Tax Policy: Tax-Exempt Status of Certain Bonds Merits		 
Reconsideration, and Apparent Noncompliance with Issuance Cost	 
Limitations Should Be Addressed (15-FEB-08, GAO-08-364).	 
                                                                 
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.					 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-08-364 					        
    ACCNO:   A80869						        
  TITLE:     Tax Policy: Tax-Exempt Status of Certain Bonds Merits    
Reconsideration, and Apparent Noncompliance with Issuance Cost	 
Limitations Should Be Addressed 				 
     DATE:   02/15/2008 
  SUBJECT:   Bonds (securities) 				 
	     Income taxes					 
	     Tax expenditures					 
	     Municipal taxes					 
	     Taxes						 
	     Tax exempt status					 
	     Federal taxes					 
	     Taxpayers						 
	     Financial statement audits 			 
	     Tax administration 				 
	     Tax violations					 
	     Financial analysis 				 
	     Municipal bonds					 

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GAO-08-364

   

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material separately. 

Report to the Committee on Finance, U.S. Senate: 

United States Government Accountability Office: 

GAO: 

February 2008: 

Tax Policy: 

Tax-Exempt Status of Certain Bonds Merits Reconsideration, and Apparent 
Noncompliance with Issuance Cost Limitations Should Be Addressed: 

Tax Policy: 

GAO-08-364: 

GAO Highlights: 

Highlights of GAO-08-364, a report to the Committee on Finance, U.S. 
Senate. 

Why GAO Did This Study: 

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 bondsï¿½ 
interest from investorsï¿½ federal gross income. Questions also exist 
over the bondsï¿½ 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 IRSï¿½s Statistics of Income 
(SOI) data and data from Thomson Financial to address these objectives. 

What GAO Found: 

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. 

Figure: total dollar amount of all long-term, tax-exempt bonds issued 
annually, 1991 through 2005: 

This figure is a bar graph showing total dollar amount of all long-
term, tax-exempt bonds issued annually, 1991 through 2005. The X axis 
represents the year, and the Y axis represents the dollars in billions 
(constant 2007 dollars). 

[See PDF for image] 

Source: GAO analysis of IRSï¿½s Statistics of Income Division data. 

Note: Amounts include governmental and qualified private activity bonds 
for new money and refunding bonds. Calendar year 2005 is the most 
recent available IRS data. 

[End of figure] 

Tax-exempt governmental and private activity bonds are used to finance 
a wide range of projects and activities, with bonds issued for 
ï¿½educational purposesï¿½ 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. IRSï¿½s 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. 

What GAO Recommends: 

Congress should consider whether facilities, including hotels and golf 
courses, that are privately used should be financed with tax-exempt 
governmental bonds. GAO also recommends that IRS clarify how bond 
issuers report issuance costs and develop methods to detect and address 
apparent noncompliance with limits on using bond proceeds for issuance 
costs. 

In response, the Acting IRS Commissioner agreed with our 
recommendations and outlined the actions IRS would take. 

To view the full product, including the scope and methodology, click on 
[hyperlink, http://www..gao.gov/cgi-bin/getrpt?GAO-08-364]. For more information, contact 
Michael Brostek at (202) 512-9110 or [email protected]. 

[End of section] 

Contents: 

Letter: 

Results in Brief: 

Background: 

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: 

Tax-Exempt Bonds Are Used to Finance a Wide Range of Facilities and 
Activities: 

Borrowing Costs Vary Depending on Bond Characteristics, and Some Bonds 
Appear to Exceed the Statutory Limit on Issuance Costs Paid from Bond 
Proceeds: 

Conclusions: 

Matter for Congressional Consideration: 

Recommendations for Executive Action: 

Agency Comments: 

Appendix I: Objectives, Scope, and Methodology: 

Appendix II: Sources of Information on the Facilities and Activities 
Financed Using Tax-Exempt Bonds: 

Appendix III: Summary of Thomson Financial 2007 Bond Buyer Yearbook 
Data, Use of Proceeds, 2002-2006 Combined: 

Appendix IV: Amount and Number of New Money, Long-term Governmental 
Bonds Issued by IRS SOI Purpose Categories, 2001-2005 Combined: 

Appendix V: List of Studies Reviewed on Interest Costs in Competitive 
and Negotiated Sales: 

Appendix VI: Comments from the Internal Revenue Service: 

Appendix VII: Comments from the Department of the Treasury: 

Appendix VIII: GAO Contact and Staff Acknowledgments: 

Tables: 

Table 1: The Amounts of Long-term Tax-Exempt Bonds Issued for New Money 
and Refunding Purposes, 1991 to 2005: 

Table 2: Summary of Bond Buyer Yearbook Data on Uses of Municipal Bonds 
Issued in Calendar Year 2006: 

Table 3: Summary of Facilities and Activities Financed with Tax-Exempt 
Bonds Issued in 2006 Based on a Limited Sample of 40 Official 
Statements: 

Table 4: Summary of Facilities and Activities Financed with New Money, 
Long-term Tax-Exempt Private Activity Bonds Issued in 2005: 

Table 5: New Types of Private Activity Bonds Created since 2001: 

Table 6: New Hotels Financed with Tax-Exempt Governmental Bonds Issued 
from 2002 through 2006: 

Table 7: Municipal Golf Courses Opened in 2005 and Financed with Tax- 
Exempt Governmental Bonds: 

Table 8: 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: 

Table 9: Median Issuance Costs as a Percentage of Bond Proceeds for 
Long-term Governmental Bonds Issued from 2002 to 2005: 

Figures: 

Figure 1: Total Dollar Amounts of All Long-term Tax-Exempt Bonds Issued 
Annually from 1991 through 2005: 

Figure 2: Comparison of the Dollar Amounts of Long-term Governmental 
and Qualified Private Activity Bonds Issued from 1991 through 2005: 

Figure 3: Percentage Change in New Money and Refunding Issues versus 
Changes in Interest Rates, 1992 through 2005: 

Figure 4: Estimated Revenue Loss from Excluding Interest Earned on Tax- 
Exempt Bonds from Federal Income Tax, 2000 through 2012: 

Figure 5: Dollar Amount and Number of New Money, Long-term Governmental 
Bonds Issued in 2005 by IRS SOI Purpose Categories: 

Abbreviations: 

AMT: alternative minimum tax: 

I.R.C.: Internal Revenue Code: 

IRS: Internal Revenue Service: 

JCT: Joint Committee on Taxation: 

MSRB: Municipal Securities Rulemaking Board: 

SOI: Statistics of Income Division Treasury: 

Department of the Treasury: 

United States Government Accountability Office: 

Washington, DC 20548: 

February 15, 2008: 

The Honorable Max Baucus: 
Chairman: 
The Honorable Charles E. Grassley: 
Ranking Member: 
Committee on Finance: 
United States Senate: 

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.[Footnote 1] 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.[Footnote 2] 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. 

Results in Brief: 

Since 2002, the dollar amount of long-term tax-exempt bonds issued 
annually has reached historically high levels. Governmental bonds, 
which are generally issued for traditional public purposes, account for 
the majority of the bonds issued each year. However, the dollar volume 
of qualified private activity bonds, which provide tax-exempt financing 
for facilities and activities that are private in nature and meet 
certain legal requirements, has also been noticeably higher in recent 
years. More than half of the bonds issued are new money issues, that 
is, bonds for new facilities and activities. Because the interest 
income that investors earn from tax-exempt bonds is generally not 
included in their federal gross income, the cost to the federal 
government is significant and growing. Based on estimates by Treasury 
and the Joint Committee on Taxation (JCT), the federal government 
forgoes tens of billions of dollars of revenue annually. 

The majority of governmental bonds are used for purposes related to 
education, transportation, and public facilities and activities, 
whereas qualified private activity bonds are mostly used by 
501(c)(3)[Footnote 3] nonprofit organizations and entities, such as 
governmental authorities specifically established to support private 
activities, such as airports, docks, wharves, and other facilities 
often intended to generate economic development. In the 1980s, Congress 
passed laws that limited the dollar amount of private activity bonds 
that could be issued in a given year as well as specifying certain 
facilities as not being eligible for tax-exempt private activity bond 
financing, including sports stadiums, hotels, and private golf courses. 
However, tax-exempt governmental bonds can still be used to finance 
some of these types of facilities and projects for which tax-exempt 
private activity bonds can no longer be used. Based on limited 
information, we found 18 newly constructed hotels that were financed in 
whole or in part with governmental bonds issued from 2002 through 2006. 
Also, based on limited information, we found that six municipal golf 
courses that opened in 2005 were financed by governmental bonds. Recent 
congressional hearings have raised questions about using governmental 
bonds for purposes that are private in nature, such as professional 
sports stadiums, but similar attention has not been focused on other 
types of facilities that are essentially private in nature. 

Although the results varied, recent studies generally showed that the 
competitive method of selling municipal bonds has lower interest costs, 
after controlling for other factors, than using the negotiated method 
of sale. However, several recently issued studies also show that there 
is not a statistically significant difference in interest costs for 
bonds sold on a competitive versus negotiated basis. Bond issuance 
costs vary by size and type of bond for both governmental and private 
activity bonds. Smaller bonds tend to report higher issuance costs as a 
percentage of bond proceeds than larger bonds. Some qualified private 
activity bonds issued from 2002 through 2005 reported issuance costs 
paid from bond proceeds that exceed statutory limits, an apparent 
violation of applicable federal laws. 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. IRS officials said that these apparent 
violations merited investigation, but given the large lost revenue 
implications of certain other forms of noncompliance, IRS would have to 
address low-cost options for addressing violations of issuance cost 
restrictions. Over half of the issuers of qualified private activity 
bonds issued from 2002 through 2005 reported issuance costs paid from 
bond proceeds, but for nearly half of issued bonds the issuers left the 
line on issuance costs blank when reporting to IRS. IRS cannot be sure 
it is able to detect nonreporting and address apparent violations with 
the statutory limit on using bond proceeds for issuance costs, in part 
because its instructions to issuers do not clearly indicate what to 
report to IRS when no bond proceeds are used for issuance costs. 

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. Additionally, to help IRS 
better monitor whether issuers of qualified private activity bonds are 
complying with the statutory limit on using bond proceeds for issuance 
costs, we recommend that the Commissioner of Internal Revenue (1) 
clarify IRS's forms and instructions for reporting issuance costs paid 
from bond proceeds so that bond issuers are required to clearly 
designate on the form instances where bond proceeds were not used to 
pay issuance costs and (2) develop cost-effective methods to address 
apparent noncompliance with the statutory limits in a manner that would 
not preclude IRS from examining the bonds for more substantive 
compliance issues in the future. 

The Acting Commissioner of Internal Revenue provided comments on a 
draft of this report in a February 7, 2008, letter. She said that IRS 
agrees with our recommendations and indicated specific actions it plans 
to take to address them. The Treasury Assistant Secretary for Tax 
Policy also provided comments on a draft of this report in a February 
8, 2008, letter. Treasury's comments focused on use of tax-exempt 
governmental bonds to finance stadiums and other projects with 
significant private business use. Treasury said that this is arguably a 
structural weakness in the targeting of the federal tax expenditure for 
tax-exempt bonds under the existing legal framework and noted options 
to address this structural weakness. Written comments from IRS are 
reprinted in appendix VI and written comments from Treasury are 
reprinted in appendix VII. 

Background: 

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.[Footnote 4] 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.[Footnote 5] 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,[Footnote 6] 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.[Footnote 7] However, some exceptions to these restrictions exist 
for qualified 501(c)(3) private activity bonds[Footnote 8] 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.[Footnote 
9] 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[Footnote 10]--competitive bids and negotiated 
sales.[Footnote 11] 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. 

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: 

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.[Footnote 12] 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. 

Figure 1: Total Dollar Amounts of All Long-term Tax-Exempt Bonds Issued 
Annually from 1991 through 2005: 

This figure is a bar graph showing total dollar amount of all long-
term, tax-exempt bonds issued annually, 1991 through 2005. The X axis 
represents the year, and the Y axis represents the dollars in billions 
(constant 2007 dollars). 

[See PDF for image] 

Source: GAO analysis of IRSï¿½s Statistics of Income Division data. 

Note: Amounts presented each year include governmental and qualified 
private activity bonds for new money and refunding bonds. Calendar year 
2005 is the most recent available IRS data. 

[End of figure] 

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. 

Figure 2: Comparison of the Dollar Amounts of Long-term Governmental 
and Qualified Private Activity Bonds Issued from 1991 through 2005: 

This figure is a combination bar graph showing comparison of the dollar 
amounts of long-term governmental and qualified private activity bonds 
issued from 1991 through 2005. The X axis represents the year, and the 
Y axis represents the dollars in millions. One bar in the graph 
represents governmental bonds, and the other represents private 
activity bonds. 

[See PDF for image] 

Source: GAO analysis of IRS's Statistics of Income Division data. 

[End of figure] 

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.[Footnote 13] 

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. 

Table 1: The Amounts of Long-term Tax-Exempt Bonds Issued for New Money 
and Refunding Purposes, 1991 to 2005: 

Dollars in millions (constant 2007 dollars). 

Year: 1991; 
New money: $146,746; 
Percentage of total: 62.5; 
Refunding: $ 88,188; 
Percentage of total: 37.5. 

Year: 1992; 
New money: 144,697; 
Percentage of total: 45.3; 
Refunding: 174,969; 
Percentage of total: 54.7. 

Year: 1993; 
New money: 128,582; 
Percentage of total: 33.2; 
Refunding: 258,222; 
Percentage of total: 66.8. 

Year: 1994; 
New money: 139,764; 
Percentage of total: 59.9; 
Refunding: 93,487; 
Percentage of total: 40.1. 

Year: 1995; 
New money: 125,931; 
Percentage of total: 63.5; 
Refunding: 72,360; 
Percentage of total: 36.5. 

Year: 1996; 
New money: 140,312; 
Percentage of total: 59.1; 
Refunding: 97,179; 
Percentage of total: 40.9. 

Year: 1997; 
New money: 152,271; 
Percentage of total: 57.6; 
Refunding: 112,233; 
Percentage of total: 42.4. 

Year: 1998; 
New money: 192,762; 
Percentage of total: 54.4; 
Refunding: 161,694; 
Percentage of total: 45.6. 

Year: 1999; 
New money: 184,067; 
Percentage of total: 66.0; 
Refunding: 94,831; 
Percentage of total: 34.0. 

Year: 2000; 
New money: 173,223; 
Percentage of total: 72.0; 
Refunding: 67,385; 
Percentage of total: 28.0. 

Year: 2001; 
New money: 203,402; 
Percentage of total: 60.7; 
Refunding: 131,955; 
Percentage of total: 39.3. 

Year: 2002; 
New money: 227,899; 
Percentage of total: 54.1; 
Refunding: 193,494; 
Percentage of total: 45.9. 

Year: 2003; 
New money: 225,440; 
Percentage of total: 53.4; 
Refunding: 196,723; 
Percentage of total: 46.6. 

Year: 2004; 
New money: 224,850; 
Percentage of total: 56.7; 
Refunding: 171,688; 
Percentage of total: 43.3. 

Year: 2005; 
New money: 218,491; 
Percentage of total: 49.0; 
Refunding: 227,287; 
Percentage of total: 51.0. 

Source: GAO analysis of IRS's Statistics of Income Division data. 

Note: Totals include both governmental and qualified private activity 
bonds. 

[End of table] 

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[Footnote 14] 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. 

Figure 3: Percentage Change in New Money and Refunding Issues versus 
Changes in Interest Rates, 1992 through 2005: 

This figure is a combination bar and line graph showing percentage 
change in new money and refunding issues versus changes in interest 
rates, 1992 through 2005. The X axis represents the year, the left Y 
axis represents percent changes in dollar amount issued, and the right 
Y axis represents percent changes in interest rates. One bar represents 
percent change in new money, and the other bar represents percent 
change in refunding. The line represents percent change in interest 
rates. 

[See PDF for image] 

Source: GAO analysis of IRSï¿½s Statistics of Income Division data and 
Thomson Financial data in the Bond Buyer Yearbook. 

[End of figure] 

The Estimated Revenue Loss from Outstanding Tax-Exempt Bonds Is One of 
the Largest Federal Tax Expenditures: 

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.[Footnote 15] 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. 

Figure 4: Estimated Revenue Loss from Excluding Interest Earned on Tax- 
Exempt Bonds from Federal Income Tax, 2000 through 2012: 

This figure is a line graph with shaded portions of the graph. The 
graph is showing estimated revenue loss from excluding interest earned 
on tax exempt bonds from federal income tax, 2000 through 2012. The X 
axis represents the year, and the Y axis represents the dollars in 
billions. The light section represents qualified private activity 
bonds, and the dark section represents government bonds.  

[See PDF for image] 

Source: GAO Analysis of Treasury Department Estimates Printed in the 
President's 2002, 2004, 2006,and 2008 Budgets, Analytical Perspective. 

Note: Summing the individual tax preference estimates is useful for 
gauging the general magnitude of the federal revenue involved, but it 
does not take into account possible interactions between individual 
provisions. All data points presented are estimates, but data points 
for future years are also projections. 

[End of figure] 

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.[Footnote 16] 

Tax-Exempt Bonds Are Used to Finance a Wide Range of Facilities and 
Activities: 

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. 

Uses of Municipal Bonds Based on Bond Buyer Yearbook Data: 

The Bond Buyer Yearbook contains historical data and is a resource and 
reference tool for portfolio managers, underwriters, financial 
advisors, and other professionals seeking information on municipal 
bonds. As previously stated, the yearbook does not separate information 
on the uses of bonds based on whether the bonds are governmental, 
qualified private activity, or taxable bonds. Nonetheless, the Bond 
Buyer Yearbook still provides a general sense of the types of projects 
financed with tax-exempt bonds. Table 2 summarizes Thomson Financial 
2006 data in the 2007 Bond Buyer Yearbook by 10 major categories and 48 
subcategories. The table also shows the proportion of bonds issued for 
each category and subcategory. 

Table 2: Summary of Bond Buyer Yearbook Data on Uses of Municipal Bonds 
Issued in Calendar Year 2006: 

Dollars in thousands (nominal 2006 dollars). 

Category: Development; 
Total amount: $4,891,000; 
Percentage of total amount for all categories: 1.3; 
Total issues: 387; 
Percentage of total issues for all categories: 3.0; 
Average size: $12,638. 

Category: Industrial; 
Total amount: 2,279,900; 
Percentage of total amount for all categories: 0.6; 
Total issues: 224; 
Percentage of total issues for all categories: 1.8; 
Average size: 10,178. 

Category: Economic; 
Total amount: 2,367,300; 
Percentage of total amount for all categories: 0.6; 
Total issues: 152; 
Percentage of total issues for all categories: 1.2; 
Average size: 15,574. 

Category: Office buildings; 
Total amount: 243,800; 
Percentage of total amount for all categories: 0.1; 
Total issues: 11; 
Percentage of total issues for all categories: 0.1; 
Average size: 22,164. 

Category: Education; 
Total amount: 106,545,800; 
Percentage of total amount for all categories: 27.4; 
Total issues: 4,197; 
Percentage of total issues for all categories: 33.0; 
Average size: 25,386. 

Category: Primary; 
Total amount: 60,492,500; 
Percentage of total amount for all categories: 15.6; 
Total issues: 3,380; 
Percentage of total issues for all categories: 26.5; 
Average size: 17,897. 

Category: Higher; 
Total amount: 29,447,800; 
Percentage of total amount for all categories: 7.6; 
Total issues: 650; 
Percentage of total issues for all categories: 5.1; 
Average size: 45,304. 

Category: Student loans; 
Total amount: 16,051,200; 
Percentage of total amount for all categories: 4.1; 
Total issues: 82; 
Percentage of total issues for all categories: 0.6; 
Average size: 195,746. 

Category: Other; 
Total amount: 554,300; 
Percentage of total amount for all categories: 0.1; 
Total issues: 85; 
Percentage of total issues for all categories: 0.7; 
Average size: 6,521. 

Category: Electric power; 
Total amount: 12,897,200; 
Percentage of total amount for all categories: 3.3; 
Total issues: 177; 
Percentage of total issues for all categories: 1.4; 
Average size: 72,866. 

Category: Environmental facilities; 
Total amount: 7,869,800; 
Percentage of total amount for all categories: 2.0; 
Total issues: 154; 
Percentage of total issues for all categories: 1.2; 
Average size: 51,103. 

Category: Pollution control; 
Total amount: 6,206,800; 
Percentage of total amount for all categories: 1.6; 
Total issues: 95; 
Percentage of total issues for all categories: 0.7; 
Average size: 65,335. 

Category: Solid waste; 
Total amount: 1,663,000; 
Percentage of total amount for all categories: 0.4; 
Total issues: 59; 
Percentage of total issues for all categories: 0.5; 
Average size: 28,186. 

Category: Recycling; 
Total amount: 0; 
Percentage of total amount for all categories: 0.0; 
Total issues: 0; 
Percentage of total issues for all categories: 0.0; 
Average size: 0. 

Category: Health care; 
Total amount: 40,102,200; 
Percentage of total amount for all categories: 10.3; 
Total issues: 827; 
Percentage of total issues for all categories: 6.5; 
Average size: 48,491. 

Category: General acute; 
Total amount: 30,871,100; 
Percentage of total amount for all categories: 7.9; 
Total issues: 518; 
Percentage of total issues for all categories: 4.1; 
Average size: 59,597. 

Category: Single specialty; 
Total amount: 475,400; 
Percentage of total amount for all categories: 0.1; 
Total issues: 20; 
Percentage of total issues for all categories: 0.2; 
Average size: 23,770. 

Category: Children's; 
Total amount: 1,398,600; 
Percentage of total amount for all categories: 0.4; 
Total issues: 14; 
Percentage of total issues for all categories: 0.1; 
Average size: 99,900. 

Category: Equipment loans; 
Total amount: 58,400; 
Percentage of total amount for all categories: 0.0; 
Total issues: 3; 
Percentage of total issues for all categories: 0.0; 
Average size: 19,467. 

Category: General medical; 
Total amount: 1,384,400; 
Percentage of total amount for all categories: 0.4; 
Total issues: 19; 
Percentage of total issues for all categories: 0.1; 
Average size: 72,863. 

Category: Nursing homes; 
Total amount: 474,900; 
Percentage of total amount for all categories: 0.1; 
Total issues: 34; 
Percentage of total issues for all categories: 0.3; 
Average size: 13,968. 

Category: Assisted living; 
Total amount: 914,700; 
Percentage of total amount for all categories: 0.2; 
Total issues: 66; 
Percentage of total issues for all categories: 0.5; 
Average size: 13,859. 

Category: Continuing care; 
Total amount: 4,524,700; 
Percentage of total amount for all categories: 1.2; 
Total issues: 153; 
Percentage of total issues for all categories: 1.2; 
Average size: 29,573. 

Category: Housing; 
Total amount: 30,532,700; 
Percentage of total amount for all categories: 7.9; 
Total issues: 955; 
Percentage of total issues for all categories: 7.5; 
Average size: 31,971. 

Category: Single family; 
Total amount: 24,107,400; 
Percentage of total amount for all categories: 6.2; 
Total issues: 606; 
Percentage of total issues for all categories: 4.8; 
Average size: 39,781. 

Category: Multifamily; 
Total amount: 6,425,300; 
Percentage of total amount for all categories: 1.7; 
Total issues: 349; 
Percentage of total issues for all categories: 2.7; 
Average size: 18,411. 

Category: Public facilities; 
Total amount: 14,650,700; 
Percentage of total amount for all categories: 3.8; 
Total issues: 661; 
Percentage of total issues for all categories: 5.2; 
Average size: 22,164. 

Category: Libraries/museums; 
Total amount: 867,400; 
Percentage of total amount for all categories: 0.2; 
Total issues: 71; 
Percentage of total issues for all categories: 0.6; 
Average size: 12,217. 

Category: Government offices; 
Total amount: 2,968,200; 
Percentage of total amount for all categories: 0.8; 
Total issues: 121; 
Percentage of total issues for all categories: 1.0; 
Average size: 24,531. 

Category: Fire stations; 
Total amount: 366,700; 
Percentage of total amount for all categories: 0.1; 
Total issues: 93; 
Percentage of total issues for all categories: 0.7; 
Average size: 3,943. 

Category: Jails/prisons; 
Total amount: 1,418,900; 
Percentage of total amount for all categories: 0.4; 
Total issues: 62; 
Percentage of total issues for all categories: 0.5; 
Average size: 22,885. 

Category: Police stations; 
Total amount: 558,700; 
Percentage of total amount for all categories: 0.1; 
Total issues: 16; 
Percentage of total issues for all categories: 0.1; 
Average size: 34,919. 

Category: Convention centers; 
Total amount: 2,443,100; 
Percentage of total amount for all categories: 0.6; 
Total issues: 57; 
Percentage of total issues for all categories: 0.4; 
Average size: 42,861. 

Category: Stadiums/arenas; 
Total amount: 3,996,300; 
Percentage of total amount for all categories: 1.0; 
Total issues: 31; 
Percentage of total issues for all categories: 0.2; 
Average size: 128,913. 

Category: Theaters; 
Total amount: 311,000; 
Percentage of total amount for all categories: 0.1; 
Total issues: 7; 
Percentage of total issues for all categories: 0.1; 
Average size: 44,429. 

Category: Parks/zoos/ beaches; 
Total amount: 824,800; 
Percentage of total amount for all categories: 0.2; 
Total issues: 132; 
Percentage of total issues for all categories: 1.0; 
Average size: 6,248. 

Category: Other recreation; 
Total amount: 895,600; 
Percentage of total amount for all categories: 0.2; 
Total issues: 71; 
Percentage of total issues for all categories: 0.6; 
Average size: 12,614. 

Category: Transportation; 
Total amount: 42,344,000; 
Percentage of total amount for all categories: 10.9; 
Total issues: 519; 
Percentage of total issues for all categories: 4.1; 
Average size: 81,588. 

Category: Airports; 
Total amount: 8,245,900; 
Percentage of total amount for all categories: 2.1; 
Total issues: 105; 
Percentage of total issues for all categories: 0.8; 
Average size: 78,532. 

Category: Seaports; 
Total amount: 3,008,500; 
Percentage of total amount for all categories: 0.8; 
Total issues: 48; 
Percentage of total issues for all categories: 0.4; 
Average size: 62,677. 

Category: Toll roads; 
Total amount: 14,576,500; 
Percentage of total amount for all categories: 3.8; 
Total issues: 222; 
Percentage of total issues for all categories: 1.7; 
Average size: 65,660. 

Category: Bridges; 
Total amount: 2,127,400; 
Percentage of total amount for all categories: 0.5; 
Total issues: 13; 
Percentage of total issues for all categories: 0.1; 
Average size: 163,646. 

Category: Tunnels; 
Total amount: 0; 
Percentage of total amount for all categories: 0.0; 
Total issues: 0; 
Percentage of total issues for all categories: 0.0; 
Average size: 0. 

Category: Parking facilities; 
Total amount: 510,600; 
Percentage of total amount for all categories: 0.1; 
Total issues: 49; 
Percentage of total issues for all categories: 0.4; 
Average size: 10,420. 

Category: Mass transit; 
Total amount: 13,875,000; 
Percentage of total amount for all categories: 3.6; 
Total issues: 81; 
Percentage of total issues for all categories: 0.6; 
Average size: 171,296. 

Category: Other; 
Total amount: 100; 
Percentage of total amount for all categories: 0.0; 
Total issues: 1; 
Percentage of total issues for all categories: 0.0; 
Average size: 100. 

Category: Utilities; 
Total amount: 42,014,500; 
Percentage of total amount for all categories: 10.8; 
Total issues: 1,328; 
Percentage of total issues for all categories: 10.4; 
Average size: 31,637. 

Category: Water/sewer; 
Total amount: 28,715,400; 
Percentage of total amount for all categories: 7.4; 
Total issues: 1,153; 
Percentage of total issues for all categories: 9.1; 
Average size: 24,905. 

Category: Gas works; 
Total amount: 10,741,700; 
Percentage of total amount for all categories: 2.8; 
Total issues: 27; 
Percentage of total issues for all categories: 0.2; 
Average size: 397,841. 

Category: Telephone; 
Total amount: 148,500; 
Percentage of total amount for all categories: 0.0; 
Total issues: 9; 
Percentage of total issues for all categories: 0.1; 
Average size: 16,500. 

Category: Sanitation; 
Total amount: 737,600; 
Percentage of total amount for all categories: 0.2; 
Total issues: 59; 
Percentage of total issues for all categories: 0.5; 
Average size: 12,502. 

Category: Flood control; 
Total amount: 620,000; 
Percentage of total amount for all categories: 0.2; 
Total issues: 24; 
Percentage of total issues for all categories: 0.2; 
Average size: 25,833. 

Category: Combined utilities; 
Total amount: 1,051,300; 
Percentage of total amount for all categories: 0.3; 
Total issues: 56; 
Percentage of total issues for all categories: 0.4; 
Average size: 18,773. 

Category: General purpose; 
Total amount: 86,711,000; 
Percentage of total amount for all categories: 22.3; 
Total issues: 3,526; 
Percentage of total issues for all categories: 27.7; 
Average size: 24,592. 

Category: General purpose; 
Total amount: 86,449,400; 
Percentage of total amount for all categories: 22.2; 
Total issues: 3,518; 
Percentage of total issues for all categories: 27.6; 
Average size: 24,573. 

Category: Veterans; 
Total amount: 203,800; 
Percentage of total amount for all categories: 0.1; 
Total issues: 1; 
Percentage of total issues for all categories: 0.0; 
Average size: 203,800. 

Category: Places of worship; 
Total amount: 47,900; 
Percentage of total amount for all categories: 0.0; 
Total issues: 5; 
Percentage of total issues for all categories: 0.0; 
Average size: 9,580. 

Category: Agriculture; 
Total amount: 9,900; 
Percentage of total amount for all categories: 0.0; 
Total issues: 2; 
Percentage of total issues for all categories: 0.0; 
Average size: 4,950. 

Category: Total; 
Total amount: $388,558,900; 
Percentage of total amount for all categories: 100.0; 
Total issues: 12,731; 
Percentage of total issues for all categories: 100.0; 
Average size: $30,521. 

Source: GAO analysis of Thomson Financial data in the 2007 Bond Buyer 
Yearbook. 

[End of table] 

As shown in table 2, the majority of municipal bonds issued in calendar 
year 2006, both in terms of dollar amounts and numbers of bonds, fell 
in the education and general purpose categories. Bonds categorized for 
education-related purposes accounted for over 27 percent of the total 
amount issued and about one-third of the number of bonds issued that 
year. Bonds in the general purpose category accounted for over 22 
percent of the total dollar amount and more than one-quarter of the 
number of bonds issued during 2006. In addition, nearly one-fourth of 
the total number of bonds issued in calendar year 2006 was categorized 
only as general purpose in the subcategory of the general purpose 
category. For these bonds, it is not clear what activities or 
facilities were funded by the $86.5 billion of bonds. 

Bonds placed into the transportation and electric power categories were 
the largest bonds, averaging $81.6 million and $72.9 million, 
respectively, per bond issue. The Long Island (New York) Power 
Authority issued the largest bond in the electric power category in 
2006 for $950 million, which included about $100 million for capital 
improvements to things like power transmission lines, substations, and 
transformers, and about $850 million for refunding purposes. The 
largest transportation bond in 2006 was a $2.0 billion mass transit 
bond sale by the Hudson Yards Infrastructure Corporation, New York, for 
the extension of a subway line that is part of an effort to redevelop 
the Hudson Yards area of midtown Manhattan. Bonds categorized by the 
Bond Buyer Yearbook as development and public facilities, on average, 
were the smallest bonds, averaging $12.6 million and $22.2 million, 
respectively. 

Appendix III shows information on the uses of municipal bonds from the 
Bond Buyer Yearbook for the 5-year period of 2002 through 2006 
combined. 

Uses of Governmental Bonds Based on IRS's SOI Data and a Limited Random 
Sample of Official Statements: 

To provide information on the facilities and activities financed with 
governmental bonds, we reviewed two data sources: (1) IRS's SOI tax- 
exempt bond publications and database for 2002 though 2005 and (2) a 
limited sample of official statements that MSRB received in 2006. 

IRS's SOI categorizes information on governmental bonds into eight 
broad categories. Unlike the Thomson Financial data, the SOI data do 
not further categorize bonds into subcategories by purpose. For 2005, 
the education and the other categories were the two largest categories 
measured by dollar amount and total number of bonds issued. 
Governmental bonds issued for transportation and education had the 
largest average size per issue, $20.6 million and $11.4 million, 
respectively. Figure 5 summarizes the dollar amounts and numbers of new 
money, long-term governmental bonds issued in 2005 by the eight SOI 
purpose categories. (See app. IV for similar data for the 5-year period 
of 2001 through 2005.) 

Figure 5: Dollar Amount and Number of New Money, Long-term Governmental 
Bonds Issued in 2005 by IRS SOI Purpose Categories: 

This figure is a combination bar and line graph showing the dollar 
amount and number of new money, long-term governmental bonds issued in 
2005 by IRS SOI purpose categories. The X axis represents the purpose 
categories, the left Y axis represents the dollar amount issued: 
Nominal 2005 dollars (in billions), and the right Y axis represents the 
number of bonds issued. The bar represents the dollar amount issued, 
and the line represents the number of bonds issued. 

[See PDF for image] 

Source: GAO analysis of IRS's Statistics of Income data. 

[End of figure] 

As shown in figure 5, based on IRS data, nearly $45.7 billion of the 
new money, long-term governmental bonds issued in 2005 are classified 
in the other category. This amounts to nearly one-third of all long- 
term new money tax-exempt governmental bonds issued in 2005. Bond 
issuers may provide additional information that describes their bond 
issues if they classify their bonds in the "other" category. Because 
IRS transcribes this information in its tax-exempt bond database, we 
conducted a limited analysis of it to obtain information on the types 
of activities and facilities that are included in the other 
category.[Footnote 17] 

Among other things, our analysis showed that bonds in the other 
category were issued for a wide range of purposes, reflecting the broad 
discretion that state and local governments have in determining what 
facilities and projects to finance with tax-exempt bonds. We found that 
bonds in the other category were issued to finance industrial parks, 
arenas, stadiums, parking facilities, sidewalks, golf courses, general 
government operations, public recreation facilities, land, vehicles, 
computer hardware, and various other purposes. While we found that the 
facilities and activities financed with some bonds were apparent in 
many cases, they were not as obvious in some other cases, such as when 
"various government operations" and similar descriptions were provided. 
However, our limited review does not provide a comprehensive list of 
the facilities and activities being financed with governmental bonds 
classified in IRS's other category. 

While the Thomson Financial and SOI data provide aggregate data on the 
projects financed with tax-exempt bonds, the official statements for 
the bonds often provide more detailed information on the uses of the 
bonds. Because of this, we reviewed a limited random sample of official 
statements of governmental bonds to provide examples of the types of 
descriptive information they contain on the projects financed with the 
bonds. The sample was drawn from official statements MSRB received in 
calendar year 2006. In total, the sample consists of 40 bonds--5 bonds 
that we identified that would likely be classified into each of the 
eight SOI categories for governmental bonds.[Footnote 18] The sample is 
not generalizable--meaning it cannot be used to generate estimates 
about all governmental bonds issued in 2006. Instead, it provides a 
limited number of specific examples of projects and activities that 
were financed with governmental bonds. Table 3 shows descriptions of 
the uses of bonds based on our analysis of official statements. (The 
methodology for our sample is discussed in app. I.) 

Table 3: Summary of Facilities and Activities Financed with Tax-Exempt 
Bonds Issued in 2006 Based on a Limited Sample of 40 Official 
Statements: 

Bond category: Education (5 bonds); 
Description of bond use: * Construction of university track and field 
stadium; 
* Construction of schools; 
* Construction of schools; 
* Construction of schools; 
* Shared computer, learning resources, and staff development services. 

Bond category: Environment (5 bonds)[A]; 
Description of bond use: * Sewer and water facilities; 
* Sewer and water facilities; 
* Sewer and water facilities; 
* Sewer and water facilities; 
* Sewer and water facilities and pollution control. 

Bond category: Health and hospital (5 bonds); 
Description of bond use: 
* Construction of new hospital and demolition of old hospital; 
* Construction of health care facilities; 
* Construction of new hospital; 
* Improvements to existing hospital; 
* Improvements to existing hospital. 

Bond category: Housing (5 bonds); 
Description of bond use: * Rehabilitate a housing development and 
office space for the issuing authority; 
* Construction of a continuing care retirement facility; 
* Finance single-family residences for low-income families; 
* Construction of a multifamily housing unit; 
* Finance owner-occupied single-family residences. 

Bond category: Public safety (5 bonds); 
Description of bond use: * School fire prevention and safety purposes; 
* Construction of courthouse and other public buildings, computer 
equipment, and county vehicles; 
* Construction of jail facility; 
* Construction of county justice system building; 
* Construction of two fire stations, emergency medical vehicles, and 
equipment. 

Bond category: Transportation (5 bonds); 
Description of bond use: * Street improvements; 
* Street improvements; 
* Marina and other port- related projects; 
* Street improvements; 
* Street improvements. 

Bond category: Utilities (5 bonds)[A]; 
Description of bond use: * Water system improvements; 
* Water system improvements; 
* Water system improvements; 
* Water system improvements; 
* Electric system improvements. 

Bond category: Other (5 bonds); 
Description of bond use: * Furnishings and equipment; 
* Streets, sewers, and other public improvements; 
* Various public works projects, including water and sewer systems, 
electric systems, gas systems, airports, and other revenue-producing 
public works projects; 
* Various capital improvement projects and equipment, including city 
trucks, police cars, water main extension, school renovations, and fire 
department equipment; 
* Construction of two YMCA facilities. 

Source: GAO analysis of official statements received by MSRB in 2006. 

Note: Some of the official statements we reviewed in each category were 
for bonds that had similar purposes. As a result, some of the entries 
in each category are identical. 

[A] IRS Form 8038 instructs bond issuers to classify bonds for sewer 
facilities as environment. As a result, we classified bonds that 
indicated that they were for sewer and water facilities in the 
environment category. Bonds only used for water system improvements 
were classified in the utilities category. 

[End of table] 

As table 3 shows, in general, the official statements we reviewed were 
for bonds with purposes traditionally associated with financing for 
governmental bonds. 

Uses of Private Activity Bonds Based on IRS's SOI Data: 

Table 4 provides summary information on the uses of tax-exempt private 
activity bonds issued in 2005 based on IRS's SOI data. As the table 
illustrates, in 2005, section 501(c)(3) bonds, including those issued 
for hospitals, accounted for over half of the dollar amount and number 
of new money, long-term private activity bonds. Section 501(c)(3) 
nonhospital bonds constituted the largest category of qualified private 
activity bonds in 2005 (29 percent). As a percentage of all private 
activity bonds, the section 501(c)(3) nonhospital bond category has 
been larger in recent years than in the early 1990s. 

If only new money long-term private activity bonds are considered, 
section 501(c)(3) bonds for other than hospitals have risen from about 
20 percent of private activity bonds in the early 1990s to nearly 30 
percent yearly in 2003 through 2005. Since 1997, section 501(c)(3) 
nonhospital bonds have accounted for more than 27 percent of new long- 
term private activity bond amounts, with 4 peak years of 38 to 39 
percent. Before 1997, section 501(c)(3) nonhospital bonds had never 
accounted for more than 24 percent of the total amount of new money 
private activity bonds issued annually. According to a Treasury 
official, one possible explanation for the increase in 501(c)(3) bonds 
as percentage of all qualified private activity bonds is that unlike 
other qualified private activity bonds, 501(c)(3) bonds are not subject 
to annual state volume caps. 

Section 501(c)(3) bonds help finance construction of facilities and 
other property used by charitable, educational, religious, and similar 
organizations recognized as tax-exempt under section 501(c)(3) of the 
I.R.C. and can generally only be used for projects that support the 
charitable activities of the 501(c)(3) organization that is benefiting 
from the bonds.[Footnote 19] Analysis of 2003 and 2004 SOI data for 
"Qualified 501(c)(3) Nonhospital" bonds indicated that about 83 percent 
of tax-exempt bond dollars in this category were used for the following 
purposes: transportation (10.3 percent), construction (5.6 percent), 
renting and leasing real estate (14.8 percent), education (15.4 
percent), and health care (37.2 percent).[Footnote 20] 

Table 4: Summary of Facilities and Activities Financed with New Money, 
Long-term Tax-Exempt Private Activity Bonds Issued in 2005: 

Nominal 2005 dollars in millions. 

Airport; 
Amount issued: $3,152; 
Percentage of total amount: 5.8; 
Number issued: 39; 
Percentage of number issued: 1.5; 
Average size: $80.8. 

Docks and wharves; 
Amount issued: 156; 
Percentage of total amount: 0.3; 
Number issued: 6; 
Percentage of number issued: 0.2; 
Average size: 26.0. 

Water; 
Amount issued: 189; 
Percentage of total amount: 0.3; 
Number issued: 14; 
Percentage of number issued: 0.5; 
Average size: 13.5. 

Sewage; 
Amount issued: 194; 
Percentage of total amount: 0.4; 
Number issued: 12; 
Percentage of number issued: 0.5; 
Average size: 16.2. 

Solid waste disposal; 
Amount issued: 1,464; 
Percentage of total amount: 2.7; 
Number issued: 57; 
Percentage of number issued: 2.2; 
Average size: 25.7. 

Qualified residential rental; 
Amount issued: 6,459; 
Percentage of total amount: 11.8; 
Number issued: 478; 
Percentage of number issued: 18.5; 
Average size: 13.5. 

Local electricity or gas furnishing facilities; 
Amount issued: 142; 
Percentage of total amount: 0.3; 
Number issued: 3; 
Percentage of number issued: 0.1; 
Average size: 47.3. 

Local district heating or cooling facilities; 
Amount issued: 24; 
Percentage of total amount: 0.0; 
Number issued: 3; 
Percentage of number issued: 0.1; 
Average size: 8.0. 

Hydroelectric environmental facilities[A]; 
Amount issued: --; 
Percentage of total amount: --; 
Number issued: --; 
Percentage of number issued: --; 
Average size: --. 

Tax Reform Act of 1986 transition property; 
Amount issued: 125; 
Percentage of total amount: 0.2; 
Number issued: 5; 
Percentage of number issued: 0.2; 
Average size: 25.0. 

District of Columbia enterprise zone[A]; 
Amount issued: --; 
Percentage of total amount: --; 
Number issued: --; 
Percentage of number issued: -
-; 
Average size: --. 

Qualified new empowerment zone; 
Amount issued: 232; 
Percentage of total amount: 0.4; 
Number issued: 10; 
Percentage of number issued: 0.4; 
Average size: 23.2. 

New York liberty zone[A]; 
Amount issued: --; 
Percentage of total amount: --; 
Number issued: --; 
Percentage of number issued: --; 
Average size: --. 

Qualified mortgage; 
Amount issued: 6,602; 
Percentage of total amount: 12.1; 
Number issued: 145; 
Percentage of number issued: 5.6; 
Average size: 45.5. 

Qualified veterans mortgage[A]; 
Amount issued: --; 
Percentage of total amount: --; 
Number issued: --; 
Percentage of number issued: --; 
Average size: --. 

Qualified small issue; 
Amount issued: 701; 
Percentage of total amount: 1.3; 
Number issued: 422; 
Percentage of number issued: 16.3; 
Average size: 1.7. 

Qualified student loan; 
Amount issued: 4,699; 
Percentage of total amount: 8.6; 
Number issued: 36; 
Percentage of number issued: 1.4; 
Average size: 130.5. 

Qualified redevelopment[A]; 
Amount issued: --; 
Percentage of total amount: --; 
Number issued: --; 
Percentage of number issued: --; 
Average size: --. 

Qualified Section 501(c)(3) hospital; 
Amount issued: 12,224; 
Percentage of total amount: 22.4; 
Number issued: 288; 
Percentage of number issued: 11.1; 
Average size: 42.4. 

Qualified Section 501(c)(3) nonhospital; 
Amount issued: 15,745; 
Percentage of total amount: 28.8; 
Number issued: 1,080; 
Percentage of number issued: 41.8; 
Average size: 14.6. 

Nongovernmental output property[A]; 
Amount issued: --; 
Percentage of total amount: --; 
Number issued: --; 
Percentage of number issued: --; 
Average size: --. 

Other purposes[B]; 
Amount issued: 31; 
Percentage of total amount: 0.1; 
Number issued: 13; 
Percentage of number issued: 0.5; 
Average size: 2.4. 

Total[C]; 
Amount issued: $54,691; 
Percentage of total amount: 100.0; 
Number issued: 2,586; 
Percentage of number issued: 100.0; 
Average size: $21.1. 

Source: GAO analysis of IRS's Statistics of Income Division data. 

[A] Based on SOI data, these cells are blank to avoid disclosure of 
information about specific bonds. However, the data are included in the 
appropriate totals. 

[B] For this table, other purposes refers to obligations for which a 
specific purpose either did not apply or was not clearly indicated on 
the Form 8038. 

[C] A given bond issue can include more than one purpose. As a result, 
when added together, the number of issues for each individual purpose 
is greater than the total number of bonds issued. In addition, the 
amounts issued and number of bonds issued may not equal the total 
because the amounts in the individual cells are rounded. 

[End of table] 

Recently, Congress has enacted legislation creating new types of tax- 
exempt private activity bonds. Table 5 provides a summary of the new 
types of tax-exempt private activity bonds enacted since 2001. 

Table 5: New Types of Private Activity Bonds Created since 2001: 

Type: Public education[A]; 
Year authorized: 2001; 
Volume authorized (dollars in millions): $15,000; 
Purpose and examples of authorized uses: For public-private 
partnerships between school districts and private developers; 
* Authorized uses include school buildings, athletic facilities, and 
property used in connection with the school facility. 

Type: New York Liberty Zone[B]; 
Year authorized: 2002; 
Volume authorized (dollars in millions): $8,000; 
Purpose and examples of authorized uses: For economic development and 
rebuilding in designated areas of New York City after 9/11; 
* Authorized uses include financing the construction and rehabilitation 
of nonresidential and residential real property. 

Type: Green building[C]; 
Year authorized: 2004; 
Volume authorized (dollars in millions): $2,000; 
Purpose and examples of authorized uses: For the development of energy-
efficient buildings and their surrounding landscapes; 
* Authorized uses include commercial buildings meeting certain 
standards or including a brownfield site-- sites being redeveloped that 
may contain pollutants or other contaminants. 

Type: Highway and surface freight transfer[D]; 
Year authorized: 2005; 
Volume authorized (dollars in millions): $15,000; 
Purpose and examples of authorized uses: For financing for certain 
projects to transfer freight from trucks to rail cars or vice versa; 
* Authorized uses include international bridges or tunnels, cranes, 
loading docks, and computer-controlled equipment. 

Type: Gulf Opportunity Zone[E]; 
Year authorized: 2005; 
Volume authorized (dollars in millions): $14,800; 
Purpose and examples of authorized uses: For assistance to support 
areas affected by hurricanes Katrina, Wilma and Rita; 
* Authorized uses include office buildings, hotels, retail stores, 
warehouses, manufacturing, medical, and other commercial facilities. 

Sources: GAO analysis and Congressional Research Service. 

[A] Pub. L. No. 107-16 (2001). 

[B] Pub. L. No. 107-147 (2002) and Pub. L. No. 108-311 (2004). 

[C] Pub. L. No. 108-357 (2004). 

[D] Pub. L. No. 109-59 (2005). 

[E] Pub. L. No. 109-135 (2005). 

[End of table] 

Governmental Bonds Can Be Used to Finance Certain Projects That 
Generally Cannot Be Financed with Qualified Private Activity Bonds: 

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[Footnote 21] 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.[Footnote 22] 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.[Footnote 23] 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[Footnote 24] 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.[Footnote 25] 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),[Footnote 26] 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. 

Table 6: New Hotels Financed with Tax-Exempt Governmental Bonds Issued 
from 2002 through 2006: 

Year bond issued: 2002; 
Hotel location: Bay City, MI; 
Issuer type: City-created nonprofit corporation; 
Amount[A]: $15,455,000; 
Bond type[B]: Revenue; 
General description[C]: A 150-room, three- diamond Doubletree hotel and 
conference center in downtown area. 

Year bond issued: 2002; 
Hotel location: Omaha, NE; 
Issuer type: City- created nonprofit corporation; 
Amount[A]: $102,970,000; 
Bond type[B]: Revenue; 
General description[C]: A 450-room, four-diamond Hilton hotel adjacent 
to Omaha convention center and arena. 

Year bond issued: 2002; 
Hotel location: Louisville, KY; 
Issuer type: Local government; 
Amount[A]: $38,900,000; 
Bond type[B]: General obligation; 
General description[C]: A 616-room, four-diamond Marriott hotel next to 
convention center in downtown area. 

Year bond issued: 2002; 
Hotel location: Washington, DC; 
Issuer type: Local government; 
Amount[A]: $45,995,387; 
Bond type[B]: Tax increment financing; 
General description[C]: A 400-room, four-diamond Mandarin hotel and 
conference center. 

Year bond issued: 2002; 
Hotel location: Hollywood, FL[D]; 
Issuer type: Local authority; 
Amount[A]: $469,000,000; 
Bond type[B]: Revenue; 
General description[C]: A 250-room, four-diamond Hard Rock hotel and 
resort facility in Hollywood, FL, attached to a casino on the Seminole 
Indian Reservation. 

Year bond issued: 2002; 
Hotel location: Tampa, FL[D]; 
Issuer type: Local authority; 
Amount[A]: $469,000,000; 
Bond type[B]: Revenue; 
General description[C]: A 250-room, four-diamond Hard Rock hotel and 
resort facility in Tampa, FL, attached to a casino on the Seminole 
Indian Reservation. 

Year bond issued: 2003; 
Hotel location: Vancouver, WA; 
Issuer type: Local authority; 
Amount[A]: $65,855,000; 
Bond type[B]: Revenue; 
General description[C]: A 226-room, three-diamond Hilton hotel and 
conference center in downtown area. 

Year bond issued: 2003; 
Hotel location: Denver, CO; 
Issuer type: City- created nonprofit corporation; 
Amount[A]: $354,825,000; 
Bond type[B]: Revenue; 
General description[C]: A 1,100-room, four-diamond Hyatt Regency hotel 
next to convention center. 

Year bond issued: 2004; 
Hotel location: Montebello, CA[E]; 
Issuer type: Local authority; 
Amount[A]: $17,060,000; 
Bond type[B]: Revenue; 
General description[C]: A 121-room, three-diamond Hilton Garden Inn 
hotel next to country club and banquet facility. 

Year bond issued: 2004; 
Hotel location: Schaumburg, IL; 
Issuer type: Local government; 
Amount[A]: $239,320,000; 
Bond type[B]: General obligation; 
General description[C]: A 500-room, four-diamond Renaissance hotel next 
to convention center. 

Year bond issued: 2005; 
Hotel location: Raleigh, NC; 
Issuer type: Local government; 
Amount[A]: $216,940,000; 
Bond type[B]: Certificates of participation; 
General description[C]: A 400-room, three-diamond Marriott hotel 
adjacent to convention center. 

Year bond issued: 2005; 
Hotel location: New Brunswick, NJ; 
Issuer type: Local authority; 
Amount[A]: $30,000,000; 
Bond type[B]: Revenue; 
General description[C]: A 248-room, three-diamond Heldrich hotel, part 
of a mixed-use facility near Rutgers University. 

Year bond issued: 2005; 
Hotel location: Shreveport, LA; 
Issuer type: Local authority; 
Amount[A]: $40,000,000; 
Bond type[B]: Revenue; 
General description[C]: A 313-room Hilton hotel next to convention 
center complex. 

Year bond issued: 2005; 
Hotel location: San Antonio, TX; 
Issuer type: City-created nonprofit corporation; 
Amount[A]: $129,930,000; 
Bond type[B]: Revenue; 
General description[C]: A 1,000-room Hyatt hotel next to convention 
center. 

Year bond issued: 2005; 
Hotel location: Erie, PA; 
Issuer type: Local authority; 
Amount[A]: $45,390,000; 
Bond type[B]: Revenue; 
General description[C]: A 200-room waterfront Sheraton hotel next to 
convention center. 

Year bond issued: 2005; 
Hotel location: Phoenix, AZ; 
Issuer type: City- created nonprofit corporation; 
Amount[A]: $156,710,000; 
Bond type[B]: Revenue; 
General description[C]: A 1,000-room Sheraton hotel located downtown 
next to convention center. 

Year bond issued: 2005; 
Hotel location: Lombard, IL; 
Issuer type: City- created nonprofit corporation; 
Amount[A]: $161,250,000; 
Bond type[B]: Revenue; 
General description[C]: A 500-room conference center Westin hotel in 
the Chicago suburbs. 

Year bond issued: 2006; 
Hotel location: Baltimore, MD; 
Issuer type: Local government; 
Amount[A]: $300,940,000; 
Bond type[B]: Revenue; 
General description[C]: A 757-room Hilton hotel adjacent to convention 
center located downtown. 

Source: GAO analysis of financial reports of municipalities and 
documents from Orrick, Herrington, and Sutcliffe LLP; HVS 
International; Akin Gump Strauss Hauer & Feld LLP; and Piper Jaffray 
and official statements from MSRB. 

[A] The amount of bond proceeds for each bond is not necessarily equal 
to the total cost of the project. Some hotel financings have generated 
funds from multiple sources. 

[B] Bonds received investment grade rankings from bond rating services. 

[C] The number of diamonds is the AAA rating for the quality of the 
hotel. Not all hotels we identified have received AAA ratings. 

[D] The Hard Rock Hotel Projects in Hollywood and Tampa, Florida, did 
not provide separate financing breakout per location. In addition, the 
number of hotel rooms financed was 250 of a total of 750 rooms at the 
locations. 

[E] The bond issued in 2004 was a partial refunding for a bond 
previously issued in 2001 for construction of the hotel. 

[End of table] 

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. 

Table 7: Municipal Golf Courses Opened in 2005 and Financed with Tax- 
Exempt Governmental Bonds: 

Year bond issued: 2003; 
Golf course location: Pleasanton, CA; 
Issuer type: City-created nonprofit corporation; 
Amount[A]: $28,425,000; 
Bond type[B]: Certificates of participation; 
General description: An 18-hole Callippe Preserve Golf Course rated as 
one of the top 10 in California and one of the best new public courses 
in 2006, and recognized for environmental excellence by the Audubon 
Cooperative Sanctuary System (green fees range between $36 and $52). 

Year bond issued: 2003; 
Golf course location: Lorton, VA; 
Issuer type: Local authority; 
Amount[A]: $15,530,000; 
Bond type[B]: Revenue; 
General description: An 18-hole Laurel Hill Golf Club located on the 
grounds of the former Lorton Correctional Facility (green fees range 
between $74 and $89). 

Year bond issued: 2003; 
Golf course location: Fargo, ND; 
Issuer type: Local government; 
Amount[A]: $3,065,000; 
Bond type[B]: Certificates of participation; 
General description: A 9-hole Osgood Golf Course with 3-hole 
developmental facility (green fees range between $13.50 and $15). 

Year bond issued: 2002; 
Golf course location: La Quinta, CA; 
Issuer type: Local authority; 
Amount[A]: $103,760,000[C]; 
Bond type[B]: Tax increment financing; 
General description: An 18-hole Arnold Palmer Classic Silver Rock 
Resort golf course (green fees range between $145 and $160). 

Year bond issued: 2002; 
Golf course location: Patterson, LA; 
Issuer type: Local authority; 
Amount[A]: $3,000,000; 
Bond type[B]: General obligation; 
General description: An 18-hole Atchafalaya at Idlewild Golf Course 
rated as one of the top 10 in Louisiana and rated as one of the best 
new public courses in 2006 (green fees range between $55 and $65). 

Year bond issued: 2003; 
Golf course location: Norfolk, VA; 
Issuer type: Local government; 
Amount[A]: $9,050,000; 
Bond type[B]: General obligation; 
General description: A 9-hole executive Lamberts Point Golf Course 
constructed on a former landfill. Winner of the Affinity Award for best 
environmental project at the 2006 Golf Course News Builder Excellence 
Awards (green fees range between $18 and $20). 

Source: GAO analysis of National Golf Foundation data and official 
statements from MSRB. 

[A] The amount of bond proceeds for each bond is not necessarily equal 
to the total cost of the project. Some golf course financings are part 
of a larger project, and some are constructed using funds from multiple 
sources. 

[B] All bonds received investment grade rankings from bond rating 
services. 

[C] Amount denotes a total of three bonds issued to fund a project that 
includes the golf course, and the information we reviewed did not 
specifically disclose the amount of financing dedicated only to the 
golf course. 

[End of table] 

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.[Footnote 27] 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. 

Borrowing Costs Vary Depending on Bond Characteristics, and Some Bonds 
Appear to Exceed the Statutory Limit on Issuance Costs Paid from Bond 
Proceeds: 

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. 

Although Study Results Varied, Most Studies Generally Found That 
Competitive Bond Sales Have Lower Interest Costs after Controlling for 
Other Factors: 

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.[Footnote 28] 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[Footnote 29] 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.[Footnote 
30] 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.[Footnote 31] 

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. 

Some Qualified Private Activity Bond Issuers Reported Issuance Costs 
Exceeding Legal Limits, and Issuance Costs Vary Depending on Bond 
Characteristics: 

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.[Footnote 32] 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. 

Table 8: 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: 

All; 
2002: 1.81; 
2003: 1.77; 
2004: 1.69; 
2005: 1.64. 

Purpose: Airport; 
2002: 1.17; 
2003: 1.36; 
2004: 1.30; 
2005: 1.13. 

Purpose: Docks; 
2002: 1.17; 
2003: 1.38; 
2004: 1.70; 
2005: 0.90. 

Purpose: Water; 
2002: 1.64; 
2003: 2.00; 
2004: 1.89; 
2005: 1.89. 

Purpose: Sewage; 
2002: 1.99; 
2003: 2.00; 
2004: 2.00; 
2005: 1.99. 

Purpose: Solid waste; 
2002: 2.00; 
2003: 2.00; 
2004: 2.00; 
2005: 1.81. 

Purpose: Rental; 
2002: 1.89; 
2003: 1.76; 
2004: 1.75; 
2005: 1.61. 

Purpose: Mortgage revenue[A]; 
2002: 1.00; 
2003: 1.01; 
2004: 1.06; 
2005: 0.71. 

Purpose: Small issue; 
2002: 2.00; 
2003: 2.00; 
2004: 2.00; 
2005: 2.00. 

Purpose: Student loan; 
2002: 0.90; 
2003: 0.61; 
2004: 0.60; 
2005: 0.63. 

Purpose: Hospital; 
2002: 1.28; 
2003: 1.26; 
2004: 1.15; 
2005: 1.08. 

Purpose: 501(c )(3); 
2002: 1.89; 
2003: 1.87; 
2004: 1.81; 
2005: 1.85. 

Purpose: Other; 
2002: 1.49; 
2003: 1.86; 
2004: 1.48; 
2005: 1.44. 

Size: Under $1 million; 
2002: 2.00; 
2003: 2.00; 
2004: 2.00; 
2005: 1.94. 

Size: $1 million - under $10 million; 
2002: 2.00; 
2003: 2.00; 
2004: 1.96; 
2005: 1.99. 

Size: $10 million - under $50 million; 
2002: 1.66; 
2003: 1.63; 
2004: 1.63; 
2005: 1.55. 

Size: $50 million - under $100 million; 
2002: 1.16; 
2003: 1.16; 
2004: 1.13; 
2005: 1.08. 

Size: $100 million and over; 
2002: 0.90; 
2003: 0.87; 
2004: 0.83; 
2005: 0.72. 

Source: GAO analysis of IRS data. 

Notes: In cases where the median issuance cost percentage is equal to 
2, it means that at least half the bonds were at the statutory limit. 
It does not mean that half of the bonds exceeded the 2 percent limit-- 
multiple bonds could be at the limit without exceeding it. 

The size of the issue is measured in 2007 dollars. The percentages in 
the table are calculated from forms where issuance costs paid from bond 
proceeds were reported. Forms where issuers reported zero issuance 
costs paid from bond proceeds or left the line blank are excluded from 
these median calculations. 

[A] Mortgage revenue and veterans' mortgage revenue bonds are combined 
into one category. These bonds are subject to 3.5 percent limits for 
issuance costs paid from bond proceeds. 

[End of table]

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. 

Table 9: Median Issuance Costs as a Percentage of Bond Proceeds for 
Long-term Governmental Bonds Issued from 2002 to 2005: 

All types; 
2002: 1.62; 
2003: 1.67; 
2004: 1.63; 
2005: 1.51. 

Purpose: Education; 
2002: 1.36; 
2003: 1.45; 
2004: 1.36; 
2005: 1.27. 

Purpose: Health and hospital; 
2002: 1.57; 
2003: 1.41; 
2004: 1.36; 
2005: 1.19. 

Purpose: Transportation; 
2002: 1.61; 
2003: 1.60; 
2004: 1.47; 
2005: 1.39. 

Purpose: Public safety; 
2002: 1.53; 
2003: 1.46; 
2004: 1.53; 
2005: 1.44. 

Purpose: Environment; 
2002: 1.54; 
2003: 1.62; 
2004: 1.50; 
2005: 1.50. 

Purpose: Housing; 
2002: 1.81; 
2003: 1.93; 
2004: 2.01; 
2005: 1.98. 

Purpose: Utilities; 
2002: 1.82; 
2003: 1.89; 
2004: 1.76; 
2005: 1.71. 

Purpose: Other; 
2002: 1.76; 
2003: 1.75; 
2004: 1.83; 
2005: 1.72. 

Size of issue: Under $1 million; 
2002: 2.78; 
2003: 2.59; 
2004: 2.70; 
2005: 2.77. 

Size of issue: $1 million - under $10 million; 
2002: 1.83; 
2003: 1.86; 
2004: 1.80; 
2005: 1.73. 

Size of issue: $10 million - under $50 million; 
2002: 1.16; 
2003: 1.12; 
2004: 1.19; 
2005: 1.15. 

Size of issue: $50 million - under $100 million; 
2002: 0.80; 
2003: 0.83; 
2004: 0.82; 
2005: 0.82. 

Size of issue: $100 million and over; 
2002: 0.61; 
2003: 0.62; 
2004: 0.60; 
2005: 0.58. 

Source: GAO analysis of IRS data. 

Note: The size of the issue is measured in 2007 dollars. The 
percentages in the table are calculated from forms where issuance costs 
paid from bond proceeds were reported. Forms where issuers reported 
zero issuance costs paid from bond proceeds or left the line blank are 
excluded from these median calculations. 

[End of table] 

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. 

Conclusions: 

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. 

Matter for Congressional Consideration: 

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. 

Recommendations for Executive Action: 

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. 

Agency Comments: 

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 [hyperlink, http://www.gao.gov]. 

If you or your staff members have any questions about this report, 
please contact me at (202) 512-9110 or [email protected]. 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. 

Signed by: 

Michael Brostek: 

Director, Tax Issues Strategic Issues: 

[End of section] 

Appendix I: Objectives, Scope, and Methodology: 

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;[Footnote 33] 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. 

[End of section] 

Appendix II: Sources of Information on the Facilities and Activities 
Financed Using Tax-Exempt Bonds: 

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.[Footnote 34] 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.[Footnote 
35] 

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.[Footnote 36] 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. 

[End of section] 

Appendix III: Summary of Thomson Financial 2007 Bond Buyer Yearbook 
Data, Use of Proceeds, 2002-2006 Combined: 

Table 10: 

Dollars in thousands (constant 2007 dollars). 

[See PDF for image] 

Source: GAO analysis of Thomson Financial data in the 2007 Bond Buyer 
Yearbook. 

[End of table] 

[End of section] 

Appendix IV: Amount and Number of New Money, Long-term Governmental 
Bonds Issued by IRS SOI Purpose Categories, 2001-2005 Combined: 

Table 11: 

Dollars in millions (constant 2007 dollars). 

Education; 
Total amount: $266,513; 
Percentage of total amount: 32.7; 
Total issues: 23,202; 
Percentage of total issues: 30.4; 
Average size: $11.5. 

Other; 
Total amount: 263,796; 
Percentage of total amount: 32.3; 
Total issues: 22,342; 
Percentage of total issues: 29.3; 
Average size: 11.8. 

Transportation; 
Total amount: 100,671; 
Percentage of total amount: 12.3; 
Total issues: 4,887; 
Percentage of total issues: 6.4; 
Average size: 20.6. 

Utilities; 
Total amount: 91,235; 
Percentage of total amount: 11.2; 
Total issues: 7,742; 
Percentage of total issues: 10.1; 
Average size: 11.8. 

Environment; 
Total amount: 47,736; 
Percentage of total amount: 5.8; 
Total issues: 5,470; 
Percentage of total issues: 7.2; 
Average size: 8.7. 

Health and hospital; 
Total amount: 18,363; 
Percentage of total amount: 2.3; 
Total issues: 1,832; 
Percentage of total issues: 2.4; 
Average size: 10.0. 

Public safety; 
Total amount: 21,200; 
Percentage of total amount: 2.6; 
Total issues: 10,203; 
Percentage of total issues: 13.4; 
Average size: 2.1. 

Housing; 
Total amount: 6,583; 
Percentage of total amount: 0.8; 
Total issues: 643; 
Percentage of total issues: 0.8; 
Average size: 10.2. 

Total; 
Total amount: $816,099; 
Percentage of total amount: 100.0; 
Total issues: 76,321; 
Percentage of total issues: 100.0; 
Average size: $10.7. 

Source: GAO analysis of IRS's Statistics of Income Division data. 

[End of table] 

[End of section] 

Appendix V: List of Studies Reviewed on Interest Costs in Competitive 
and Negotiated Sales: 

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. 

[End of section] 

Appendix VI: Comments from the Internal Revenue Service: 

Department Of The Treasury: 
Internal Revenue Service: 
Washington, D.C. 20224: 

February 7, 2008: 

Mr. Michael Brostek: 
Director, Tax Issues: 
Strategic Issues: 
United States Government Accountability Office: 
Washington, D.C. 20548: 

Dear Mr. Brostek: 

We appreciate the opportunity to review your draft report concerning 
tax-exempt bonds and the issue of compliance with limitations on 
issuance costs. The report fairly represents the growth, character and 
size of the tax-exempt bond market, and its impact on federal revenues. 
Although the choice made by the issuer of tax-exempt bonds between a 
competitive or a negotiated sale method does not present issues under 
the federal tax laws, it is clear that the choice of sales method can 
significantly affect the cost of issuing the bonds. 

The Internal Revenue Service (IRS) is committed to ensuring compliance 
with the federal tax law applicable to tax-exempt bonds. Our Tax Exempt 
Bond function, within the Tax Exempt and Government Entities division, 
operates enforcement, educational, and voluntary compliance programs to 
ensure compliance with the applicable law and to assist the issuers of 
tax-exempt bonds in understanding their tax responsibilities. 

These programs include an audit planning process that takes into 
account non- compliance with the federal tax law requirements related 
to issuance costs. They also include a program involving both general 
examination activity and compliance checks. For example, we recently 
sent charities a compliance questionnaire inquiring whether they were 
properly maintaining documentation reflecting the allocation of bond-
financed proceeds to bond issuance costs. We also have developed and 
distributed two compliance guides that educate issuers and borrowers 
regarding issuance cost requirements (Publication 4077, Tax-Exempt 
Bonds for 501(c)(3) Charitable Organizations, and Publication 4078, Tax-
Exempt Private Activity Bonds Compliance Guide). 

Thank you for your interest in this area. If you have questions 
concerning this response, please contact Steven T. Miller, 
Commissioner, Tax Exempt and Government Entities, at (202) 283-2500. 

Sincerely,

Signed by: 

Linda E. Stiff: 
Acting Commissioner of Internal Revenue: 

Enclosure: 

Recommendation One: 

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 should clarify its 
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. 

Response: 

The IRS agrees with this recommendation. We will clarify the 
instructions for IRS Form 8038, Information Return for Tax Exempt 
Private Activity Bond issues, to require that bond issuers clearly 
indicate when no bond proceeds were used to pay issuance costs. 

Recommendation Two: 

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 develop cost-
effective methods to address apparent noncompliance with the statutory 
limits on using bond proceeds for issuance costs in such a manner that 
would not preclude IRS from examining the bonds for more substantive 
compliance issues in the future. 

Response: 

The IRS agrees with this recommendation. For the FY 2009 Tax Exempt 
Bonds Work Plan, we will develop a compliance project that will address 
apparent non-compliance with the issuance cost requirements but will 
not preclude us from examining the bonds for other issues at a later 
date. This compliance project will most likely incorporate "soft-
contact" letters of the sort we have used successfully in other areas 
in the past.

[End of section] 

Appendix VII: Comments from the Department of the Treasury: 

Department Of The Treasury: 
Washington, D.C.: 

Assistant Secretary: 

February 8, 2008: 

Mr. Michael Brostek: 
Director, Tax Issues, Strategic Issues Team: 
United States Government Accountability Office: 
Washington, DC 20548 

Dear Mr. Brostek: 

Thank you for providing the Treasury Department with an opportunity to 
review and comment on your draft report, entitled "Tax Policy: Tax-
exempt Status of Certain Bonds Merits Reconsideration and IRS Should 
Address Apparent Noncompliance with Issuance Cost Limitations (GAO-08-
364)." John Cross, Associate Tax Legislative Counsel, previously 
provided technical comments to your staff on the draft report. 

I want to take the opportunity in this letter to underscore one main 
point referenced in your report that I made in recent testimony before 
the House Committee on Oversight and Government Reform's Domestic 
Policy Subcommittee on October 10, 2007. A copy of my testimony is 
attached. In particular, from a tax policy perspective, the ability to 
use tax-exempt governmental bonds to finance stadiums and other 
projects with significant private business use when the bonds are 
subsidized with State or local governmental payments, such as generally 
applicable taxes, arguably represents a structural weakness in the 
targeting of the Federal tax expenditure for tax-exempt bonds under the 
existing legal framework. That possible structural weakness exists 
because current law generally allows characterization of bonds as tax-
exempt governmental bonds unless more than 10 percent of the bond 
proceeds are both used for private business use and are payable from 
private payments. Thus, governmental bonds, which are not subject to 
the state volume cap and other limitations of qualified private 
activity bonds, may finance a project with significant private business 
use so long as private payments are limited. 

The tax policy justification for the existing framework is that it 
gives State and local governments appropriate flexibility to use 
governmental bonds to finance a range of projects in public-private 
partnerships with significant private business use when the projects 
are sufficiently important to warrant subsidizing them with State and 
local governmental funds. Here, political constraints against 
commitment of governmental funds ordinarily serve as a sufficient check 
against excess financing of such projects. This justification may be 
debatable in certain cases, such as in the case of certain stadium 
financings. My above-noted recent testimony outlined several options 
that could be considered to address the possible structural weakness in 
the targeting of the tax-exempt bond subsidy relative to tax-exempt 
governmental bonds for stadium financings. 

At this time, the Administration does not take a position on any 
specific policy option with respect to possible legislative changes to 
the tax-exempt bond provisions relative to stadium financings or other 
governmental bond financings involving significant private business 
use. This topic raises difficult questions that require balancing the 
interests of State and local governments in having flexibility to 
finance projects they deem sufficiently important to subsidize with 
governmental funds and the Federal interest in ensuring effective 
targeting of the Federal tax expenditure for tax-exempt bonds. The 
Administration recognizes that review of this important Federal tax 
expenditure may be appropriate in considering ways more generally to 
simplify this area and to ensure effective targeting of this subsidy 
for public infrastructure. 

Thank you again for the opportunity to comment on your draft report. 

Sincerely, 

Signed by: 

Eric Solomon: 
Assistant Secretary (Tax Policy): 

Attachment: 

U.S. Treasury Department Office Of Public Affairs: 
Embargoed Until 2 P.M. EDT October 10, 2007: 

Contact Andrew DeSouza (202) 622-2960: 

Testimony Of Treasury Assistant Secretary For Tax Policy Eric Solomon 
Before The House Oversight Subcommittee On Domestic Policy
On Tax Exempt Bond Financing: 

Washington, DCï¿½ Chairman Kucinich, Ranking Member Issa, and 
distinguished Members of the Subcommittee: 

I appreciate the opportunity to appear before you today to discuss 
certain Federal tax issues regarding the use of tax-exempt bond 
financing The Administration recognizes that tax-exempt bond financing 
plays an important role as a source of lower-cost financing for State 
and local governments As a nation, we are focusing on the critical need 
to support capital investment in public infrastructure The Federal 
government provides an important Federal subsidy for tax-exempt bond 
financing through the Federal income tax exemption for interest paid on 
State or local bonds under Section 103 of the Internal Revenue Code 
(the "Code"), which enables State and local governments to finance 
public infrastructure projects and other public-purpose activities at 
lower costs 

The cost to the Federal government of tax-exempt bonds is significant 
and growing. Unlike direct appropriations, however, the cost of this 
Federal subsidy receives less attention because it is not tracked 
annually through the appropriations process. In addition, it also is 
important to recognize that the, Federal subsidy for tax-exempt bonds 
is less efficient than that for direct appropriations because of the 
inefficiency of pricing in the tax-exempt bond market. In this regard, 
since some bond purchasers have higher marginal, tax rates than those 
of the bond purchasers needed to clear the market, tax-exempt bonds 
cost the Federal government more in foregone revenue than they deliver 
to State and local governments in reduced interest expenses The steady 
growth in the volume of tax-exempt bonds reflects the importance of 
this incentive in addressing public infrastructure and other needs. At 
the same time, it is appropriate to review the tax-exempt bond program 
to ensure that it is properly targeted and that the Federal subsidy is 
justified in light of the lost Federal revenue and other costs imposed 

My testimony covers four main issues First, my testimony provides an 
overview of the legal framework for tax-exempt bonds. Second, it 
discusses the use of tax-exempt bonds to finance public infrastructure 
projects and stadium projects under the existing legal framework. 
Third, my testimony comments on certain tax policy and regulatory 
authority considerations Finally, it provides certain statistical data 
on tax-exempt bonds for background. 

Overview of Legal Framework for Tax-Exempt Bonds: 

A. Introduction: 

In general, there are two basic types of tax-exempt bonds: Governmental 
Bonds and Private Activity Bonds Bonds generally are classified as 
Governmental Bonds if the proceeds are used for State or local 
governmental use or the bonds are repaid from State or local 
governmental sources of funds Bonds generally are classified as Private 
Activity Bonds if they meet the definition of a Private Activity Bond 
under the Code, based on specified levels of private business 
involvement In general, the interest on Private Activity Bonds is 
taxable unless the bonds meet qualification requirements for financing 
certain projects and programs specifically identified in the Code 

B. Governmental Bonds: 

State and local governments issue Governmental Bonds to finance a wide 
range of public infrastructure projects The Code does not provide a 
specific definition of "Governmental Bonds " Instead, bonds are 
generally treated as Governmental Bonds if they avoid classification as 
Private Activity Bonds, as defined in the Code, by limiting private 
business use or private business sources of payment or security, and 
also by limiting private loans_ Here, it is important to appreciate 
that bonds can qualify as Governmental Bonds if they are either used 
predominantly for State or local governmental use or payable 
predominantly from State or local governmental sources of funds, such 
as generally applicable taxes. Stated differently, under the current 
legal framework, Governmental Bonds can be used to finance a project 
that has significant private business use or that are payable from 
significant private business sources of payment, but not both. 

In order for the interest on Governmental Bonds to be excluded from the 
bond holder's gross income for Federal tax purposes, a number of 
general eligibility requirements must be met Requirements generally 
applicable to all tax-exempt bonds include arbitrage restrictions, bond 
registration and information reporting requirements, a general 
prohibition on Federal guarantees, advance refunding limitations, 
restrictions on unduly long spending periods, and pooled financing bond 
limitations. 

C. Private Activity Bonds: 

1. In General: 

Under section 141 of the Code, bonds are classified as Private Activity 
Bonds if more than 10 percent of the bond proceeds are both: 

(I) used for private business use (the "private business use 
limitation"); and: 

(2) payable or secured from payments derived from property used for 
private business use (the "private payments limitation"). 

Bonds also are treated as Private Activity Bonds if more than the 
lesser of $5 million or 5 percent of the bond proceeds are used to 
finance private loans, including business and consumer loans. The 
permitted private business thresholds are reduced from 10 percent to 5 
percent for certain private business use that is "unrelated" to 
governmental use or that is "disproportionate" to governmental use 
financed in a bond issue. These tests are intended to identify 
arrangements that have the potential to transfer the benefits of tax-
exempt financing to nongovernmental persons. 

2. Projects and Programs Eligible for Tax-Exempt Private Activity Bond 
Financing: 

Private Activity Bonds may be issued on a tax-exempt basis only if they 
meet the requirements for qualified Private Activity Bonds, including 
targeting requirements that limit such financing to specifically 
defined facilities and programs. Under present law, qualified Private 
Activity Bonds may be used to finance eligible projects and activities, 
including the following: (1) airports, (2) docks and wharves, (3) mass 
commuting facilities, (4) facilities for the furnishing of water, (5) 
sewage facilities, (6) solid waste disposal facilities, (7) qualified 
low-income residential rental multifamily housing projects, (8) 
facilities for the local furnishing of electric energy or gas, (9) 
local district heating or cooling facilities, (10) qualified hazardous 
waste facilities, (11) high-speed intercity rail facilities, (12) 
environmental enhancements of hydroelectric generating facilities, (13) 
qualified public educational facilities, (14) qualified green buildings 
and sustainable design projects, (15) qualified highway or surface 
freight transfer facilities, (16) qualified mortgage bonds or qualified 
veterans mortgage bonds for certain single-family housing facilities, 
(17) qualified small issue bonds for certain manufacturing facilities, 
(18) qualified student loan bonds, (19) qualified redevelopment bonds, 
(20) qualified 501(c)(3) bonds for the exempt charitable and 
educational activities of Section 501(c)(3) nonprofit organizations, 
(21) certain projects in the New York Liberty Zone, and (22) certain 
projects in the Gulf Opportunity Zone, 

Qualified Private Activity Bonds are subject to the same general rules 
applicable to Governmental Bonds, including the arbitrage investment 
limitations, registration and information reporting requirements, the 
Federal guarantee prohibition, restrictions on unduly long spending 
periods, and pooled financing bond limitations. In addition, most 
qualified Private Activity Bonds are also subject to a number of 
additional rules and limitations. One notable additional rule limits 
the annual amount of these bonds that can be issued in each state (the 
"bond volume cap" limitation) under section 146 of the Code Another 
notable additional rule prohibits advance refundings for most Private 
Activity Bonds under section 149(d)(2) (other than for qualified 
501(0(3) bonds). Further, unlike the tax exemption for interest on 
Governmental Bonds, the tax exemption for interest on most qualified 
Private Activity Bonds is generally heated as a preference item under 
the alternative minimum tax ("AMT"), meaning that the benefit of an 
exclusion from income for interest paid on these bonds can be taken 
away by the AMT 

The current legal framework for Private Activity Bonds was enacted as 
part of the Tax Reform Act of 1986. The basic purpose of the Private 
Activity Bond limitations was to limit the ability of State and local 
governments to act as conduit issuers in financing projects for the use 
and benefit of private businesses and other private borrowers except in 
prescribed, circumstances. Prior to the Tax Reform Act of 1986, the 
predecessor legal framework had more liberal rules regarding the use of 
tax-exempt bonds for the benefit of private businesses (then called 
"industrial development bonds"), including a more liberal 25-percent 
limitation on permitted private business use and private payments (as 
compared to the present 10-percent private business and private payment 
limitations), and it did not include bond volume cap limitations on 
private activity bonds.  

Prior to the Tax Reform Act of 1986, stadiums were on the list of 
eligible facilities that could be financed with tax-exempt industrial 
development bonds. Stadiums were removed from the list of facilities 
eligible for tax-exempt Private Activity Bond financing in 1986, but 
stadiums remain eligible for Governmental Bond financing 
notwithstanding the substantial private business use of these 
facilities if they meet the requirements for Governmental Bonds. Under 
current law, these requirements can generally be met when State and 
local governments subsidize the projects with governmental revenues or 
generally applicable taxes.

3 The Private Business Use Limitation: 

In general, private business use of mole than 10 pet cent of the 
proceeds of a bond issue violates the private business use limitation 
Private business use generally arises when a private business has legal 
rights to use bond-financed property Thus, private business use arises 
from ownership, leasing, certain management arrangements, certain 
research arrangements, certain utility output contract arrangements (e 
g, certain electricity purchase contracts under which private utilities 
receive benefits and burdens of ownership of governmental electric 
generation facilities), and certain other arrangements that convey 
special legal entitlements to bond-financed property. 

Various exceptions and safe harbors apply with respect to the private 
business use limitation, which allow limited private business use of 
property financed by Private Activity Bonds in prescribed 
circumstances. Exceptions to the private business use limitation 
include exceptions for use in the capacity as the general public, such 
as use by private businesses of public roads ("general public use"), 
certain very short-term use arrangements, certain de minimis incidental 
uses, certain uses as agents of State and local governments, and 
certain uses incidental to financing arrangements (e g , certain 
bondholder trustee arrangements). In addition, safe harbors against 
private business use apply to certain private management and research 
arrangements Thus, for management contracts, in Rev. Proc. 97-13, 1997-
1 C.B 632, the IRS provided safe harbors that allow private businesses 
to enter into certain qualified management contracts with prescribed 
terms and compensation arrangements without giving rise to private 
business use to accommodate public-private partnerships for private 
management of public facilities. For research contracts, in Rev Proc. 
2007-47, 2007-29 I R B 108 (July 16, 2007), the IRS provided updated 
safe harbors that allow certain research contract arrangements with 
private businesses at tax-exempt bond financed research facilities 
without giving rise to private business use (e g , certain Federally 
sponsored research) 

4 The Private Payments Limitation: 

In general, private payments aggregating more than 10 percent of the 
debt service on a bond issue (on a present value basis) violates the 
private payments limitation. The private payments limitation considers 
direct and indirect payments with respect to property used by private 
businesses that represent sources of payment or security for the debt 
service on a bond issue- For example, if a private business pays rent 
for its use of the bond-financed property, the rent payments give rise 
to private payments. Various limited exceptions apply for purposes of 
the private payments limitation. 

5 The Generally Applicable Taxes Exception to the Private Payments 
Limitation: 

A notable exception to the private payments limitation applies to 
payments from generally applicable taxes In the legislative history to 
the Tax Reform Act of 1986, Congress indicated its intent to exclude 
revenues from generally applicable taxes from treatment as private 
payments for purposes of the private payments limitation. The 
Conference Report to the Tax Reform Act of 1986 included the following 
statement: 

Revenues flue; generally applicable taxes are not treated as payments 
for purposes of the security interest lest; however, special charges 
imposed on persons satisfying the use test (but not on members of the 
public generally) are so treated if the charges are in substance fees 
paid for the use of bond proceeds.[Footnote 37] 

Consistent with this legislative history, Treasury Regulations define a 
generally applicable tax as an enforced contribution imposed under the 
taxing power that is imposed and collected for the purpose of raising 
revenue to be used for a governmental purpose A generally applicable 
tax must have a uniform tax rate that is applied equally to everyone in 
the same class subject to the tax and that has a generally applicable 
manner of determination and collection By contrast, a payment for a 
special privilege granted or service rendered is not considered a 
generally applicable tax Special assessments imposed on property owners 
who benefit from financed improvements are also not considered 
generally applicable taxes For example, a tax that is limited to the 
property or persons benefiting from an improvement is not considered a 
generally applicable tax Although taxes must be determined and 
collected in a generally applicable manner, the Treasury Regulations 
permit certain agreements to be made with respect to those taxes An 
agreement to reduce or limit the amount of taxes collected to further a 
bona fide governmental purpose is such a permissible agreement Thus, an 
agreement to abate taxes to encourage a property owner to rehabilitate 
property in a distressed area is a permissible agreement 

In addition, the Treasury Regulations treat certain "payments in lieu 
of taxes" and other tax equivalency payments ("PILOTs") as generally 
applicable taxes.[Footnote 38] Under the current Treasury Regulations, 
a PILOT is treated as a generally applicable tax if the payment is 
"commensurate with and not greater than the amounts imposed by a 
statute for a tax of general application." For instance, lithe payment 
is in lieu of property tax on the bond-financed facility, it may not be 
greater in any given year than what the actual property tax would be on 
the property. In addition, to avoid being a private payment, a PILOT 
must be designated for a public purpose and not be a special charge. 
Under this rule, a PILOT paid for the use of bond-financed property is 
treated as a special charge. 

In 2006, the Treasury Department and the Internal Revenue Service (IRS) 
published Proposed Regulations to modify the standards for the 
treatment of PILOTs to ensure a close relationship between eligible 
PILOT payments and generally applicable taxes Under the Proposed 
Regulations, a payment is commensurate with general taxes only if the 
amount of the payment represents a fixed percentage of, or a fixed 
adjustment to, the amount of generally applicable taxes that otherwise 
would apply to the property in each year if the property were subject 
to tax. For example, a payment is commensurate with generally 
applicable taxes if it is equal to the amount of generally applicable 
taxes in each year, less a fixed dollar amount or a fixed adjustment 
determined by reference to characteristics of the property, such as 
size or employment. The Proposed Regulations permit the level of fixed 
percentage or adjustment to change one time following completion of 
development of the property. The Proposed Regulations also provide that 
eligible PILOT payments must be based on the current assessed value of 
the property for property taxes for each year in which the PILOTs are 
paid, and the assessed value must be determined in the same manner and 
with the same frequency as property subject to generally _applicable 
taxes. A payment is not commensurate if it is based in any way on debt 
service with respect to an issue or is otherwise set at a fixed dollar 
amount that cannot vary with the assessed value of the property. The 
Treasury Department and the IRS are in the process of reviewing the 
public comments on the Proposed Regulations regarding the treatment of 
PILOTs. 

Governmental Bonds for Public Infrastructure Projects and Private 
Stadiums Under the Existing Legal Framework: 

A. Public Infrastructure Projects: 

For public infrastructure projects, qualification for Governmental Bond 
financing focuses on limiting private business use to not more than 10-
percent private business use under the first prong of the Private 
Activity Bond definition In general, Governmental Bonds are an 
important tool that State and local governments use to finance public 
infrastructure projects to carry out traditional governmental 
functions, such as providing public roads, bridges, courthouses, and 
schools Typically, State and local governments finance public 
infrastructure projects with Governmental Bonds based on predominant 
State or local governmental use of the projects and limited private 
business use within the permitted 10- percent private business use 
limitation for Governmental Bonds Often, State and local governments 
finance public infrastructure projects with Governmental Bonds based in 
part on reliance on the general public use exception to private 
business use Thus, for example, public roads may be financed with 
Governmental Bonds even if private businesses use them in the same way 
as individual members of the general public. 

The tax policy justification for a Federal subsidy for tax-exempt bonds 
is strongest in circumstances where State or local governments use 
Governmental Bonds to finance public infrastructure projects and other 
traditional governmental functions to carry out clear public purposes.  

B. Private Stadiums: 

For stadium projects that are acknowledged to exceed the 10-percent 
private business use limitation, qualification for Governmental Bond 
financing depends on limiting private payments to comply with the 10-
percent private payments under the second prong of the Private Activity 
Bond definition. Here, it is important to recognize that, under the 
existing legal framework, bonds are classified as Private Activity 
Bonds only if they exceed both the 10-percent private business use 
limitation and the 10-percent private payments limitation Thus, a State 
or local government may issue tax-exempt Governmental Bonds to finance 
a project that is 100-percent used for private business use, such as a 
stadium that a private professional sports team uses 100-percent for 
private business use, provided that the issuer does not receive private 
payments from the team or elsewhere that in the aggregate exceed the 10-
percent private payments limitation. Alternatively, a State or local 
government may issue tax-exempt Governmental Bonds to finance a stadium 
to be used for private business use if it subsidizes the repayment of 
the bonds with State or local governmental funds, such as generally 
applicable taxes. For example, a city could pledge revenues from a city-
wide sales tax, hotel tax, car tax, property tax, or other broadly 
based generally applicable tax to pay the debt service on Governmental 
Bonds to finance a stadium. 

The tax policy justification for a Federal subsidy for tax-exempt bonds 
is weaker when State or local governments use Governmental Bonds to 
finance activities beyond traditional governmental functions, such as 
the provision of stadiums, in which the public purpose is more 
attenuated and private businesses receive the benefits of the subsidy. 

Certain Tax Policy and Regulatory Authority Considerations Regarding 
Tax-Exempt Bond Financing: 

A. Targeting the Federal Subsidy for Tax-Exempt Bonds in General: 

In general, it is important to ensure that the Federal subsidy for tax-
exempt bonds is properly targeted and justified. A rationale for a 
Federal subsidy for tax-exempt bonds for State and local governmental 
projects and activities exists when they serve some broader public 
purpose. The tax policy justification for a Federal subsidy for State 
or local governmental projects and activities is clearest in the case 
of traditional public infrastructure projects to carry out traditional 
governmental functions where the public purpose is clear, particularly 
when the Federal subsidy is necessary to induce the projects to be 
undertaken. 

The tax policy justification for this Federal subsidy becomes weaker, 
however, in circumstances that are more attenuated from traditional 
State or local governmental activities, such as circumstances that lack 
a clear public purpose justification, provide significant benefits to 
private businesses, or involve projects that might have been undertaken 
in any event without the benefit of the Federal subsidy 

In addition, it also is important to recognize that, in general, the 
Federal subsidy for tax-exempt bonds is less efficient than that for 
direct appropriations because of the inefficiency of pricing in the tax-
exempt bond market. 1n this regard, since some bond purchasers have 
higher marginal tax rates than those of the bond purchasers needed to 
clear the market, tax-exempt bonds cost the Federal government more in 
foregone revenue than they deliver to State and local governments in 
reduced interest expenses. Thus, for example, if taxable bonds yield 10 
percent and equivalent tax-exempt bonds yield 7 5 percent, then 
investors whose marginal income tax rates exceed 25 percent will derive 
part of the Federal tax benefits, resulting in a subsidy to the State 
and local governmental issuer that is less than the reduction in 
Federal revenue 

At the same time, it is important to point out that tax-exempt bond 
financing has advantages over the use of appropriated funds by 
government agencies The involvement of private investors in the 
decision- making process for infrastructure investment can bring with 
it greater sensitivity to actual project costs and returns than in 
public sector investment decision-making In some cases, this enhanced 
sensitivity to project costs and returns may compensate for the 
somewhat lower tax efficiency of tax-exempt bonds and lead to a more 
efficient investment outcome overall In 2005, the Administration 
supported legislation that extended Private Activity Bond authority to 
qualified highway and surface freight transfer facilities in the 
highway and transit reauthorization based in part on these 
considerations 

B. Certain Tax Policy Considerations regarding Tax-Exempt Bond 
Financing of Stadiums: 

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, such as 
generally applicable taxes, arguably represents a structural weakness 
in the targeting of the Federal subsidy for tax-exempt bonds under the 
existing legal framework 

At the same time, the tax policy justification in favor of the existing 
two-pronged Private Activity Bond definition is that it gives State and 
local governments appropriate flexibility and discretion to finance 
with Governmental Bonds a range of projects in public-private 
partnerships with significant private business use when the projects 
are sufficiently important to warrant subsidizing them with State and 
local governmental funds, such as generally applicable taxes. Here, 
political constraints against commitment of such governmental funds 
ordinarily serve as a sufficient check against excess financing of such 
projects. An argument can be made, however, that this justification 
maybe debatable in certain cases, such as in the case of certain 
stadium financings. 

Several options could be considered to address the possible structural 
weakness in the targeting of the tax-exempt bond subsidy relative to 
tax-exempt Governmental Bonds for stadium financings. 

First, Congress could consider repealing the private payments prong of 
the Private Activity Bond definition for stadiums only This possible 
change would prevent use of lax-exempt Governmental Bonds to finance a 
stadium whenever the stadium has more than 10 percent private business 
use, as would typically be the case with any professional sports 
stadium This option would preserve the ability of State and local 
governments to use Governmental Bonds to finance stadiums used 
primarily for governmental use (e.g., stadiums for state universities 
or city-sponsored amateur sports) This option would ensure targeting of 
the Federal subsidy for tax-exempt Governmental Bonds to circumstances 
involving predominant State or local governmental use of stadiums In 
its Options to Improve Tax Compliance and Reform Tax Expenditures (JCS-
02-05, January 27, 2005), the Congressional Joint Committee on Taxation 
included this option to repeal the private payments limitation for 
stadium financings. 

Second, Congress could consider combining the first option described 
above with an amendment to Section 142 of the Code to allow the use of 
tax-exempt Private Activity Bonds to finance stadiums used primarily 
for private business use within the constraint of the annual State tax-
exempt Private Activity Bond volume caps. This measured option would 
constrain stadiums to compete with other eligible projects for 
allocations of this bond volume cap 

Third, Congress could consider banning tax-exempt bond financing for 
stadiums altogether. In 1996, Senator Patrick Moynihan sponsored a 
widely-publicized legislative proposal to this effect, which was never 
enacted into law 

Fourth, Congress could consider a broader option to repeal the private 
payments prong of the Private Activity Bond definition altogether This 
possible change would treat bonds as Private Activity Bonds whenever 
private business use exceeded the 10 percent private business use 
limitation This broader option would have an effect well beyond 
stadiums. This broader option would affect all types of projects with 
significant private business use that otherwise could be financed 
currently with Governmental Bonds based on payments from governmental 
funds In its 2005 tax compliance options mentioned above, the Joint 
Committee on Taxation also discussed this broader option to repeal the 
private payments limitation altogether. 

At this time, the Administration does not take a position on any 
specific policy option with respect to possible legislative changes to 
the tax-exempt bond provisions relative to stadium financings. This 
topic raises difficult questions which require balancing the interests 
of State and local governments in flexibility to finance projects they 
deem sufficiently important to subsidize with governmental funds and 
the Federal interest in ensuring effective targeting of the Federal 
subsidy for tax-exempt bonds. The Administration recognizes that review 
of this important Federal subsidy may be appropriate in considering 
ways more generally to simplify this area and to ensure effective 
targeting of this subsidy for public infrastructure in order to justify 
its cost 

C. Certain Regulatory Authority Considerations 

The question has been raised whether the Treasury Department has the 
regulatory authority to restrict the use of tax-exempt bond financing 
for professional sports stadiums. The existing legal framework allows 
the use of Governmental Bonds to finance professional sports stadiums 
when the bonds are payable from governmental sources of funds, such as 
generally applicable taxes. In the legislative history to the present 
tax-exempt bond provisions of the Code, Congress clearly stated its 
intent to allow Governmental Bonds when secured by generally applicable 
taxes The Treasury Department's and the IRS's roles in providing 
regulatory guidance are to interpret the Code in a manner consistent 
with Congressional intent 

Therefore, while the Treasury Department and the IRS have broad 
regulatory authority to interpret the Code, neither the Treasury 
Department nor the IRS has regulatory authority so broad as to read the 
private payments limitation out of the Private Activity Bond definition 
under Section 141 of the Code or to disregard Congress' expressed 
intent to exclude generally applicable taxes from private payments for 
this purpose Thus, we do not believe the Treasury Department has the 
regulatory authority to prohibit use of Governmental Bonds to finance 
stadiums under the existing statutory structure. 8
Certain Statistical Data on Tax-Exempt Bonds 

The Treasury Department estimates that Federal tax expenditures for the 
Federal subsidy for tax-exempt bonds grew from about $26 billion in 
1998 to about $30.9 billion in 2006 This tax expenditure is estimated 
to grow to about $41 1 billion in 2012 Attached to my testimony is 
certain statistical data on tax-exempt bonds One chart provides 
information on long term new money (versus refinancing) tax- exempt 
bond issuance from 1991-2005, derived from IRS Statistics of Income 
data, and shows that annual total tax-exempt bond issuance grew from 
about $100 billion in 1991 to over $200 billion in 2005 Two additional 
charts provide breakdowns of the types of projects financed with 
Governmental Bonds and Private Activity Bonds from 1991-2005 

Although the Treasury Department has no specific data on tax-exempt 
bond usage for stadiums, in a U S Government Accounting Office ("GAO") 
Report entitled "Federal Tax Policy: Information on Selected Capital 
Facilities Related to the Essential Governmental Function Test" (GAO-06-
1082, dated September 2006), the GAO estimated that, during the period 
from 2000 through 2004, approximately $53 billion in tax-exempt bonds 
were issued in about 119 bond issues to finance stadiums and arenas 

Conclusion 

The Administration recognizes the important role that tax-exempt bond 
financing plays in providing a source of lower-cost financing for 
critical public infrastructure projects and other significant public 
purpose activities It is important to ensure that the tax-exempt bond 
program is properly targeted so that it works most effectively and that 
the Federal subsidy for tax-exempt bonds is justified in light of the 
revenue costs and other costs imposed- The Administration would be 
pleased to work with the Congress in reviewing possible options to try 
to improve the effectiveness of this important Federal subsidy 

Thank you again, Mr Chairman, Ranking Member Issa, and other Members of 
the Subcommittee for the opportunity to appear before you today. I 
would be pleased to answer any questions.  

Figure: Governmental Tax-Exempt Bonds by Purpose, 1991-2005: 

[See PDF for image] 

[End of figure] 

Figure: Private Activity Bond Issuance by Purpose, 1991-2005: 

[See PDF for image] 

[End of figure] 

Figure: Long-Term, New Money Tax-Exempt Debt Issuance, 1991-2005: 

[See PDF for image] 

[End of figure] 

[End of section] 

Appendix VIII: GAO Contact and Staff Acknowledgments: 

GAO Contact: 

Michael Brostek, (202) 512-9110 or [email protected]: 

Acknowledgments: 

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. 

[End of section] 

Footnotes: 

[1] Summing the individual tax preference estimates, as is done to 
obtain these totals, is useful for gauging the general magnitude of the 
federal revenue involved, but it does not take into account possible 
interactions between individual provisions. Despite the limitations in 
summing separate revenue loss estimates, these are the best available 
data with which to measure the value of tax expenditures. Other 
researchers also have summed tax expenditure estimates to help gain 
perspective on the use of this policy tool and examine trends in the 
aggregate growth of tax expenditure estimates over time. 

[2] Pub. L. No. 99-514 (1986). 

[3] Section 501(c)(3) of the Internal Revenue Code defines the 
conditions for nonprofit, or charitable organizations to maintain tax- 
exempt status. 

[4] States may also allow tax-exempt bond interest to be excluded from 
state income taxes. 

[5] Notes, commercial paper, certificates of participation, and tax- 
increment financing are all different types of financing arrangements 
typically used in connection with tax-exempt bonds. Notes have short- 
term maturities and are issued to address mismatches in timing of 
expenditures and offsetting revenues. Commercial paper is an unsecured 
obligation also used to finance short-term credit needs. Certificates 
of participation are financing arrangements in which an individual buys 
a share of the lease revenues of an agreement made by a municipal or 
governmental entity, rather than the bond being secured by those 
revenues. Tax-increment financing is a way of pledging some of the 
increased taxes that result when property is redeveloped to pay the 
costs of associated public investment. 

[6] Qualified private activity bonds for small mortgage revenue bonds 
and veterans' mortgage revenue bonds are subject to a 3.5 percent limit 
on bond proceeds for issuance costs. 

[7] AMT is a separate federal tax system that applies to both 
individual and corporate taxpayers. It parallels the income tax system 
but with different rules for determining taxable income, different tax 
rates for computing tax liability, and different rules for allowing the 
use of tax credits. 

[8] Section 501(c)(3) bonds are issued by charitable organizations that 
qualify for exemption under I.R.C. ï¿½ 501(c)(3). Such organizations must 
be organized and operated exclusively for educational, religious, or 
charitable purposes, and no part of the organizations' net earnings may 
inure to or be for the benefit of any shareholders or individuals. 

[9] Although not states or subdivisions of states, Indian tribal 
governments are provided with a tax status similar to state and local 
governments for specified purposes under I.R.C. ï¿½ 7871. Among the 
purposes for which a tribal government is treated similar to a state is 
the issuance of tax-exempt bonds. However, tribal bond issues are 
subject to limitations not imposed on state and local government 
issuers. Tribal governments are authorized to issue tax-exempt bonds 
only if substantially all of the proceeds are used for essential 
governmental functions or certain manufacturing facilities. 

[10] A bond is being offered in the primary market during its original 
sale, where the bond proceeds go to the bond issuer. Bonds being 
offered in the secondary market are being traded among investors after 
the original sale has taken place. 

[11] A third method, referred to as private placement, is less 
frequently used. Under the private placement method, the issuer sells 
bonds directly to investors. 

[12] Numbers are presented in constant 2007 dollars. 

[13] From 2001 through 2005, about half of the states, including the 
District of Columbia, used their full allocation of tax-exempt private 
activity bonds. In total, only about 2 percent of all qualified private 
activity bonds subject to annual volume caps were not used by the 
states during this period. 

[14] We used the Bond Buyer 20-Bond Index, a set of general obligation 
bonds maturing in 20 years, to compare interest rates on tax-exempt 
bonds over time. 

[15] Summing the individual tax preference estimates is useful for 
gauging the general magnitude of the federal revenue involved, but it 
does not take into account possible interactions between individual 
provisions. Despite the limitations in summing separate revenue loss 
estimates, these are the best available data with which to measure the 
value of tax expenditures and make comparisons to other spending 
programs. Other researchers also have summed tax expenditure estimates 
to help gain perspective on the use of this policy tool and examine 
trends in the aggregate growth of tax expenditure estimates over time. 

[16] JCT does not publish estimates for tax expenditures valued at less 
than $50 million per year. As a result, JCT does not include estimates 
for the revenue loss associated with all qualified private activity 
bonds. 

[17] Our limited analysis included searching for particular words in 
the description that we believed would describe activities associated 
with tax-exempt bonds. This included searching for words such as 
"pollution," "industrial park," and "stadium," in order to identify a 
few of the purposes for which bonds placed into the other category were 
used. The data we reviewed do not allow us to make generalizations 
about how governmental bonds in the other category are used or provide 
us with a comprehensive list of purposes for bonds in the other 
category. 

[18] We classified the bonds into the eight SOI categories by reviewing 
the official statements. We classified bonds that included multiple 
uses as other. In SOI's data, bonds classified as other are regularly 
used for multiple purposes; however, a single bond issue for multiple 
purposes can be classified into more than one category. 

[19] To qualify as a tax-exempt 501(c)(3) bond, the property financed 
with the bond issue must be owned by the 501(c)(3) organization or a 
governmental entity and it must not satisfy both the modified private 
business use and modified private payments test. This means that more 
than 5 percent of the net bond proceeds cannot be used for any private 
business use and more than 5 percent of the payment of principal and 
interest on the bond issue cannot be directly or indirectly secured by 
payments or property used or to be used for a private business use. 

[20] We identified uses for nonhospital 501(c)(3) bonds by matching 
two- digit industry codes on the IRS Form 8038 with the corresponding 
dollar amounts for the bonds that were issued. 

[21] The Tax Reform Act of 1986, Pub. L. No. 99-514 (1986) disallowed 
the use of private activity bonds for several types of facilities 
allowable under the previously existing laws. Some examples include (1) 
development associated with airports including hotels, retail 
facilities, office buildings, and industrial parks; (2) small issue 
bonds for nonmanufacturing facilities, another type of financing used 
for hotels; (3) redevelopment bonds for private or commercial golf 
courses, country clubs, massage parlors, hot tub and suntan facilities, 
racetracks and other gambling facilities, and liquor stores; and (4) 
exempt facility bonds for certain purposes, such as sports facilities, 
convention or trade show facilities, and parking facilities. 

[22] Gulf Opportunity Zone private activity bonds, authorized in 2004 
for rebuilding areas affected by hurricanes Katrina, Rita, and Wilma, 
and Liberty Zone private activity bonds, authorized in 2001 to help 
rebuild areas affected by the September 11, 2001, terrorist attacks in 
New York City, can be used to finance hotels. 

[23] Joint Committee on Taxation, General Explanation of the Tax Reform 
Act of 1986, JCS-10-87 (Washington, D.C.: 1987), 1161. 

[24] 97-1 C.B. 632. 

[25] We were able to identify limited information in the SOI data on 
golf-related facilities in our review of the other category for 
governmental bonds. However, we were not able to use these data to 
determine the number of golf courses financed with tax-exempt bonds. 

[26] The AAA ratings service is a nationally recognized source of 
information on hotel ratings. The ratings range from one to five 
diamonds. The definitions of the ratings vary, ranging from basic to 
luxurious in terms of service and amenities. 

[27] Hearing on Taxpayer Financed Stadiums, Convention Centers and 
Hotels, 110th Cong. (Mar. 29, 2007) and Professional Sports Stadiums: 
Do They Divest Public Funds From Critical Public Infrastructure, 110th 
Cong. (Oct. 10, 2007). 

[28] For example, in cases where a bond with relatively complex 
features is to be issued during a time period with volatile interest 
rates, a negotiated sale might be preferred because in a negotiated 
sale the underwriter and the issuer have more flexibility in terms of 
the timing of the bond issue, and the underwriter has more time to 
search for investors better suited to more complex bonds. 

[29] The studies we reviewed generally used multivariate regression 
analysis techniques to identify the effect that the method of sale has 
on interest costs. Multivariate regression analysis is a research 
technique commonly used by economists and other researchers to isolate 
the effect of one or more variables on the variable of primary 
interest. 

[30] Of studies that reported the magnitude of the difference in 
interest costs for competitive and negotiated bonds, one found the 
difference to be 0.6 percentage points. However, most of these studies 
found the difference to be lower, generally ranging from 0.1 to 0.2 
percentage points, and two of the studies raised questions about 
whether bonds issued through the competitive method of sale have 
significantly lower interest costs. 

[31] Some debate exists about the appropriate statistical specification 
and whether potential selection bias issues need to be taken into 
account. In the case of comparing competitive and negotiated bond 
sales, potential selection bias may arise from the fact that most bond 
issuers can choose the method of sale that they believe will be most 
beneficial. Some studies have found either insignificant or relatively 
small advantages to competitive sales after taking these potential bias 
issues into account, but other studies have found the potential bias to 
have little effect on the results. 

[32] 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. Generally, these forms are required to be filed by the 
15TH day of the second calendar month following the quarter in which 
the bonds were issued. 

[33] GAO, Federal Tax Policy: Information on Selected Capital 
Facilities Related to the Essential Government Function Test, GAO-06-
1082 (Washington, D.C.: Sept. 13, 2006). 

[34] Some of the other private vendors are Bloomberg and DCP Data. 

[35] Routinely, state and local governments authorize a single bond 
issue for multiple facilities and activities because it is more cost- 
effective to do so than to issue separate bonds for each individual 
project. 

[36] The Bond Buyer Yearbook is published by Thomson Financial, one of 
several private vendors that collect information on municipal bonds. 
The Bond Buyer staff develops the information presented in the Bond 
Buyer Yearbook primarily from the Thomson Financial municipal bond 
database. 

[37] H. Rep. too. 99-841, 99" Cong. 2d Sess. at Page 11-688, 1986-3 
C.B. Vol 4 688 (1986) (emphasis added). 

[38] In general, the treatment of payments, including PILOTs, as taxes 
based on their substance is grounded in longstanding Federal income tax 
principles See, e. g., Rev. Rel. 71-49, 1971-1 C B 103 (PILOTs treated 
as taxes in substance for purposes of deductibility of taxes under Code 
Section 164). 

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