GAO: Only Half of Allocated GO Zone Bonds Have Been Issued

Alabama, Louisiana, and Mississippi have allocated about 87% of the private-activity bonds authorized under the Gulf Opportunity Zone program, but only 50% of those bonds have been issued thus far, according to a report released this week by the Government Accountability Office.

Turmoil in the credit and tax-exempt bond markets has made it challenging for interested parties to issue bonds, and reduced values in the housing market has also slowed developers that could use the tax benefits the program provides, the report found.

Alabama was authorized to issue $2.2 billion of private activity bonds, Louisiana, $7.8 billion, and Mississippi, $4.9 billion. The bonds count against the private-activity bond volume cap and can be used to finance projects such as housing, retail facilities, and hotels.

But the GAO report stated: "Current economic conditions, including the reduced availability of credit nationwide, have made it difficult to issue tax-exempt bonds, and the value of housing tax credits has declined recently, meaning developers attract less equity investment."

Furthermore, states mostly adopted a first-come, first-serve basis to allocate the bonds, and did not make a concerted effort to ensure the tax benefits were going to the heavily storm-damaged areas that provided the basis for the GO Zone program, the report found. Only Louisiana has recently set aside funds for its hardest hit parishes, GAO said.

"For the most part, all three eligible states allocated GO Zone tax-exempt private-activity bond authority without consistently targeting the allocations to assist recovery in the most damaged areas," the report stated. "Officials in Louisiana and Mississippi acknowledged that the first-come, first-served approach made it difficult for applicants in some of the most damaged areas to make use of the [PAB] provision at the beginning of the program."

State officials said they were not sure whether it would be better to allocate the bonds as quickly as possible, or to hold onto the allocations until they determined which areas had the greatest needs, according to the report.

Also, they said businesses in less-damaged areas received more of the allocations because they were more prepared to apply for the bonds. Businesses in highly damaged areas had to deal with the immediate aftermath of the hurricane, such as debris removal and helping displaced residents, before getting around to applying for bonds, they said.

States have only allocated 16% of advance refunding bonds permitted under the GO Zone program, GAO said. They have struggled to find debt eligible for that aspect of the program, according to the report. Normally, tax-exempt private activity bonds cannot be advance refunded, and municipalities can only advance refund municipal debt one time.

The GO Zone program authorized $7.9 billion of additional advance refunding bonds for issuers within the GO Zone states, in order to give issuers another chance to reduce interest costs through bond refundings.

While states said they had difficulties educating investors about the $350 million of tax credit bonds available under the GO Zone program, they managed to allocate most of their authority in that area. Louisiana and Mississippi both allocated the $200 million and $100 million they had been authorized, respectively, while Alabama opted not to allocate any of the $50 million in its tax credit bond authority due to time constraints.

Tax-credit bonds are taxable bonds that provide holders with an income tax credit in lieu of tax-exempt interest payments.

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