Gulf Opportunity Zone: States Are Allocating Federal Tax Incentives to Finance Low-Income Housing and a Wide Range of Private Facilities
Released: 2008-07-16T00:00:00

Letter

Background

The Gulf Opportunity Zone Act of 2005 includes tax incentives to assist recovery and economic revitalization for individuals and businesses in designated areas in Alabama, Florida, Louisiana, Mississippi, and Texas following Hurricanes Katrina, Rita, and Wilma in 2005. Some of the tax incentives in the act are extensions of existing federal tax incentives (e.g., tax-exempt private activity bonds, new markets tax credits, low-income housing tax credits, etc.). In some cases, the GO Zone Act liberalizes the rules that taxpayers must follow to be eligible to claim the incentives. JCT estimates indicate that these tax incentives will reduce federal revenue by about $9 billion over the 10-year period from 2006 to 2015.

The act defined the GO Zones as those counties and parishes in the presidentially-declared disaster areas that warranted additional, long-term federal assistance. Rather than making the incentives available statewide in the five states affected by the 2005 hurricanes, the act defined a separate GO Zone for the three major 2005 hurricanes—Katrina, Rita, and Wilma. Both Hurricane Katrina and Hurricane Rita affected certain areas in Louisiana, so those GO Zones overlap in Louisiana. Figure 1 illustrates the GO Zone areas in each of the five affected states. Tax provisions to assist recovery vary by GO Zone, with the most assistance provided to areas damaged by Hurricane Katrina, particularly in Louisiana and Mississippi.

The GO Zone Act was broadly similar to legislation that created the New York Liberty Zone following the September 11, 2001, terrorist attacks in New York City. The Job Creation and Worker Assistance Act of 2002 contained various tax incentives designed for response and recovery for the area of lower Manhattan designated as the New York Liberty Zone.

Similar to those in the Liberty Zone, individuals and businesses may claim the GO Zone tax incentives as long as they meet specified federal requirements. In these cases, the tax incentives essentially function as open-ended entitlement programs that any eligible taxpayer may claim. For GO Zone tax incentives such as claiming accelerated depreciation on certain assets or partial expensing for certain clean-up costs, the full cost to the federal government depends on how many taxpayers claim the provision on their tax returns.

For certain tax incentives in the GO Zone Act of 2005, state governments in states with GO Zones were authorized to establish processes and select which qualified projects are to receive tax incentive allocations up to each state’s allocation authority limit. As mandated by law, this report discusses those tax incentives in the GO Zone Act of 2005 that state and local governments play a role in allocating and overseeing.

Because the states are responsible for selecting which entities receive the tax benefit up to the allocation authority provided by law, these GO Zone tax incentives appear similar to traditional grant programs where governments provide funds directly to grant recipients. For example, Gulf Coast states have processes for allocating funds through FEMA’s Public Assistance program and the CDBG program. In contrast with grant programs, where funds come directly from the government, investors in projects that have received GO Zone incentives are allowed to either claim a credit against their tax liability, as in the case of the LIHTC program, or exclude certain portions of the return on their investment, such as interest earned, in GO Zone projects from their taxable income, as is the case for tax-exempt bonds. Unlike traditional grant programs, the projects receiving these tax incentives are financed with bonds that must be repaid or equity provided by private investors, meaning developers, investors, insurers and other participants have an additional incentive to ensure that projects are financially viable and will remain compliant with applicable laws.

Since the 2005 hurricanes, we are conducting ongoing work and have completed a number of studies evaluating disaster relief and recovery efforts along the Gulf Coast, including how states with GO Zones have made use of federal resources. Appendix IV lists related GAO products.

States with GO Zones Are Responsible for Allocating Four Federal Tax Incentives under the GO Zone Act of 2005

Under the GO Zone Act of 2005, state and local governments are responsible for allocating and overseeing the use of four GO Zone tax incentives. According to our analysis of JCT estimates, these incentives accounted for about 40 percent, or $3.5 billion, of the projected cost to the federal government from the GO Zone Act over the 10-year period from 2006 to 2015. States with GO Zones were awarded authority to allocate $14.9 billion in tax-exempt private activity bonds, resulting in an estimated $1.6 billion reduction in federal revenue from 2006 to 2015; $330 million in low-income housing tax credits (LIHTC), resulting in an estimated $1.1 billion reduction in federal revenue from 2006 to 2015; $350 million in tax credit bonds, resulting in an estimated $57 million reduction in federal revenue from 2006 to 2015; and $7.9 billion in additional advance refunding bonds, resulting in an estimated $741 million reduction in federal revenue from 2006 to 2015.

Alabama, Louisiana, and Mississippi received authority for all three bond provisions to use by the end of 2010 and increased LIHTC allocations each year for 2006 through 2008. Florida and Texas did not receive allocation authority for the bond provisions, but each received a onetime increase in LIHTC authority of $3.5 million for 2006. Table 1 shows the amount of allocation authority that each state received by provision.

For GO Zone tax-exempt private activity bonds, the allocation amount that can be used over the 5-year period from 2006 to 2010 is significantly greater than the amount of qualified private activity bonds that may be allocated subject to annual state volume caps. For perspective, in 2008, state volume caps for tax-exempt private activity amounted to about $393 million, $365 million, and $262 million for Alabama, Louisiana, and Mississippi, respectively. Similarly, GO Zone LIHTC allocation authority in Alabama, Louisiana, and Mississippi exceeds regular LIHTC authority for 2006 to 2008. Alabama, Louisiana, Mississippi, received a total of about $27 million, $26 million, and $17 million, respectively, from their combined regular state LIHTC allocations (credit ceilings) for 2006 to 2008.

Tax-Exempt Private Activity Bond Authority

The GO Zone Act of 2005 grants Alabama, Louisiana, and Mississippi the authority to award tax-exempt bond allocations for qualified private activities. Tax-exempt private activity bonds allow private business owners and corporations to borrow capital at interest rates lower than would otherwise be available. Governmental entities issue the tax- exempt private activity bonds, generally serving as conduits to provide the bond proceeds to borrowers, including business owners and corporations that have been awarded allocation authority from the state. The borrowers’ payments on their loans are then used to repay principal and interest on the bonds, and investors who purchased the bonds can generally exclude interest earned on the bonds from their federal income tax.

All states receive an annual tax-exempt private activity bond allocation that is subject to a volume cap and is limited to certain types of facilities. GO Zone bonds can be issued in addition to annual state volume caps in eligible states and can be used for a broader range of facilities than tax- exempt private activity bonds subject to annual state volume caps. According to the GO Zone Act of 2005, eligible states have the authority to allocate an amount of GO Zone private activity bonds equal to $2,500 per person in the GO Zone, based on prehurricane population counts. States with GO Zone bond allocation authority must issue the bonds by December 31, 2010. For the three eligible states, aggregate GO Zone allocation authority over the period is between 6 and 22 times greater than annual qualified private activity bond authority subject to state volume caps. In contrast with qualified private activity bonds subject to annual state volume caps, GO Zone tax-exempt private activity bonds are not subject to the Alternative Minimum Tax.

While GO Zone bonds can be used for facilities that generally cannot be built with tax-exempt private activity bond authority subject to annual state volume caps, such as hotels and retail facilities, GO Zone private activity bonds are subject to certain tax-exempt private activity bond prohibitions against financing golf courses, massage parlors, gambling, and liquor stores, among other prohibited uses. In addition, 95 percent of the bond proceeds must be used for qualified projects in the GO Zone.

The liberalized use for GO Zone tax-exempt private activity bonds in comparison to qualified private activity bonds subject to annual state volume caps is broadly similar to private activity bond authority awarded in the New York Liberty Zone. Whereas the Liberty Zone provision divided the authority between the state and local levels and set specific limits on retail and residential rental property, the GO Zone provision did not set aside any portion to be allocated for specific localities or set dollar caps on certain categories of use. The GO Zone Act of 2005 provided states with broad discretion in allocating GO Zone tax-exempt private activity bonds.

Low-Income Housing Tax Credits (LIHTC)

The GO Zone Act of 2005 temporarily increased the amount of allocated tax credits for the five states along the Gulf Coast by a total of about $330 million. The Tax Reform Act of 1986 authorized the LIHTC program to provide an incentive for the acquisition and development or the rehabilitation of rental housing affordable to low-income households. As required under the Internal Revenue Code, state housing finance agencies (HFA) must award credits to developers of qualified projects according to their qualified allocation plans (QAP), which establish the agencies’ funding priorities and eligibility criteria. Developers either use the credits or sell them to investors to raise capital (i.e., equity) for real estate projects. In general, investors can claim credits on the qualified basis of the property—that is, total development cost (excluding land and other certain costs) of the low-income units. The investor receives approximately 9 percent of the qualified basis in tax credits annually for 10 years. The equity raised by the tax credits reduces the need for debt financing and as a result, these properties can offer lower, more affordable rents.

GO Zone LIHTCs were provided to the five eligible states in addition to their regular annual allocations. Under the regular LIHTC program in 2006, each of the five states was allocated tax credits equal to $1.90 per capita. The allocation claimed by Louisiana, Alabama, and Mississippi for 2006, 2007, and 2008 equaled $18.00 times each state’s prehurricane population in the GO Zone. As a result of the increased per capita allocation, the 2006 through 2008 GO Zone LIHTC authority was about 75 percent, 567 percent, and 523 percent greater than the regular LIHTC authority that Alabama, Louisiana, and Mississippi received in the same period, respectively. While projects that receive LIHTCs must normally be placed in service within 2 years of the credit allocation, GO Zone LIHTC-funded units (as well as regular LIHTC units funded during 2006 through 2008 in a GO Zone) must be placed in service before January 1, 2011. Unlike regular LIHTC allocations, GO Zone credits generally cannot be carried forward.

The GO Zone LIHTC provision also expanded the amount of credits available to investors. To promote investment in areas where the need is greatest for affordable housing, investors can receive additional credits if the tax credit properties are located in distressed areas known as “difficult development areas” (DDA). Investors in such “enhanced” tax credit properties can claim credits for 91 percent (instead of the normal 70 percent) of the project’s qualified basis. The GO Zones are treated as DDAs under the 2005 act, and LIHTC properties located in the GO Zone are thus eligible for those enhanced LIHTCs.

GO Zone Tax Credit Bonds

The GO Zone Act of 2005 created a new category of tax credit bonds—GO Zone tax credit bonds—which Alabama, Louisiana, and Mississippi were authorized to issue to provide debt relief to state and local governments. The GO Zone tax credit bonds must be general obligations of the state and the bond proceeds must be used to make payments on existing state and local debt. Tax credit bonds differ from tax exempt bonds in that rather than receiving tax-exempt interest payments, bondholders are entitled to a federal tax credit equal to a certain percentage of their investment. Because the state does not pay interest on the GO Zone tax credit bonds, they essentially serve as an interest-free loan while they are outstanding. Under the act, states are required to match the GO Zone tax credit bonds with funds from other sources, such as issuing additional general obligation bonds or money from a state’s general fund. The three eligible states were required to issue tax credit bonds by December 31, 2006, and must retire the bonds within 2 years of issuing them, meaning that they provide only temporary debt relief to the state and local governments that they benefit.

Additional Advance Refundings of State and Local Bonds

The GO Zone Act of 2005 permits one additional advance refunding for certain existing tax-exempt bonds in Alabama, Louisiana, and Mississippi. State and local governments typically refund, or refinance, bonds to reduce interest costs and ease restrictions on the original bond contract. However, state and local governments can generally only advance refund a bond one time and, in certain cases, including most tax-exempt private activity bonds, bonds cannot be advance refunded. The GO Zone additional advance refunding provision provides Alabama, Louisiana, and Mississippi the ability to reduce interest costs on existing debt that has already been advance refunded one time or did not originally meet the requirements to allow for advance refunding. The provision can be used by any issuer in the state and is not limited to counties and parishes located in the GO Zone. All additional advance refunding bonds must be issued by December 31, 2010.

The additional advance refunding provision can only be used for bonds where one bond is currently outstanding, whether that bond is the original bond or the first advance refunded bond. To clarify, bonds being refunded are often subject to a call date, or a date at which the bond issuer may recall the original bonds and refund or retire them. For advance refundings, a second set of bonds is often established in advance of the call date with the proceeds from these bonds being dedicated to retire the original bond when the call date is reached. Therefore, after the second set of bonds are issued and before the call date on the original bonds is reached, two sets of bonds are outstanding. GO Zone additional advance refundings cannot be used in these instances.

Like GO Zone tax-exempt private activity bonds, GO Zone additional advance refunding authority is similar to additional advance refunding authority awarded in the New York Liberty Zone following the September 11, 2001, terrorist attacks. Liberty Zone advance refunding was limited to certain debts of the state or New York City, including qualified hospital 501(c)(3) bonds.

With Some Variation in Their Processes, States with GO Zones Generally Allocated Bond Authority on a First-Come, First- Served Basis; States Relied on Existing Procedures to Allocate LIHTCs

With some variations in their processes, Alabama, Louisiana, and Mississippi generally allocated the GO Zone bond provisions on a first- come, first-served basis, and all five eligible states used existing processes to award GO Zone LIHTCs. For the most part, all three eligible states allocated GO Zone tax-exempt private activity bond authority without consistently targeting the allocations to assist recovery in the most damaged areas, although Louisiana recently set aside some of its remaining allocation authority for the most damaged parishes. Officials in Louisiana and Mississippi acknowledged that the first-come, first-served approach made it difficult for applicants in some of the most damaged areas to make use of the bond provision at the beginning of the program. While all eligible states followed existing, prehurricane procedures to award LIHTCs and will use existing procedures to monitor for federal compliance, the states exhibited some differences in how they targeted the GO Zone LIHTC authority to the most damaged areas. Louisiana and Mississippi adopted different approaches for issuing tax credit bonds and identifying matching fund sources, and Alabama chose not to issue tax credit bonds due to time constraints associated with issuing the bonds. Similar to the case of GO Zone private activity bonds, when allocating additional advance refunding authority the three eligible states generally used a first-come, first-served approach.

States Generally Awarded Tax-Exempt Private Activity Bond Authority on a First-Come, First-Served Basis and Rely on Bond Counsel to Ensure Compliance with Federal Laws

To expedite bond processing, the three eligible states generally allocated the GO Zone private activity bond authority and approved projects on a first-come, first-served basis without consistently targeting the allocations to assist recovery in the most damaged areas. Alabama and Mississippi have similar processes for allocating GO Zone private activity bonds, whereas Louisiana’s bond allocation process has changed over time. Some state officials we interviewed said they were uncertain whether the GO Zone bonds should be used quickly anywhere within the qualified areas to provide an economic stimulus to the GO Zone, or if the bonds should be more focused on recovery efforts in the damaged areas. State officials we interviewed acknowledged that the first-come, first-served approach led to awarding bond allocation to projects in less damaged areas in the GO Zone because businesses in these areas were ready to apply for and issue bonds before businesses in more damaged areas could make use of the incentive. Counties and parishes in the most damaged coastal areas of Louisiana and Mississippi faced challenges dealing with the immediate aftermath of hurricane debris removal and helping those displaced. While potential GO Zone private activity bond applicants in some of the most damaged areas were not positioned to apply for allocations when they first became available, applicants in those areas have been able to use the GO Zone bonds more recently.

As with tax-exempt private activity bonds that are subject to state volume caps, state officials said they rely on bond counsel to ensure that bond applications meet program requirements before issuance. Issuers must also file information return Form 8038 with the IRS. According to IRS officials, post-issuance compliance costs often do not surface until as long as 5 years after bonds have been issued. State officials and others we interviewed did not identify any alleged cases of fraud, waste, or abuse with GO Zone private activity bonds. However, the processes states used to allocate GO Zone bonds introduced risks that could lead to inefficient allocation of the federal assistance. For example, officials interviewed indicated that some projects that may have been viable without tax- exempt financing received some tax-exempt bond authority.

Alabama and Mississippi Processes for Allocating GO Zone Tax-Exempt Private Activity Bonds

Alabama and Mississippi applied similar first-come, first-served approaches to allocate GO Zone tax-exempt private activity bonds. In accordance with the GO Zone Act of 2005, the governors of both states had the authority to award GO Zone private activity bond allocations. Both states outlined general criteria for making awards, but also acknowledged that they did not specifically target certain areas within the zone to receive set-aside amounts of GO Zone private activity bond allocations.

The Governor of Alabama initially identified four criteria for prioritizing GO Zone bond authority: (1) replacing property damaged or destroyed by Hurricane Katrina, (2) rebuilding infrastructure of cities or counties damaged by Hurricane Katrina, (3) projects that substantially improve the quality of life for the area, and (4) new economic development projects. Beginning in April 2006, Alabama began awarding allocations based on the Governor’s priorities. According to Alabama officials, the apparent demand was for new economic development projects, and the state decided to adopt a first-come, first-served approach for allocating GO Zone private activity bond authority. According to the officials we interviewed, one possible explanation why many potential GO Zone bond borrowers in the first two categories generally did not apply for tax- exempt private activity bonds could be that they received insurance settlements and federal grants and loans for rebuilding efforts. Unlike regular private activity bonds subject to volume caps, Alabama did not charge an application fee for GO Zone bonds. GO Zone private activity bond applicants in Alabama submit applications to the Alabama Department of Finance, Debt Management Division, which reviews the applications for completeness and the applications are then submitted to the Finance Director for his approval. The Governor did not set a maximum amount of authority that may be allocated per project. In Alabama, the bonds must be issued within 1 year of the time the borrower receives final approval to issue bonds, but borrowers may request an extension.

In Mississippi, the Governor’s Office grants the final approval of GO Zone bond allocations on a case-by-case basis after reviewing recommendations from the Mississippi Development Authority (MDA). The MDA reviews GO Zone bond applications for information on the number of jobs the project will create, its projected general economic effect, and the degree to which the developer is willing to invest its own funds in the project. Mississippi’s application for private activity bond authority includes a $1,000 application fee and applications are reviewed in the order in which they are received. Recommendations for allocation are generally made by MDA on a first-come, first-served basis. Mississippi officials indicated that they have tried to ensure that the six most-damaged counties along the Gulf Coast have benefited from projects with GO Zone private activity bond allocations, but no portion of the GO Zone bond allocation authority was set aside specifically for these counties. The Governor did not set a maximum amount of authority that may be allocated per project. Once a project receives final approval in Mississippi, bonds must be issued within 120 days.

Louisiana Process for Allocating GO Zone Tax- Exempt Private Activity Bonds

Louisiana’s process for allocating GO Zone private activity bonds has changed over time, and as of June 2008, most of the bond allocation authority has been awarded on a first-come, first-served basis with a portion set-aside for the 13 most-damaged parishes.

The Louisiana State Bond Commission (SBC) in February 2006 planned to set aside 50 percent of its allocation authority for the 13 most-damaged parishes and 50 percent for the rest of the GO Zone. No single project was to receive more than $250 million in GO Zone bond allocation authority. In March 2006, the Louisiana Department of Economic Development (LDED) began recommending that projects receive allocations based on applications to the Louisiana SBC on a first-come, first-served basis. Under the GO Zone Act of 2005, the Louisiana SBC had authority to make GO Zone bond allocations. However, following SBC approval of GO Zone bond allocations, the final step in the Louisiana process included the Governor issuing an allocation letter to each GO Zone bond recipient.

Louisiana state officials we interviewed stressed that they did not initially believe they would have sufficient demand to use all of their $7.9 billion allocation by the end of 2010, when the GO Zone bond authority expires. Beginning in May 2006, Louisiana SBC staff provided status updates to Louisiana SBC members on the amount of remaining and used GO Zone bond authority for the 13 most-damaged parishes and the remaining parishes at monthly Louisiana SBC meetings. By the end of June 2007, the Louisiana SBC had granted final approval for almost $4.6 billion, or nearly 60 percent, of the state’s GO Zone bond allocation authority, and preliminary approval to projects worth an additional $3.0 billion, leaving roughly $300 million in allocation authority. The allocations approved included projects exceeding the $250 million cap with two large projects for $1 billion each.

According to bond commission meeting transcripts, some bond commission members expressed concerns that the allocations had not been effectively targeted to areas and businesses with the greatest need. While the 13 most-damaged parishes in aggregate had received more than 50 percent of the final allocations, some of the most severely damaged areas around New Orleans had received relatively little as of June 2007. For example, as of June 2007, Orleans parish had only received about 2 percent of the GO Zone bond allocation authority that had been granted final approval. According to Louisiana SBC officials, this was in large part due to a lack of applications for potential GO Zone bond projects in the most severely damaged areas. Around that time, the Governor’s office declined to issue final allocation letters pending review of the state’s GO Zone bond process, and the Louisiana SBC temporarily stopped awarding final approval for GO Zone bonds. In September 2007, the Louisiana Attorney General ruled that the Governor did not have the authority to issue final approval letters for GO Zone private activity bonds because the federal act specified that the state bond commission has final approval.

In September 2007, the Louisiana SBC, in conjunction with the Governor’s Office and the LDED, revised the GO Zone allocation process and established two pools of allocation authority—a “designated pool” for the 13 most-damaged parishes and a “competitive pool” for the rest of the GO Zone parishes. While the designated pool resembled the SBC’s original concept, the list of the 13 parishes targeted for GO Zone bond allocations was updated based in part on FEMA data on businesses and infrastructure damage and HUD data on major and severe housing damage. Each pool was to receive half of the remaining GO Zone bond authority, or about $1.7 billion per pool. Further, each of the 13 parishes in the designated pool was to receive GO Zone bond allocation authority in proportion to the degree of damage sustained. In addition, projects that had received preliminary approval earlier were put on hold and had to qualify for final approval by satisfying certain criteria relating to the number of jobs created and overall economic effect.

The Louisiana SBC announced allocation awards in October 2007, awarding allocations for all remaining authority in the competitive pool with about $900 million of allocation authority remaining in the designated pool. From October 2007 to April 2008, GO Zone bond projects faced difficulty obtaining credit due in part to changing market conditions nationwide, and some GO Zone projects requested additional time to complete their issuance. However, some bond commissioners expressed concern that repeatedly extending the period to issue GO Zone bonds allowed less viable projects to retain their allocations while other applications were waiting for consideration.

On the basis of its March 2008 review of Louisiana’s GO Zone bond process requested by the newly elected Governor, the LDED acknowledged that the Louisiana GO Zone bond process lacked effective prioritization mechanisms and lacked mechanisms to ensure selected projects would be viable, and that the changing rules had led to disappointment and confusion among some stakeholders. Therefore, the LDED recommended that the Louisiana SBC revise its rules for allocating the remaining private activity bond authority. In April 2008, the Louisiana SBC adopted the LDED’s recommendations and, among other recommendations, took the following actions: Award authority in the competitive pool to applicants that applied before November 2007 on a first-come, first-served basis. After making awards to those existing applicants, future awards from the competitive pool will be prioritized based on whether the LDED determines that the proposed project is consistent with Louisiana’s longer-term economic development strategy. However, even if the LDED does not designate a project as consistent with Louisiana’s longer-term economic development strategy, the projects are considered by the SBC on a first-come, first-served basis, and, at the SBC’s discretion, may or may not be awarded an allocation.

Limit the amount of authority that any single developer can receive to $100 million going forward.

Allow local jurisdictions in the designated pool to recommend projects to the Louisiana SBC for approval, and local jurisdictions may recommend projects exceeding the $100 million limit, as long as the local jurisdiction is located in a designated pool parish that has allocation authority remaining and the parish approves the allocation. Impose a 240-day period to issue bonds after receiving allocations.

Require, in addition to the regular application fee, that applicants must submit a refundable deposit totaling 0.5 percent of the proposed allocation with their application. This change also applied to the applicants that had received allocations but had not yet issued bonds as a condition for them to receive the full 240-day extension of their allocation time limit.

In May 2008, the Louisiana SBC awarded GO Zone bond authority to applicants in the competitive pool pending before November 2007 as well as to all other pending applications on the basis of the prioritization policy described above, effectively exhausting the competitive pool allocation authority on a first-come, first-served basis. As of June 2008, parishes in the designated pool have bond authority remaining to allocate. According to Louisiana officials, if the designated pool parishes have not issued bonds for all of their authority by the beginning of 2010, the remaining authority will be available to both the competitive and designated pools during 2010.

States Used Existing Procedures to Award GO Zone LIHTCs and Will Use Existing Procedures to Monitor Compliance with Applicable Federal Laws

The HFAs from the five eligible states used their existing procedures to announce the availability of credits, process applications, and award GO Zone LIHTCs. Three of the five states announced the availability of GO Zone LIHTCs in their qualified allocation plans (QAP), which HFAs use to announce the availability of credits, eligibility criteria, and information on ranking applications. The Florida HFA had already finalized its QAP in 2006 (before the state received the extra GO Zone allocation), so the availability of these funds was not announced in the QAP, but was advertised at the beginning of the 2006 funding cycle. Similarly, the Texas HFA announced the availability of GO Zone LIHTCs through a separate policy because its QAP had already been published. Officials from each state HFA stated that they used their existing procedures to process GO Zone LIHTC applications and to award the credits. These processes generally include scoring and ranking applications, reviewing market studies and environmental assessments, underwriting, and making funding recommendations to the boards.

States generally announced funding priorities for each funding cycle through their QAPs. According to the 2006 through 2008 QAPs and HFA officials, in some funding cycles the HFAs for Louisiana, Mississippi, and Texas gave priority to projects that were to be developed in the GO Zone counties with the most hurricane-related damage. For example, according to the 2007/2008 QAP for Louisiana, at least 75 percent of the 2007 and 2008 GO Zone credits were reserved for parishes with significant numbers of rental housing with damage from Hurricanes Katrina and Rita. While 13 specific parishes were targeted in Louisiana for GO Zone bonds, the QAP targeted 8 parishes for GO Zone LIHTCs. The QAPs for Alabama and Florida did not give any priority to projects in the most-damaged GO Zone counties. According to the addendum to Alabama’s 2006 QAP, the HFA’s priority was to balance the distribution of credits throughout the state in terms of geographical regions, counties, and urban and rural areas. Officials from the Florida HFA stated that the need to prioritize the GO Zone counties with the most damage was mitigated by an agency policy to prioritize the counties that were hardest hit by 2004 and 2005 hurricanes, which already included some of the GO Zone counties.

HFAs are required to annually monitor LIHTC-funded projects for compliance with the Internal Revenue Code once projects are complete and in service, and report any instances of noncompliance to the IRS after giving the owner time to correct the problem. As a part of this annual monitoring process, officials review documentation to ensure that the properties meet one of two tests that restrict both the amount of rent that is assessed to tenants and the income of eligible tenants. In addition, at least once every 3 years, HFAs must conduct on-site inspections of all buildings in a project and, for at least 20 percent of the project’s low- income units, inspect the units and review income and rent records. For example, the Alabama HFA’s compliance manual states that its staff will perform annual file reviews, including site visits as needed, to ensure that the owner is operating the project in compliance. Similarly, according to the Louisiana HFA compliance manual, staff will annually review compliance monitoring reports, which all project owners are required to submit, and periodically conduct on-site visits. We did not assess the extent to which monitoring policies have been followed since few GO Zone LIHTC-funded units had been placed in service as of April 2008.

Louisiana and Mississippi Adopted Different Approaches for Issuing Tax Credit Bonds; Alabama Did Not Issue Tax Credit Bonds

The Louisiana SBC issued tax credit bonds matched by the state with general obligation bonds and will retire the bonds by July 17, 2008, by refunding them with tax-exempt general obligation bonds. The state accepted applications from local entities to receive funds from the tax credit bond proceeds. In Mississippi, the State Treasurer’s Office issued tax credit bonds matched by state general fund money to provide temporary debt relief at the state level. They will retire these bonds on October 30, 2008. Both states rely on the state’s bond counsel opinions to ensure that the tax credit bonds are issued in accordance with applicable federal laws.

Alabama did not issue the tax credit bonds because officials in Alabama’s Debt Management Division believed the deadline for issuing tax credit bonds would expire before the state would be able to issue general obligation bonds. Alabama officials said the state is required to amend its constitution to issue general obligation bonds; as we noted earlier, states are required to issue the GO Zone tax credit bonds as general obligation bonds. As such, Alabama officials did not believe they would be able to meet the deadline for issuing the tax credit bonds.

States Generally Allocated Additional Advance Refundings on a First- Come, First-Served Basis and Rely on Bond Counsel to Ensure Compliance with Applicable Laws

The Governor of Alabama delegated the responsibility to allocate advance refundings to the Finance Director. Alabama allocated advance refundings on a first-come, first-served basis as counties and bond authorities submitted advance refunding applications to the Alabama Department of Finance, Debt Management Division. According to Alabama officials, as long as the bond issuer and bond counsel certified that the bonds qualified for advance refunding, the state approved the application.

In Louisiana, additional advance refunding applicants were to apply to the Louisiana SBC, with a copy being sent to the Governor’s Office. Applications for additional advance refunding authority were approved on a first-come, first-served basis. Louisiana indicated the state will approve eligible advance refundings on a first-come, first-served basis until $1.5 billion of allocation authority remains and then will develop criteria to allocate the remaining authority. The issuer’s bond counsel must indicate in writing that the bonds meet applicable requirements.

The Mississippi State Treasurer’s Office, along with other state agencies, made cities, counties, and other governmental debt issuers aware of the additional advance refunding provision. It then allocated additional advance refunding authority to entities that applied to the Treasurer’s Office generally on a first-come, first-served basis after the issuer’s bond counsel indicated the bonds met the eligibility requirements for GO Zone additional advance refundings and the State Treasurer certified that the issuer filed a completed application.

Most GO Zone Private Activity Bonds Have Been Allocated for a Range of Private Facilities and LIHTCs for Rental Housing; States Used Debt Relief Provisions to Varying Degrees

As of mid-June 2008, states with GO Zones had allocated 87 percent of their authority for GO Zone tax-exempt private activity bonds and as of April 2008 about 95 percent of their LIHTC authority. However, bonds have been issued for only about half of the final allocations, representing 44 percent of the total GO Zone tax-exempt private activity bond authority, and few LIHTC units were in service. As of those dates, Alabama, Louisiana, and Mississippi used GO Zone private activity bonds to finance a broad range of private facilities, including manufacturing facilities, utilities, housing, retail facilities, hotels, and other facilities. Depending on circumstances such as time frames for issuing the bonds and the number of eligible bonds available, states’ use of GO Zone tax credit bonds and additional advance refundings varied. States used these latter two provisions to provide debt relief at the state and local level. State officials identified some challenges in making use of all four provisions.

Gulf Coast States Have Allocated about 87 Percent of Private Activity Bond Authority for a Wide Range of Private Facilities, but Bonds Have Only Been Issued for about Half of the Awarded Authority

As of mid-June 2008, the three eligible states have allocated 87 percent of the $14.9 billion in GO Zone private activity bond authority, and bonds issued amounted to about 44 percent of the total allocation authority (see fig. 2). Alabama, Louisiana, and Mississippi have allocated 88 percent, 89 percent, and 84 percent of their GO Zone private activity bond authority, respectively. Bonds had been issued for about half of the allocation authority that the states awarded. If applicants receiving private activity bond allocations cannot issue bonds within required time frames, the allocation authority is returned to the state to be reallocated. States have used these bonds for a wide range of facilities as allowed under the act. For example, states used GO Zone bonds for manufacturing facilities, utilities, housing, hotels, conference centers, retail facilities, and a variety of other private business activities. Under normal rules for tax-exempt private activity bond financing, some of these uses, including hotels and retail facilities, would not be allowed. For a listing of GO Zone private activity bonds issued in Alabama, Louisiana, and Mississippi as of mid- June 2008, see appendix I.

In all three eligible states, larger bonds account for at least 69 percent of the total GO Zone bonds issued. As of mid-June 2008, the 10 largest bonds issued in Alabama, Louisiana, and Mississippi account for approximately 92 percent, 76 percent, and 69 percent of total bonds issued, respectively. This is one indication that borrowers financing larger projects may have been able to use the GO Zone tax-exempt private activity bonds to a greater extent than borrowers financing smaller projects. Officials in Louisiana and Mississippi said that smaller projects, such as those issuing bonds for less than about $2 or $3 million, may have a more difficult time using the GO Zone private activity bond provision because the issuance costs, including fees for legal and financial advisors, begin to account for a larger percentage of bond proceeds for smaller bonds than for larger bonds.

Some GO Zone parishes and counties contained multiple projects that received GO Zone bond allocations, with total amounts in the counties and parishes ranging from less than $1 million to over $1 billion. The states also awarded projects that were to benefit multiple GO Zone counties and parishes. Alabama awarded 7 percent of its GO Zone private activity bond authority to projects affecting multiple counties. Louisiana awarded 6 percent of its authority to projects affecting multiple parishes and Mississippi awarded 29 percent of its authority in a similar manner. Figure 3 shows the range of GO Zone tax-exempt private activity bond allocations by state and by county or parish as of mid-June 2008. Even though the figure indicates that some of the most-damaged counties and parishes in Mississippi and Louisiana did not yet have any specific projects that have received GO Zone bond allocations as of June 2008, these counties and parishes may have benefited from some of the projects affecting multiple counties or parishes within that state.

Projects are experiencing challenges in issuing the GO Zone private activity bonds. According to state officials and others we interviewed: private businesses may need to combine tax-exempt bond financing with other federal, state, or local subsidies for a project to be viable; risks associated with financing projects in areas most vulnerable to future natural disasters can make it difficult to sell the bonds; insurance costs have risen since the 2005 hurricanes; reduced availability of credit nationwide has made it more difficult to issue bonds; and the most heavily damaged areas in and around New Orleans, Louisiana, may not be able to use their designated allocation authority before it expires in 2010.

The Five States Combined Have Awarded 95 Percent of Their LIHTC Allocation; Few Planned Units Were In Service as of April 2008

The five eligible states have awarded 95 percent of the combined $330 million in additional tax credit allocation from 2006 through 2008 as provided under the GO Zone Act of 2005. The state HFAs for Florida, Mississippi, and Texas awarded all of the $113 million of the additional GO Zone LIHTC allocations from 2006 through 2008. As of April 2008, the Alabama HFA had awarded 74 percent of its $47 million GO Zone LIHTC allocation for 2006 through 2008. The agency awarded all of its 2006 and 2007 allocations, and was in the process of awarding its nearly $16 million 2008 GO Zone LIHTC allocation. The Louisiana HFA had awarded all of its GO Zone LIHTCs, but some have since been returned.

Few of the planned GO Zone LIHTC funded units were in service as of April, 2008 (see fig. 4). While LIHTC-funded units are generally required to be placed in service within 2 years of credit allocation, Congress extended this requirement for units funded with GO Zone LIHTCs. GO Zone LIHTC- funded units (as well as regular LIHTC units funded during 2006 through 2008 in a GO Zone) must be placed in service before January 1, 2011.

Officials from the five HFAs that received GO Zone LIHTCs told us that most units are anticipated to be in service within the required time frames, but that they are working to address challenges to help ensure that all units are placed in service by the deadline. One of the challenges that some HFA officials stated that they are facing is the declining market value of tax credits. As the value of tax credits declines, developers get less equity from investors for each dollar in tax credits awarded. As a result, developers must seek additional funding sources to make up for the equity shortfall. HFA officials from Alabama, Louisiana, and Mississippi also explained that they have encountered resistance from some communities to the development of affordable rental housing. Such resistance generally slows development, as developers try to work out such issues with local officials. In addition, HFA officials noted that other challenges include the need to address environmental issues, and increases in the total costs to develop projects, due to increased costs for labor, materials, and land.

The number of planned GO Zone LIHTC-funded units, and units placed in service as of April 2008, varies by GO Zone parish and county (see fig. 5 and app. II, table 5). As an example, the total number of planned and in- service units ranged from a low of 24 units in Washington County, Alabama, to a high of 8,636 in Orleans Parish, Louisiana. In most counties, from 1 to 150 units were either planned or in service as of April 2008. In other GO Zone counties, no GO Zone LIHTC-funded units are planned. Our analysis focuses on GO Zone LIHTC-funded units, and it is important to note that other programs can also be used to fund affordable rental housing, such as HUD programs and other state and local programs.

According to statewide HUD data, over 82,000 rental housing units in Louisiana and over 20,000 rental housing units in Mississippi had major or severe damage. Of these units, nearly 80,000 were in eight Louisiana parishes and about 19,200 were in three Mississippi counties (see fig. 6). In Louisiana and Mississippi, the number of rental units with major or severe damage ranged from a low of 468 in Vermilion Parish, Louisiana, to a high of nearly 52,000 units in Orleans Parish, Louisiana.

Comparing the number of planned and in-service GO Zone LIHTC-funded units to the number of rental housing units with major or severe damage shows that about 17 percent of the rental housing units with major or severe damage in the state of Louisiana, and 45 percent of the similarly damaged units in the state of Mississippi, will be addressed by GO Zone LIHTC units. While other programs can also be used to fund affordable rental housing, our analysis focuses on GO Zone LIHTC-funded units. The extent to which damaged units will be addressed varies by county and parish (see fig. 7 and app. II, table 5).

Louisiana and Mississippi Exhausted Their Tax Credit Bond Allocation Authority

Louisiana and Mississippi issued a total of $300 million of GO Zone tax credit bonds, exhausting their allocation authority. Louisiana issued its $200 million of the tax credit bonds to distribute funds through a “Debt Service Assistance Fund” to selected local government entities that applied to the State Bond Commission. In all, 13 local government entities in New Orleans and the surrounding area received bond proceeds from Louisiana’s tax credit bonds and general obligation matching bonds. The local governments used the funds to make premium and interest payments on bonds issued before August 28, 2005. Mississippi issued $100 million of the tax credit bonds to make debt service payments on state bonds for fiscal year 2007.

As discussed above, Alabama did not issue tax credit bonds because state officials did not believe they would be able to meet the requirements for issuing general obligation bonds (tax credit bonds must be general obligations of the state) before the provision expired.

Mississippi officials indicated that educating investors about the mechanics of tax credit bonds—that investors receive a credit against tax liability but no interest payments—proved to be one challenge in marketing the bonds to investors.

Alabama Has Issued a Larger Percentage of the State’s Advance Refunding Authority than Louisiana or Mississippi

In total, Alabama, Louisiana, and Mississippi have issued GO Zone additional advance refunding bonds accounting for 16 percent of their total allocation authority. As of mid-June 2008, Alabama had issued 65 bonds and approved an additional 19 advance refundings, totaling $599 million, or about 53 percent of its allocation authority. In contrast, Louisiana has issued 9 advance refundings, totaling $483 million, or about 11 percent of its allocation authority, and Mississippi has only issued 6 advance refundings, totaling $169 million, or about 8 percent of its allocation authority. Appendix III lists the additional advance refunding bonds issued in Alabama, Louisiana, and Mississippi.

Similar to the case of other tax incentives such as private activity bonds and tax credit bonds, the states faced certain challenges in issuing additional advance refundings. According to state officials in Louisiana and Mississippi, some bonds for which the state may have been able to approve an additional advance refunding still had both the original bond awaiting its call date and the first advance refunding bond outstanding. Under the GO Zone Act of 2005, such bonds are ineligible for an additional advance refunding. Also, according to officials in Louisiana, some debt had already been refunded before the hurricanes at lower interest rates than those available after the 2005 hurricanes.

Agency Comments

We provided state officials in Alabama, Florida, Louisiana, Mississippi, and Texas with portions of the draft report that addressed aspects of GO Zone tax incentive allocation and use in their jurisdictions. We incorporated their technical comments as appropriate. We also provided relevant sections of the report to the Internal Revenue Service and the Office of Tax Policy, Department of the Treasury. We also incorporated their technical comments as appropriate.

We are sending copies of this report to the interested congressional committees, the Commissioner of Internal Revenue, the Secretary of Housing and Urban Development, and other interested parties. We will make copies available to others on 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 have any questions on matters discussed in this report or would like additional information, please contact me at (202) 512-9110 or at brostekm@gao.gov. Major contributors to this report are acknowledged in appendix V.

Appendix I: Gulf Opportunity (GO) Zone Tax- Exempt Private Activity Bonds Issued

Appendix II: Low-Income Housing Tax Credit Uses by State

GO Zone LIHTC units as a percent of units with severe or major damage n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.

GO Zone LIHTC units as a percent of units with severe or major damage n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.

Appendix III: Additional Advance Refunding Bonds Issued, by State

Appendix III: Additional Advance Refunding Bonds Issued, by State Alabama A&M University The Public Building Authority of the City of Huntsville Jasper Water Works & Sewer Board Inc.

Utilities Board of the City of Opp Dale County Board of Education Crenshaw County Public Building Authority The Governmental Utility Services Corp. of Bessemer The Hale County Health Care Authority Lamar County Water & Fire Protection Authority Inc.

Appendix IV: Related GAO Products

Tax Policy: Tax-Exempt Status of Certain Bonds Merits Reconsideration, and Apparent Noncompliance with Issuance Cost Limitations Should Be Addressed. GAO-08-364. Washington, D.C.: February 15, 2008.

Tax Compliance: Federal Grant and Direct Assistance Recipients Who Abuse the Federal Tax System. GAO-08-31. Washington, D.C.: November 16, 2007.

Tax Compliance: Some Hurricanes Katrina and Rita Disaster Assistance Recipients Have Unpaid Federal Taxes. GAO-08-101R. Washington, D.C.: November 16, 2007.

Gulf Coast Rebuilding: Observations on Federal Financial Implications. GAO-07-1079T. Washington, D.C.: August 2, 2007.

Preliminary Information on Gulf Coast Rebuilding. GAO-07-809R. Washington, D.C.: June 29, 2007.

Gulf Coast Rebuilding: Preliminary Observations on Progress to Date and Challenges for the Future. GAO-07-574T. Washington, D.C.: April 12, 2007.

Tax Policy: New Markets Tax Credit Appears to Increase Investment by Investors in Low-Income Communities, but Opportunities Exist to Better Monitor Compliance. GAO-07-296. Washington, D.C.: January 31, 2007.

Empowerment Zone and Enterprise Community Program: Improvements Occurred in Communities, but the Effect of the Program Is Unclear. GAO- 06-727. Washington, D.C.: September 22, 2006.

Government Performance and Accountability: Tax Expenditures Represent a Substantial Federal Commitment and Need to Be Reexamined. GAO-05-690. Washington, D.C.: September 23, 2005.

Elderly Housing: Federal Housing Programs That Offer Assistance for the Elderly. GAO-05-174. Washington, D.C.: February 14, 2005.

Tax Administration: Information Is Not Available to Determine Whether $5 Billion in Liberty Zone Tax Benefits Will Be Realized. GAO-03-1102. Washington, D.C.: September 30, 2003.

Federal Housing Assistance: Comparing the Characteristics and Costs of Housing Programs. GAO-02-76. Washington, D.C.: January 31, 2002.

Tax Credits: Opportunities to Improve Oversight of the Low-Income Housing Program. GAO/GGD/RCED-97-55. Washington, D.C.: March 28, 1997.

Appendix V: GAO Contact and Staff Acknowledgments

Acknowledgments

In addition to the individual named above, MaryLynn Sergent, Assistant Director; Dan Garcia-Diaz; Thomas Gilbert; Patrick Hatch; Suzanne Heimbach; Lisa Moore; John McGrail; Cheryl Peterson; and Jessica Thomsen made key contributions to this report.