of sale, considering characteristics of the bond and bond issuer  and providing information on how bond issuance costs vary between  governmental and private activity bonds, including the extent to which  private activity bond issuers exceed the statutory limit for issuance costs  as a percentage of bond proceeds.
To address our objectives, we obtained information from several sources  that are recognized as being reliable sources for data on tax-exempt  bonds. To describe recent trends in the dollar amounts and numbers of  tax-exempt bonds, we used data from the Internal Revenue Service’s (IRS)  Statistics of Income Division (SOI), which collects data from the  information returns issuers of tax-exempt bonds are required to file with  IRS. We also used data contained in the Bond Buyer Yearbook, a  publication that summarizes information on bond issuances that is widely  used as a reference by bond industry experts. To provide information on  the facilities and activities financed using tax-exempt bonds, we relied on  data from SOI, the Bond Buyer Yearbook, and a limited random sample of  official statements for tax-exempt bonds. Official statements are used to  market the bonds and contain descriptive information on the facilities and  activities financed using the bonds. Because we could not find a  comprehensive source of information on hotels and municipal golf courses  financed with tax-exempt bonds, we provide some limited data from the  best available sources we could identify. To provide information on  borrowing costs associated with tax-exempt bonds, we summarized  relevant recent research on whether interest costs vary considering the  method of sale and analyzed SOI data on issuance cost as reported to IRS  by bond issuers. For information pertaining to our work in general, we  interviewed officials in IRS’s Tax-Exempt Bond Office in its Government  Entities and Tax-Exempt Division and Treasury’s Office of Tax Policy and  other experts in taxation and government finance in the Government  Finance Officers’ Association, the Securities Industry and Financial  Markets Association, and the Congressional Research Service.
We determined that the data we used in this report were sufficiently  reliable for our purposes. Appendix I provides a detailed description of  our methodology, sources, and limitations. We conducted our work from  December 2006 through January 2008 in accordance with generally  accepted government auditing standards.
subsections: section_title: Background
paragraphs: Tax-exempt bonds are valid debt obligations of state and local  governments. Under Section 103 of the Internal Revenue Code (I.R.C.), the  interest earned on most bonds issued by state and local governments is  tax-exempt. This means that the interest paid to bondholders is generally  not included in their gross income for federal income tax purposes. The  tax exemption lowers the bond issuer’s borrowing costs and may provide  equivalent or higher after-tax yields to investors than alternative  investments that are not tax-exempt. Tax-exempt bond financing can  apply to different types of debt financing arrangements, including notes,  loans, commercial paper, certificates of participation, and tax-increment  financing. The tax-exempt status remains throughout the life of the bonds  provided that all applicable laws are satisfied. IRS’s Tax-Exempt Bond  Office in its Tax Exempt and Government Entities division is responsible  for administering tax laws pertaining to tax-exempt bonds.
Tax-exempt bonds can be characterized as new money and refunding  issues. New money issues refer to bonds used to finance a new project. A  refunding issue refers to any bond issue used to pay debt service on and  retire an outstanding issue. Typically, refunding is done for reasons such  as to reduce the interest rate and ease restrictions on the original bond  contract. Refunding issues are either current or advanced based on the  timing between the issuance of the new bonds and the maturity date of the  outstanding bonds. Current refunding occurs when new bonds are issued  within 90 days of the final payment on the prior issue and advance  refunding occurs if the new bonds are issued more than 90 days before  final payment on the prior issue.
For federal tax purposes municipal bonds are classified as either  governmental bonds or private activity bonds. In general, governmental  bonds are tax-exempt and are used to build public capital facilities and  serve the general public interest. The I.R.C. does not specifically define  governmental bonds; rather, all municipal bonds that do not meet the  criteria to be classified as private activity bonds are governmental bonds.
Municipal bonds are classified as private activity bonds, which provide  financing to private businesses, if they pass both the private payment and  the private business use test. These tests specify that if more than 10  percent of the bond proceeds are used for private business purposes and  more than 10 percent of the bond proceeds are secured by payments from  property used for private business use, then the bond is a private activity  bond. A bond that is classified as a private activity bond can be taxable or  tax-exempt. Congress has specified certain private activities (see tables 4  and 5) that can be financed with tax-exempt bonds. Private activity bonds  that receive tax-exempt status are called qualified private activity bonds.  Private activities that are not “qualified” are taxable.
Generally, qualified private activity bonds are subject to a number of  restrictions that do not apply to governmental bonds, including a 2 percent  limit on using proceeds of the bond sale to pay issuance costs, annual  state-by-state limitations on the volume of bonds that can be issued, and  the disallowance for advanced refunding. In addition, the interest income  from qualified private activity bonds is an addition to income for purposes  of calculating the alternative minimum tax (AMT) whereas the interest on  governmental bonds is not. However, some exceptions to these  restrictions exist for qualified 501(c)(3) private activity bonds issued by or  on behalf of nonprofit entities. Qualified 501(c)(3) bonds do not count  toward annual state-by-state volume limits; the interest income on these  bonds issued after August 7, 1986, is not subject to AMT rules; and unlike  other qualified private activity bonds, qualified 501(c)(3) bonds can be  advance refunded.
Tax-exempt bonds can be structured as general obligation or revenue  bonds. General obligation 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 general obligation 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 governmental bonds or private activity bonds for tax purposes.
In addition to issuing tax-exempt bonds directly, state and local  governments may establish other entities to issue bonds “on behalf of”  such governmental units, or any political subdivision thereof. For  example, a specifically constituted nonprofit corporation acting on behalf  of governmental units might own, operate, and issue debt to finance a  local airport. In addition to issuing bonds for government operations and  services, qualified governmental units are permitted to issue qualified  private activity bonds to provide tax-exempt financing for certain private  activities. In these cases, the qualified governmental unit generally acts as  a conduit, meaning that the qualified governmental unit issues the bonds,  but the nongovernmental entity receiving the benefit of tax-exempt  financing is required to provide the funds to repay the bonds.
Municipal governments incur costs to issue their bonds. Bond issuance  costs include the underwriting spread, which is the difference between the  price paid to the issuer by the underwriter and the price at which the  bonds are reoffered to investors, and fees for bond counsel, financial  advisors, public hearings, printing, and other costs. In addition, at the time  bonds are issued, issuers may choose to purchase bond insurance or  secure a line of credit to further ensure that principal and interest  payments will be made on time. This additional security can improve the  bond’s credit rating and result in lower interest costs over time for bond  issuers. Bond insurance or other types of credit designed to ensure the  timely repayment of bonds may not count as issuance costs for the  purposes of calculating the 2 percent limit with which qualified private  activity bonds generally must comply.
Bond issuers have two principal avenues for marketing their bonds in the  primary market—competitive bids and negotiated sales. In competitive  bids, underwriters who sell the bonds compete against each other to  market the bonds for the issuer, while in negotiated sales, the issuer  selects the underwriter and negotiates the terms of the bond sale. The  majority of tax-exempt bonds are issued through negotiated sales.  Guidance issued in 1996 and revised in 2007 by the Government Finance  Officers’ Association on the preferred method of sale emphasized that  both methods offer advantages in different circumstances. Generally,  competitive sales are favored in cases when the bond has a relatively high  credit rating; the bond is secured by strong, long-standing revenue  streams; and the structure of the bond does not include innovative  financing methods that require explanation to the bond market.  Negotiated sales may be preferred in cases where a bond with relatively  complex features is to be issued during a time period with volatile interest  rates, giving the underwriter and the issuer more flexibility in terms of the  timing of the bond issue and the underwriter more time to search for  investors better suited to more complex bonds. The revised guidance on  the preferred method of sale puts more emphasis on the advantages for  issuers to obtain financial advice that is independent from the underwriter.
In offering bonds for sale, various documents may be prepared, including a  preliminary (announcing the prospective bond sale) and final (after the  bonds have been issued) official statement. Official statements contain  information describing the bond issue, including the dollar amount,  maturity dates, financing arrangements, and information on the types of  facilities and activities being financed. A copy of the final official  statement is required to be sent to the Municipal Securities Rulemaking  Board (MSRB), a congressionally chartered organization that regulates  securities firms and banks involved in underwriting, trading, and selling  municipal securities.
section_title: In Recent Years, the Dollar Amount of Long-term Tax- Exempt Bonds Issued Annually Has Been at Historically High Levels, and the Tax Exemption Is One of the Largest Federal Tax Expenditures
paragraphs: Based on IRS data, the dollar amounts of long-term tax-exempt bonds  issued have been at their highest levels in recent years. Since 2002, the  dollar amount of long-term, tax-exempt bonds issued has exceeded       $395 billion annually. In only 2 earlier years from the period 1991 through  2001, did the annual amount of bonds issued exceed $350 billion.  Furthermore, during this same period, municipal governments never  issued more bonds than in recent years. Figure 1 shows the annual dollar  amount of long-term, tax-exempt governmental and private activity bonds,  including new money and refunding bonds, issued from 1991 through 2005.
The recent increases in the dollar amounts of governmental bonds issued  have been a leading factor contributing to the high volume of tax-exempt  bonds issued since 2002. Figure 2 compares the annual dollar amounts of  governmental and qualified private activity bonds issued from 1991  through 2005. In recent years, that is, 2002 through 2005, at least             $295 billion of governmental bonds have been issued annually, or on  average about $314.8 billion per year. In comparison, in the earlier years of  1991 through 2001, the average amount of governmental bonds issued  annually was about $194.3 billion, or about 62 percent less than the  average annual amounts from 2002 through 2005 after adjusting for  inflation.
Similar to governmental bonds, the amounts of private activity bonds  issued annually has also been at peak levels since 2002. From 2002 through  2005, over $100 billion dollars in qualified private activity bonds were  issued each year. About $116 billion of qualified private activity bonds  were issued in 2005, more than in any other year since 1998. The average  dollar amount of qualified private activity bonds issued annually from 2002  through 2005 was about $106.7 billion. In comparison, in the earlier years  of 1991 through 2001, the average amount of qualified private activity  bonds issued annually was about $86.1 billion, or about 24 percent less  than the average annual amounts from 2002 through 2005 after adjusting  for inflation. Thus, though not as large as the comparable increase for  governmental bonds, there has been a noticeable increase in the amount  of qualified private activity bonds issued recently.
While both governmental and qualified private activity bonds reached  historically high levels recently, the amount of governmental bonds issued  annually has fluctuated to a greater extent. For example, from 1992 to  2005, the dollar amounts of governmental bonds issued annually either  increased or decreased by an average of about 25 percent per year. In  contrast, qualified private activity bonds fluctuated to a lesser extent, by  an average of about 13 percent per year. The wider fluctuation in  governmental bonds could be in part because governmental bonds are not  subject to as many restrictions, including annual state-by-state volume  caps, as qualified private activity bonds. Even if the volume cap for private  activity bonds is not reached for all states, the volume cap can place  constraints on the volume of private activity bonds issued because some  individual states may reach their limits and this would restrict them from  issuing any additional qualified private activity bonds that year.
Another way to analyze the dollar amount of tax-exempt bonds is to  compare new money bonds to refunding bonds. Although the amount of  refundings substantially increased around 2002, new money bond issues  were generally higher than refunding issues each year since 1991. Since  1991, the dollar amount of refundings has been greater than new money  issues in only 3 years—1992, 1993, and 2005. From 2001 through 2005, the  amount of new money tax-exempt bond issues has exceeded $200 billion  annually (in constant dollars). This is greater than any year from 1991  through 2000. Table 1 shows the annual volume and percentage of long- term, tax-exempt bonds issued for new money and refunding purposes  from 1991 through 2005.
Tax-exempt bond issuers tend to issue more debt when interest rates  decline. Since 1991, years when interest rates were at their lowest levels  generally have corresponded with the years in which the amounts of tax- exempt bonds issued, including bonds for refunding, were the highest. For  example, since 2002, average interest rates on tax-exempt bonds have  fallen to their lowest levels since the early 1970s. During this same time  period, the dollar amount of tax-exempt bonds issued has been at the  highest level since 1993.
Figure 3 shows how changes in interest rates have corresponded with the  amounts of new money and refunding bonds. As the figure illustrates,  generally, increases in the dollar amounts of bonds that were refunded  have accompanied declines in interest rates. This indicates that municipal  governments tend to take advantage of interest rate declines to restructure  existing bond debt to obtain more attractive financing terms, such as  obtaining a lower interest rate to reduce borrowing costs. On the other  hand, changes in the dollar amounts of new bond issues do not appear to  correspond as closely to interest rate changes as the amounts of  refundings. One explanation for this could be that municipal governments  tend to issue new bonds based on current needs to finance operations and  activities, and decisions regarding new financing are likely to be less  sensitive to interest rates.
subsections: section_title: The Estimated Revenue Loss from Outstanding Tax-Exempt Bonds Is One of the Largest Federal Tax Expenditures
paragraphs: Because the interest earned by investors who purchase tax-exempt bonds  is generally excluded from federal income taxes, the federal government  incurs a revenue loss each year. Revenue loss estimates are based on the  total dollar value of outstanding tax-exempt bonds and not on the dollar  amounts of tax-exempt bonds issued in a given year. Both Treasury and  JCT provide estimates of the revenue loss associated with tax-exempt  bonds. Though calculated differently, both estimates show that the  revenue loss is in the billions of dollars annually.
According to our analysis of Treasury’s estimates, the revenue loss from  excluding the interest earned on tax-exempt bonds from federal income  tax is the ninth largest tax expenditure in the I.R.C. in 2007. Figure 4  shows our analysis of Treasury’s revenue loss estimates from 2000 to 2012.  The estimates indicate that the federal government could lose about        $37 billion in 2007—$25.4 billion from interest on governmental bonds and  $11.6 billion from interest on qualified private activity bonds. As figure 4  shows, the estimated revenue loss from governmental bonds has  fluctuated from a high of $30.1 billion in 2003 to a low of $23.6 billion in  2006. According to our analysis of Treasury’s estimates, the revenue loss is  likely to be about $27.9 billion from governmental bonds and about       $12.6 billion from qualified private activity bonds by 2012.
JCT estimates also suggest a similar pattern of higher estimated revenue  losses attributable to excluding the interest earned on tax-exempt bonds  from federal gross income in future years. For example, in 2007, JCT  reported that the federal government would forgo about $27.8 billion due  to tax-exempt governmental bonds and projected that the revenue losses  would grow to about $31.9 billion in 2011. For qualified private activity  bonds, our analysis of JCT estimates shows the revenue loss increasing  from $8.6 billion in 2007 to about $10.1 billion in 2011, an 18 percent  increase.
section_title: Tax-Exempt Bonds Are Used to Finance a Wide Range of Facilities and Activities
paragraphs: Tax-exempt governmental and private activity bonds are used to finance a  wide range of facilities and activities, primarily in support of the entity  responsible for paying the bond debt service. Information describing the  types of facilities and activities that are financed with tax-exempt bonds is  available from several sources. In addition, tax-exempt governmental  bonds can be used to finance some facilities and activities for which most  tax-exempt private activity bonds cannot, including some facilities that  Congress specifically prohibited from being financed with qualified private  activity bonds.
To illustrate the wide range of purposes for which tax-exempt bonds are  used, we reviewed the most recent information available on bonds in  Thomson Financial’s Bond Buyer Yearbook and IRS’s SOI data. We also  reviewed a limited sample of official statements to further illustrate the  uses of tax-exempt bonds. Because most of the information is summarized  by broad descriptive categories, it does not fully reveal the wide range of  facilities and activities for which tax-exempt bonds can be used. Appendix  II describes the primary sources for information on the facilities and  activities financed with tax-exempt bonds.
subsections: section_title: Governmental Bonds Can Be Used to Finance Certain Projects That Generally Cannot Be Financed with Qualified Private Activity Bonds
paragraphs: Over the last several decades, Congress has prohibited qualified private  activity bonds from being used to finance certain projects. For example,  the Tax Reform Act of 1986 prohibited the use of qualified private activity  bonds to finance a number of specific facilities, including hotels adjacent  to airports, professional sports stadiums, and private golf courses.  Although qualified private activity bonds can no longer be used to finance  such facilities, these types of facilities can be financed with tax-exempt  governmental bonds because, as previously discussed, they fail either the  private payments or private business use test. In addition, governmental  bonds could be issued by authorities that directly operate facilities, such  as golf courses, that qualify as general public use. Under current law, state  and local governments have broad discretion to make decisions on the  types of projects and activities they finance with tax-exempt bonds.  Further, while the 1986 act prohibited qualified private activity bonds from  being used to finance certain projects such as hotels, Congress did not  prohibit such projects from being financed with governmental bonds.  According to legislative history surrounding the 1986 change, Congress  directed Treasury to liberalize guidelines regarding the treatment of third- party use pursuant to management agreements. The liberalization of the  guidelines has permitted governmental entities to use third parties to  operate facilities financed with tax-exempt governmental bonds under  management agreements so that the third-party use of the bond-financed  property is not treated as a private trade or business.
Generally, the guidelines issued by Treasury in Revenue Procedure 97-13  provide that tax-exempt governmental bonds can be used to finance  certain facilities provided ownership of the facility remains with the  governmental entity issuing the bonds and that payments to the facility  operator are not based on the facility’s net profits. The facility operator  may be compensated based on the gross operating revenues of the facility,  a per unit fee, or a per person fee.
As you requested, we are providing information on newly constructed  hotels and golf courses that were recently financed, at least in part, with  some amount of tax-exempt bonds. Our information is limited because we  could not identify any comprehensive lists of hotels and municipal golf  courses that were financed with tax-exempt bonds. Neither the Bond  Buyer Yearbook nor the SOI data had information on hotels and golf  courses that were financed with tax-exempt bonds. We considered recent  years for our analysis because information on financing would more likely  be available than information for facilities financed in earlier years. For  hotels, we limited our analysis to hotels that were financed with tax- exempt bonds issued from 2002 through 2006, and for golf courses we  limited our analysis to municipal courses that opened in 2005. We found 18  hotels and 6 golf courses that we could confirm had some tax-exempt  bond financing in those years.
In general, the hotels were large, full-service hotels. Not all the hotels were  yet rated by the American Automobile Association (AAA), but those with  AAA ratings were all three- or four-diamond hotels, meaning that at a  minimum the hotels provided multifaceted, comprehensive services and,  in the case of four-diamond hotels, were considered upscale with  extensive amenities. In 14 of the 18 cases, the hotels contained conference  facilities or were located near convention centers. According to the official  statements, the hotels that were built in connection with convention  centers were usually intended to enhance the competitive position of  convention center facilities, making the convention center a more  appealing and convenient location to hold large meetings, and to  contribute to economic development in the areas where they are being  built. Table 6 summarizes information on the hotels we identified.
In general, the six golf courses we identified and confirmed as being  constructed, at least in part, with tax-exempt governmental bond financing  were considered among the better golfing facilities in their respective  regions. For example, in 2006, Golf Styles magazine recognized the Lorton,  Virginia, course as one of the “100 Must Play Courses of the Middle  Atlantic.” Additionally, Golf Digest recognized the publicly financed  course in Patterson, Louisiana, as one of the best new public courses in  2006. Table 7 provides information on the municipal golf courses we  identified.
While tax-exempt governmental bonds are typically used to support  traditional governmental functions with a public purpose, they are  sometimes used for activities that are essentially private in nature, as  illustrated by the hotels and golf courses we identified. Municipal  governments have used their broad discretion to finance projects and  activities, such as hotels, that are essentially private with tax-exempt  governmental bonds on the grounds that the facilities and activities serve  broader public purposes. Broader public purposes may include providing  benefits to a community that extend beyond the purpose of the facility  being financed by the bonds or providing certain services to those who  would not otherwise be able to use them.
It is not clear whether facilities like these provide public benefits to  federal taxpayers that extend beyond the purposes of the facilities. The  state and local governments that issued the bonds to finance hotels and  golf courses generally justified the projects on the grounds that they would  generate economic development, including new jobs and businesses.  However, in some cases, it is not clear whether the facilities generate  public benefits that would be underprovided by the private market or  whether the facilities generally make services available to those who  would not otherwise be able to use them. For example, in 2005, about 85  percent of existing golf courses had been financed privately, offering a  range of fees and services often similar to those offered by publicly  financed courses. As a result, the use of tax-exempt governmental bonds  for facilities and activities like hotels and golf courses, which are routinely  financed with private funds, raises questions about how much public  benefit is produced at the local level and what, if any, benefits federal  taxpayers receive for subsidizing these and other kinds of facilities that  are essentially private in nature.
The House Committee on Oversight and Government Reform’s  Subcommittee on Domestic Policy recently held hearings that focused  primarily on whether tax-exempt governmental bonds should be used to  finance professional sports stadiums that are privately used. In 1986,  Congress removed sports stadiums, along with other facilities, including  certain hotels and golf courses, from the list of facilities eligible for tax- exempt private activity bond financing. Participants in congressional  hearings leading up to the restrictions placed on tax-exempt private  activity bonds in 1986 debated allowing stadiums and other facilities that  were routinely financed with private funds from being financed with tax- exempt private activity bonds. However, stadiums and other facilities,  including hotels and golf courses, continue to be financed with tax-exempt  governmental bonds if they satisfy certain requirements for governmental  bonds or safe harbors pertaining to private use. For example, according to  Treasury’s Assistant Secretary for Tax Policy, under current law, the  requirements to use governmental bonds for stadiums can generally be  met when state and local governments subsidize the projects with  governmental revenues or governmental sources of funds, such as  generally applicable taxes. He also stated that from a tax policy  perspective, the ability to use governmental bonds to finance stadiums  with significant private business use when the bonds are subsidized with  state or local governmental payments possibly represents a weakness in  the targeting of the federal subsidy for tax-exempt bonds under the  existing legal framework. A similar situation may exist with the continued  financing of hotels and golf courses using tax-exempt governmental  bonds.
section_title: Borrowing Costs Vary Depending on Bond Characteristics, and Some Bonds Appear to Exceed the Statutory Limit on Issuance Costs Paid from Bond Proceeds
paragraphs: Borrowing costs paid by bond issuers include interest and issuance costs.  Although study results varied, most studies that we reviewed indicate that  bonds sold through competitive sales generally have lower interest costs  than bonds sold through negotiated sales after taking other factors into  account that might influence interest costs. Median issuance costs paid  from bond proceeds as a percentage of bond proceeds vary by the size and  type of tax-exempt bond. Slightly over half of the qualified private activity  bonds issued from 2002 through 2005 had issuance costs paid from bond  proceeds—with nearly half leaving the reporting line blank—and some of  the bonds had issuance costs that exceeded statutory limits. For example,  from 2002 to 2005, between 17 and 39 qualified private activity bonds  annually—about 1 to 2 percent of qualified private activity bonds that  reported issuance costs paid from bond proceeds—reported issuance  costs that exceeded applicable statutory limits.
subsections: section_title: Although Study Results Varied, Most Studies Generally Found That Competitive Bond Sales Have Lower Interest Costs after Controlling for Other Factors
paragraphs: Researchers have attempted to determine whether the method of sale (i.e.,  competition between underwriters or negotiation with underwriters) has  an effect on the interest costs that bond issuers pay investors. From the  federal government’s perspective, lower interest costs for municipal  governments may be preferable because this might result in less forgone  federal tax revenue and better target the subsidy to its intended  beneficiaries. However, even if the competed method of sale generally  yields lower interest costs to municipal governments, the negotiated  method of sale may still be preferable in some instances. We reviewed  studies published from 1996 through 2007 that address whether there is a  difference in interest costs for bonds sold on a competitive basis versus  bonds sold on a negotiated basis.
The studies we reviewed generally used statistical analysis techniques to  identify the effect that the method of sale (i.e., competitive or negotiated)  has on the interest cost paid by bond issuers. In addition to the method of  sale, a number of other factors in the municipal bond market could affect  interest costs, and the studies we reviewed attempt to control for these  factors to isolate the effect that the method of sale has on interest costs.  Other factors that could affect a bond issuer’s borrowing costs include  marketwide factors, such as the average level of tax-exempt interest rates  and the recent volatility of these rates; issuer-specific factors, such as  economic characteristics of the issuing jurisdiction and the amount of  experience the issuer has in issuing bonds; and bond-specific factors, such  as the number of years until the bond matures, the amount of the bond,  the purpose of the bond, the funding source that backs the bond, the  bond’s credit rating, and whether the issuer purchased bond insurance or  other credit enhancers.
In general, after controlling for other factors that may affect interest costs,  research suggests that bonds issued on a competitive basis will likely have  lower interest costs than bonds sold on a negotiated basis because bond  issuers are likely to benefit from multiple underwriters bidding on the  right to sell the bonds. In addition, several of the studies suggested that  as the number of competitive bids on a bond issue increase, the interest  costs that state and local governments pay decline further. However, one  of the studies we reviewed found no significant differences in interest  costs for competitive and negotiated sales and one found some advantage  for negotiated bonds.
The studies included in our literature review had several limitations.  Because of limited data availability, some key variables are not available to  be included in the study. No study that we reviewed had data on the extent  to which issuers that used a negotiated sale searched among several  underwriters before making a selection. Also, none of the studies we  reviewed included a comprehensive, recent review of competitive and  negotiated bond sales for the entire municipal bond market. Most of the  studies we identified were limited to certain states for certain time periods  or focused on a particular market sector, such as bonds issued specifically  for hospitals.
See appendix V for a list of the studies we reviewed addressing whether  interest costs vary by method of bond sale.
section_title: Some Qualified Private Activity Bond Issuers Reported Issuance Costs Exceeding Legal Limits, and Issuance Costs Vary Depending on Bond Characteristics
paragraphs: IRS requires qualified private activity bond issuers to report issuance costs  paid from bond proceeds on the Form 8038, and for most types of private  activity bonds, issuance costs that can be paid from bond proceeds are  limited to 2 percent of bond proceeds. From 2002 to 2005, bond issuers  reported issuance costs paid from bond proceeds on slightly more than  half of the filed Form 8038s. For example, bond issuers reported issuance  costs paid from bond proceeds between 51 percent and 59 percent of the  time annually for 2002 to 2005. Bond issuers for the remaining bonds left  the line for issuance costs paid from bond proceeds blank. Issuers of  smaller bonds, meaning those with bond proceeds of less than $1 million,  reported issuance costs less frequently than issuers of larger bonds;  however, issuers of large bonds, meaning those with proceeds over       $100 million, also did not report issuance costs about 35 percent of the  time.
According to the Director of IRS’s Tax-Exempt Bond Office, IRS would  need to contact the issuer to determine whether a tax-exempt bond  information return that a bond issuer submitted to IRS reporting no  issuance cost is a problem. He said that there may be legitimate reasons  why issuance cost was not reported on the form, such as when issuance  costs are paid from other sources or special funds. Currently, IRS does not  have mechanisms in place to routinely determine whether unreported  issuance cost is a compliance problem or a bond issuer’s mistake. IRS’s  instructions for Form 8038 require bond issuers to enter the amount of  proceeds that will be used to pay bond issuance costs, including  underwriters’ spread and fees for trustees and bond counsel. However, the  instructions do not provide any guidance for instances when issuance  costs are not paid from bond proceeds.
For qualified private activity bonds with reported issuance costs, the  median issuance costs as a percentage of bond proceeds varied by the size  and type of the bond. For all qualified private activity bonds that reported  issuance costs paid from bond proceeds, the median issuance cost as a  percentage of bond proceeds ranged from a low of 1.6 percent in 2005 to a  high of 1.8 percent in 2002. For bonds under $10 million, the median  issuance cost as a percentage of bond proceeds reached or came close to  the 2 percent limit annually from 2002 to 2005. Larger bonds reported  lower issuance costs as a percentage of bond proceeds, possibly indicating  that issuance costs include fixed fees or other payments that are not based  on the size of the bond. When considering bond purposes, the median  issuance costs as a percentage of bond proceeds for qualified private  activity bonds issued reached or came near the 2 percent statutory limit  for numerous categories of bonds. Table 8 shows median issuance costs  paid from bond proceeds as a percentage of bond proceeds for long-term  qualified private activity bonds issued from 2002 to 2005.
Of the qualified private activity bonds with reported issuance costs, we  identified 38 bonds in 2002, 39 bonds in 2003, 25 bonds in 2004, and 17  bonds in 2005 that reported issuance costs as a percentage of bond  proceeds that exceeded statutory limits. This accounts for 1 to 2 percent  of qualified private activity bonds issued annually.
According to the Director of IRS’s Tax-Exempt Bond Office, IRS does not  routinely check to determine if all issuers of qualified private activity  bonds are complying with the statutory 2 percent limit on using proceeds  for issuance costs. He said that if the limit is exceeded, it may be a  potential compliance issue. During its examinations of tax-exempt bonds,  IRS routinely assesses whether issuance costs exceed legal limits. The  Director recognized the importance of bond issuers adhering to the  statutory issuance cost limit; however, he also stated that because of  resource constraints, IRS places more emphasis on tax-exempt bond  compliance examinations and checks that have the most impact. He stated  that in considering how best to address potential compliance issues  regarding issuance costs, IRS would want to ensure that these inquiries are  not automatically construed as audits. Once IRS initiates an audit, it is  precluded from auditing the same return again in the same tax year even if  more substantial compliance issues arise. The Director indicated that IRS  has plans to conduct more special initiatives to monitor compliance with  tax-exempt bond rules than it has in the past, such as starting to provide  “soft notices” to certain bond issuers that could be used to identify  potential issues related to compliance. Soft notices alert taxpayers to  potential errors they made and encourage them to correct such errors. In a  number of cases, IRS has found many taxpayers do take corrective  actions. Because soft notices do not require taxpayers to send IRS any  information from their books and records, they are not considered audits.  Although it would need to be tested, the Director thought it might be cost- effective to begin using soft notices, when appropriate, to inform bond  issuers that they reported issuance costs paid from bond proceeds that  exceed statutory limitations.
Unlike qualified private activity bonds, issuance costs for governmental  bonds are not subject to any limits; however, like qualified private activity  bonds, they vary based on the type of bond and the size of the bond issue.
For all governmental bonds issued from 2002 through 2005 where bond  issuers reported issuance costs on the Form 8038-G, median issuance  costs paid from bond proceeds as a percentage of bond proceeds ranged  from 1.51 percent in 2005 to 1.67 percent in 2003. For bonds with reported  issuance costs, from 34 to 39 percent indicated that issuance costs  exceeded 2 percent of bond proceeds, the statutory limit for most qualified  private activity bonds. Governmental bonds issued for housing generally  had the highest median issuance costs paid from bond proceeds as a  percentage of bond proceeds while bonds issued for education and health  and hospital purposes generally had the lowest median issuance costs paid  from bond proceeds as a percentage of bond proceeds. Table 9 shows the  median issuance costs paid from bond proceeds as a percentage of bond  proceeds for long-term governmental bonds issued from 2002 to 2005 by  bond purpose and size of bond.
Like qualified private activity bonds, smaller governmental bonds  generally had higher median issuance costs as a percentage of bond  proceeds. For example, for bonds under $1 million, the median issuance  cost paid from bond proceeds as a percentage of bond proceeds exceeded  2.5 percent in all years for 2002 through 2005. Median issuance costs as a  percentage of bond proceeds for governmental bonds issued for amounts  greater than $100 million were about 0.6 percent from 2002 to 2005.
section_title: Conclusions
paragraphs: State and local governments have broad discretion in deciding which  activities and facilities to finance using tax-exempt bonds. In particular,  the broad discretion afforded to state and local governments allows them  to use tax-exempt governmental bonds to finance facilities and activities  that cannot be financed with private activity bonds. Recently, the dollar  amount of tax-exempt governmental bonds reached peak levels as  municipal governments issued bonds for a wide variety of purposes  ranging from traditionally public facilities, such as schools, fire stations,  and roads, to facilities that are essentially private in nature, such as sports  stadiums.
Congressional policymakers have recently shown interest in whether  certain facilities providing benefits that are essentially private in nature,  such as stadiums, should be financed with tax-exempt governmental  bonds. However, similar attention has not been given other types of  facilities, like hotels and golf courses that also provide benefits that are  essentially private in nature. As Congress continues to hold discussions on  whether sports stadiums are appropriate uses of tax-exempt governmental  bonds, it should also consider whether other facilities that are privately  used, such as hotels, should continue to be financed with tax-exempt  bonds. However, if Congress still views these and other facilities that are  essentially private in nature as appropriate uses of tax-exempt  governmental bonds, then legislative changes would not be necessary.
Issuers of qualified private activity bonds must adhere to the limits on  using bond proceeds for issuance cost that are imposed by law. In part,  this helps to ensure that the federal subsidy afforded to issuers of bonds  for private uses is appropriately targeted to the purposes for which the  bonds were issued. This is equally important to ensure that the bonds’ tax- exempt status remains intact. In addition, it would be more beneficial to  IRS if its forms and instructions included specific directions to bond  issuers that did not use bond proceeds for issuance costs to indicate this  on the form. Although this may require that IRS revise Form 8038, we  believe that it would be beneficial for IRS to know positively whether  issuers used bond proceeds for issuance costs and, if so, how much was  used. This would better equip IRS to determine if there are any compliance  issues that need to be addressed. We believe that if the Form 8038 is  revised, the benefits to IRS would likely outweigh the costs.
section_title: Matter for Congressional Consideration
paragraphs: As Congress considers whether tax-exempt governmental bonds should be  used for professional sports stadiums that are generally privately used, it  should also consider whether other facilities, including hotels and golf  courses, that are privately used should continue to be financed with tax- exempt governmental bonds.
section_title: Recommendations for Executive Action
paragraphs: To better ensure that IRS can routinely and cost effectively determine  whether issuers of qualified private activity bonds are complying with the  statutory limits on using bond proceeds for issuance costs, we recommend  that the Commissioner of Internal Revenue take the following two actions:    Clarify IRS’s forms and instructions for reporting issuance cost paid from  bond proceeds to require that bond issuers clearly designate on the form  instances when bond proceeds were not used to pay issuance costs.
Develop cost-effective methods to address apparent noncompliance with  the statutory limits on using bond proceeds for issuance costs in such a  manner that it would not preclude IRS from examining the bonds for more  substantive compliance issues in the future.
section_title: Agency Comments
paragraphs: We provided a draft of this report to IRS and Treasury for comment. The  Acting Commissioner of Internal Revenue provided comments on a draft  of this report in a February 7, 2008, letter, which is reprinted in appendix  VI. IRS said that it agreed with our recommendations. Regarding our  recommendation that IRS clarify its forms and instructions for reporting  issuance cost paid from bond proceeds to require that bond issuers clearly  designate on the form instances where bond proceeds were not used to  pay issuance costs, IRS said that it will clarify instructions for IRS Form  8038 to require that bond issuers clearly indicate when no bond proceeds  were used to pay issuance costs. Concerning our recommendation that  IRS develop cost-effective methods to address apparent noncompliance  with the statutory limits, IRS said that it will develop a compliance project  to address apparent noncompliance with the issuance cost requirements  for the fiscal year 2009 tax-exempt bonds work plan that will likely  incorporate sending soft-contact letters similar to ones previously used  with success in other areas.
In a February 8, 2008, letter, Treasury’s Assistant Secretary for Tax Policy  commented that the use of tax-exempt governmental bonds to finance  stadiums and other projects with significant private business use is  arguably a structural weakness in the targeting of the federal tax  expenditure for tax-exempt bonds under the existing legal framework.  Treasury pointed out that while the existing framework might have a tax  policy justification in giving municipal governments flexibility to use  governmental bonds for a range of public-private partnerships, it may also  be debatable in certain cases, such as for certain stadium financings.  Treasury noted its recent testimony that outlined several options to  address the possible structural weakness in the targeting of tax-exempt  bond subsidy relative to tax-exempt governmental bonds for stadium  financings. Treasury’s comments are reprinted in appendix VII.
As arranged with your offices, unless you publicly announce the contents  of this report earlier, we plan no further distribution of it until 30 days  after its date. At that time, we will send copies of this report to the  Commissioner of Internal Revenue and the Secretary of the Treasury and  other interested parties. We will also provide copies to others upon  request. In addition, the report will be available at no charge on the GAO  Web site at http://www.gao.gov.
If you or your staff members have any questions about this report, please  contact me at (202) 512-9110 or brostekm@gao.gov. Contact points for our  Offices of Congressional Relations and Public Affairs may be found on the  last page of this report. GAO staff who made contributions to this report  are listed in appendix VIII.
section_title: Appendix I: Objectives, Scope, and Methodology
paragraphs: The objectives of this report were to (1) describe recent trends in the  dollar volume of tax-exempt bonds; (2) provide information on the types  of facilities and activities that are financed with tax-exempt bonds, in  particular, information on hotels and municipal golf courses that were  recently financed with tax-exempt bonds; and (3) provide information on  borrowing costs that bond issuers pay when issuing bonds by summarizing  relevant research on whether bond interest costs vary by the method of  sale, considering characteristics of the bond and bond issuer and provide  information on how bond issuance costs vary between governmental and  private activity bonds, including the extent to which private activity bond  issuers exceed the statutory limit for issuance costs as a percentage of  bond proceeds.
To provide information on trends in the volume of tax-exempt bonds, we  relied primarily on data from the Internal Revenue Service’s (IRS)  Statistics of Income Division (SOI), which collects statistical data from  information returns that tax-exempt bond issuers are required to file with  IRS. We used SOI data from 1991 through 2005, the most recently available  data, to provide information on the overall volume of tax-exempt bonds  issued, the volume of governmental and private activity bonds issued, and  the volume of new money versus refunding bonds issued. We also relied  on the 20-Bond Index in the 2007 Bond Buyer Yearbook, which presents  average interest rates on a set of 20 investment grade general obligation  bonds maturing in 20 years, to compare interest rate changes from 1992  through 2005 with the volume of new money and refunding tax-exempt  bond issues. We used data from the Technical Appendix of the President’s  Budget for fiscal years 2002, 2004, 2006, and 2008 and data from the Joint  Committee on Taxation’s 2007 Estimates of Federal Tax Expenditures to  provide estimates of the amount of forgone revenue resulting from the  exclusion of interest earned on tax-exempt bonds from federal income  taxes.
To describe the types of activities and facilities that are being financed  with tax-exempt bonds, we relied on data in the 2007 Bond Buyer  Yearbook, IRS’s SOI data, and a limited random sample of official  statements. We used Bond Buyer Yearbook information because it  provided us with more information about the purposes of tax-exempt  bonds than other private data sources we identified. Data in the 2007  Bond Buyer Yearbook provide summary information on the uses of  municipal bonds in 10 main categories and 48 subcategories. Information  in the Bond Buyer Yearbook is obtained from Thomson Financial’s  municipal bond database, one of the most comprehensive data sources on  tax-exempt bonds. One limitation of the Bond Buyer Yearbook is that it  does not provide separate breakouts of the uses of governmental and  private activity bonds and includes taxable bonds. Taxable municipal  bonds generally account for less than 10 percent of all municipal bonds.
We used SOI data to provide information on the uses of governmental and  private activity bonds. IRS’s SOI collects data on the purposes of  governmental and qualified private activity bonds as reported on Form  8038-G and Form 8038, respectively. The information is summarized into  broad categories for governmental bonds and by allowable uses for  qualified private activity bonds. IRS generates summary tables on tax- exempt bond uses that are posted on IRS’s Web site and published in  regularly issued bulletins. We used IRS’s SOI tax-exempt bond data for  2002 through 2005 to analyze the other category for governmental bond  purposes and the nonhospital 501(c)(3) category for qualified private  activity bond purposes.
In some cases, information from the Bond Buyer Yearbook and  information from the SOI database differ for similar types of bonds and for  statistics about similar bond characteristics. Several possible reasons exist  for the difference between summary information from SOI and the Bond  Buyer Yearbook. For example, SOI relies on bond issuers to timely and  accurately report bond information while Thomson Financial relies on  automated reporting systems from the financial marketplace to develop  reports in the Bond Buyer Yearbook. Even though the amounts differ in  some instances for SOI and Bond Buyer data, our testing of these data  allowed us to conclude that both sources were sufficiently reliable for  providing information on tax-exempt bonds used in this report.
We reviewed a limited random sample of official statements to provide  more detailed information about the specific uses of tax-exempt  governmental bonds than can typically be found in other data sources,  such as the Bond Buyer Yearbook and the SOI data. The sample was not  designed to provide projectable data on the uses of tax-exempt bonds. We  drew the sample using the Municipal Securities Rulemaking Board’s  (MSRB) database of official statements that it received in calendar year  2006. MSRB is a congressionally chartered organization that regulates  securities firms and banks involved in underwriting, trading, and selling  municipal securities, and based on its rules, bond issuers are required to  send a copy of their final official statements to it. We reviewed the  randomly ordered official statements until we identified five official  statements that we determined would likely be included in each of the  eight categories in the SOI data.
For providing information on hotels that were financed with tax-exempt  bonds, we could not find a comprehensive, reliable source with  information on the numbers of hotels financed with tax-exempt bonds.  Thus, we provide some limited data from the best available sources we  could find for hotels financed with tax-exempt bonds from 2002 through  2006. We used these recent years because information on financing for  these hotels would more likely be available than information for hotels  financed in earlier years. To identify the hotels, we used information from  a previous GAO report; HVS International, a global consulting services  firm that focuses on hotel and hospitality services; and Bond Buyer daily  publications that provide additional information on municipal bonds.  From these sources we identified a number of hotels that may have been  financed with tax-exempt bonds. However, we were only able to confirm  that the 18 hotels identified in our report were financed, at least in part,  with tax-exempt bonds by reviewing official statements and government  financial reports and contacting local officials. The list of hotels we  present likely is not a comprehensive list of all hotels financed with tax- exempt bonds.
For providing information on municipal golf courses that were financed  with tax-exempt bonds, we could not find a comprehensive, reliable  source with information on the number of municipal golf courses financed  with tax-exempt bonds. Thus, similar to our review of hotels, we provide  limited data from the best available sources we could find. We used the  National Golf Foundation’s database to identify municipal golf courses  that opened in 2005. We identified nine municipal golf courses that opened  in 2005. However, the National Golf Foundation’s database did not have  information on whether the golf courses were financed with tax-exempt  bonds. To confirm whether these nine municipal golf courses were  financed with tax-exempt bonds, we contacted city, county, and golf  course officials. From these contacts, we determined that six of the nine  municipal golf courses were financed with tax-exempt bonds, and we  obtained the official statements for those municipal golf courses.
To provide information on borrowing costs, we conducted a literature  review of previous studies that reviewed whether bond issuance costs vary  by method of sale, including characteristics of the bond and bond issuers,  and we analyzed IRS data on issuance costs. We reviewed studies  published in peer-reviewed academic journals from 1996 through 2007.  Because the studies we reviewed had several limitations, including that  they were limited to certain states for certain time periods or focused only  on certain market sectors, we initially attempted to conduct original  research on this topic by obtaining a broad set of data on tax-exempt  bonds and developing similar econometric analysis to the studies we  reviewed that would have covered a wider range of bonds over a longer  time period. However, we determined that the available data were not  sufficiently reliable for our purposes. As a result, we confined our review  of bond issuance costs to a summary of previous studies that attempt to  address the same issue, but not on as wide of a scale as we had initially  intended. We analyzed IRS’s SOI data on tax-exempt bonds from 2002 to  2005 to identify how issuance costs vary between governmental and  private activity bonds. We reviewed issuance costs as a percentage of total  bond proceeds for the various categories of governmental and qualified  private activity bonds and by bond size. We also used IRS data to identify  the extent to which issuance costs for qualified private activity bonds  exceed the statutorily required 2 percent limit and the extent to which  bond issuers do not report issuance costs on the IRS Forms 8038 and 8038- G.
We interviewed officials in IRS’s Tax-Exempt Bond Office in its  Government Entities and Tax-Exempt Division and Treasury’s Office of  Tax Policy and other experts in taxation and government finance, such as  representatives of the Government Finance Officers’ Association, the  Securities Industry and Financial Markets Association, and the  Congressional Research Service, to gain an understanding about the  volume and uses of tax-exempt bonds. We determined that the data we  evaluate in this report were sufficiently reliable for our purposes. We  performed our work from December 2006 through January 2008 in  accordance with generally accepted government auditing standards.
section_title: Appendix II: Sources of Information on the Facilities and Activities Financed Using Tax- Exempt Bonds
paragraphs: Information on the types of facilities and activities that are financed with  tax-exempt bonds is available from several sources, including the official  statements prepared by underwriters to market the bonds, IRS, and private  vendors, such as Thomson Financial. Specific information on what tax- exempt bonds are used for varies by source. Overall, the official statement  generally contains the most detailed descriptive information. However,  because there are no standard guidelines on the format and content of  official statements, the level of detailed information they contain on the  facilities and activities financed with tax-exempt bonds varies. For  example, an official statement for a bond issued in 2006 stated that the  bond was to be used to construct and improve the water facility for a  municipality. Another official statement for a bond issued the same year  showed that the bonds were to be used for various capital improvements.  While in the first instance, the official statement more clearly discloses  what the bond is to be used for, it is not fully apparent from the other  example what specific capital improvements were financed by the bond.
The information IRS collects on tax-exempt bonds is transcribed from  information returns bond issuers are required to send IRS. By law, bond  issuers are required to file IRS Form 8038-G, Information Return for Tax- Exempt Government Obligations for Governmental Bonds for bonds with  an issue price of $100,000 or greater, or IRS Form 8038, Information  Return for Tax-Exempt Private Activity Bonds. In filling out the form, a  bond issuer checks boxes that best describe the types of facilities and  activities to be financed with the bonds. For governmental bonds, the form  has eight broad categories, including education, transportation, public  safety, and other. If the other category is checked, the bond issuer is also  asked to write in information that describes the intended use of bond  proceeds. While the information that IRS collects from the form is useful  in presenting summary information on the facilities and activities financed  with governmental bonds, it only presents a very broad picture of the  facilities for which the bonds are used. For example, if the bond issuer  checked education, it is only apparent that the bonds were intended for  educational facilities and activities. However, the specific nature of the  educational facilities and activities is unknown based on the type of data  IRS collects. For instance, it would not be apparent whether the bonds  were used to finance new educational facilities, such as public and charter  schools; fund teachers’ pension plans; construct a college athletic field; or  pay for computer equipment used in a school. Likewise, issuers of private  activity bonds are required to send IRS a similar form wherein they check  boxes that broadly describe the facilities and activities financed with the  bonds. IRS publishes descriptive statistics from these forms.
Another source of information on the facilities and activities financed by  tax-exempt bonds that we used was the Bond Buyer Yearbook, a  publication by Thomson Financial that summarizes information on  municipal bonds on a yearly basis. Information in the Bond Buyer  Yearbook is obtained from several sources and provides one of the most  comprehensive sources of information describing the facilities and  activities financed by municipal bonds. The Bond Buyer Yearbook  categorizes the facilities and activities financed by municipal bonds based  on 10 broad categories and 48 subcategories. Even though the Bond Buyer  Yearbook categorizes municipal bonds into many categories, the  information only presents a general picture of the range of facilities and  activities for which the bonds are used. For example, the Bond Buyer  Yearbook development category has 3 subcategories—industrial,  economic, and office buildings. From this summarized information, it is  not apparent whether facilities such as hotels financed with tax-exempt  governmental bonds are included as economic development.
It is also important to note that Bond Buyer Yearbook information on the  uses of bonds does not distinguish between tax-exempt governmental,  qualified private activity, and taxable municipal bonds. However,  according to Bond Buyer Yearbook information, generally less than 10  percent of all municipal bonds issued annually are taxable. Despite that,  the Bond Buyer Yearbook is a useful source for summarized information  on the types of facilities and activities that are financed using municipal  bonds, including tax-exempt bonds.
section_title: Appendix III: Summary of Thomson Financial 2007 Bond Buyer Yearbook Data, Use of Proceeds, 2002-2006 Combined
subsections: section_title: Dollars in thousands (constant 2007 dollars)
paragraphs: Dollars in thousands (constant 2007 dollars)
section_title: Appendix IV: Amount and Number of New Money, Long-term Governmental Bonds Issued by IRS SOI Purpose Categories, 2001- 2005 Combined
subsections: section_title: Dollars in millions (constant 2007 dollars)
section_title: Appendix V: List of Studies Reviewed on Interest Costs in Competitive and Negotiated Sales
paragraphs: Gershberg, Alec Ian, Michael Grossman, and Fred Goldman. “Competition  and the Cost of Capital Revisited: Special Authorities and Underwriters in  the Market for Tax-Exempt Hospital Bonds.” National Tax Journal, vol.  54, no. 2 (2001): 255-280.
Kriz, Kenneth A. “Comparative Costs of Negotiated versus Competitive  Bond Sales: New Evidence From State General Obligation Bonds.” The  Quarterly Review of Economics and Finance, vol. 43 (2003): 191-211.
Leonard, Paul A. “An Empirical Analysis of Competitive Bid and  Negotiated Offerings of Municipal Bonds.” Municipal Finance Journal,  vol. 17, no. 1 (1996): 37-66.
Peng, Jun and Peter F. Brucato, Jr. “Another Look at the Effect of Method  of Sale on the Interest Cost in the Municipal Bond Market—A Certification  Model.” Public Budgeting and Finance, vol. 23, no. 1 (2003): 73-95.
Robbins, Mark D. and Bill Simonsen. “Competition and Selection in  Municipal Bond Sales: Evidence From Missouri.” Public Budgeting and  Finance, vol. 27, no. 2 (2007): 88-103.
Simonsen, Bill, Mark D. Robbins, and Lee Helgerson. “The Influence of  Jurisdiction Size and Sale Type on Municipal Bond Interest Rates: An  Empirical Analysis.” Public Administration Review, vol. 61, no. 6 (2001):  709-717.
Simonsen, William and Mark. D. Robbins. “Does It Make Any Difference  Anymore? Competitive versus Negotiated Municipal Bond Issuance.”  Public Administration Review, vol. 56, no. 1 (1996): 57-64.
section_title: Appendix VI: Comments from the Internal Revenue Service
section_title: Appendix VII: Comments from the Department of the Treasury
section_title: Appendix VIII: GAO Contact and Staff Acknowledgments
subsections: section_title: Acknowledgments
paragraphs: In addition to the individual named above, Charlie Daniel, Assistant  Director; Terry Draver; Thomas Gilbert; Nancy Hess; Larry Korb; John  Mingus; Ed Nannenhorn; David Perkins; Cheryl Peterson; Katrina Taylor;  and Walter Vance made key contributions to this report.