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Private-Activity Bonds

PAB Issuance Kept Ebbing Through ’09

WASHINGTON — Private-activity bond issuance lagged in 2009 for the second year in a row, despite efforts by Congress to make the bonds more attractive, as the recession continued to take a toll on this part of the municipal market, according to an annual survey and market participants.

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The results of the survey, which are to be released by the Council of Development Finance Agencies on Thursday, show the 50 states and the District of Columbia issued $11.9 billion of PABs in 2009, a drop of $1.7 billion or 12.7% from 2008.

The drop comes after issuance in 2008 was 51% lower than in 2007 because of the financial crisis.

It also comes despite Congress’ efforts to ease the tax-law restrictions on PABs through the American Recovery and Reinvestment Act, which was enacted in February of last year.

Among other bond provisions, the ARRA temporarily exempted all bonds, including PABs, from the alternative minimum tax, and also expanded the use of industrial development bonds by allowing them to be sold through 2010 to finance facilities that produce or manufacture intangible property.

Yet PAB issuance was down nearly across the board, in six of eight categories, with rare bright spots in the issuance of mortgage credit certificates, which nearly tripled, and PABs that did not fall into any specific category, which rose slightly.

“I think it’s pretty consistent with what you’d expect in a really weak economy,” said Michael Decker, managing director and co-head of municipal securities at the Securities Industry and Financial Markets Association.

Four states — Colorado, New York, Nevada and Mississippi — either were unable or declined to provide volume-cap data to the CDFA for 2009. The total amount of PAB cap for those states in 2009 was $2.745 billion, 9% of the $30.3 billion available to all 50 states and the district.

Theere are also some discrepancies in the data provided by Missouri and North Carolina that could not be rectified by the CDFA.

The impact of the recession was apparent in the carry-forward category, which grew as states continued to bank their PAB cap, waiting for friendlier market conditions. A total of $34.4 billion of available cap last year was set aside to be carried forward into 2010, a 41.6% jump from the $24.3 billion that was set aside in 2008. That figure is the sum of any unused cap from the previous three calendar years — 2007, 2008 and 2009 — which federal tax law permits states to carry forward.

States also carried forward $6 billion of extra housing cap provided by Congress, creating a total carry-forward amount of $41.2 billion in PAB capacity for 2010. In 2008, lawmakers authorized an additional $10.5 billion of housing-bond volume cap as part of an omnibus housing relief bill, and $7.4 billion of that cap was carried forward to 2009.

While states were carrying forward increasing amounts of their volume cap, the amount they had to abandon in 2009 was down from the previous year. A total of $2.3 billion of carry forward was abandoned by 18 states last year, down from the $3.6 billion that 25 states abandoned in 2008.

The $30.3 billion of PABs that states could issue in 2009 represents a 5.9% increase from the $28.6 billion available in 2008. The capacity figures are determined under the federal tax rules, which permit most states and the District of Columbia to issue a fixed amount of tax-exempt PABs based on their population figures.

Currently states receive $90 per capita of PAB authority. However, for states with low populations, a predetermined minimum amount of the bonds can be used instead. For 2009, that minimum was set at $273.3 million.

HOUSING

Historically, the housing sector accounts for the majority of private-activity bond issuance, and 2009 was no exception. Housing bonds accounted for 58.4% of total issuance, but their lackadaisical performance played a major role in driving down the overall 2009 numbers.

“Housing is such a big part of PABs, and of course housing is not in a good state right now,” said William Daly, senior vice president of government relations at the Regional Bond Dealers Association.

Issuance for the four PAB categories tied to housing — single-family housing bonds, multifamily housing bonds, mortgage credit certificates, and housing that was not broken out into specific categories by certain states — dropped 11% to $6.967 billion.

Single-family housing bonds, as usual, were the largest single category of PABs, with issuance totaling $3.6 billion. The bonds, which typically are used to provide low-interest loans to first-time homebuyers, accounted for 30% of all PABs issued in 2009. But issuance in that category was down 3.6% from 2008, and that was after issuance in 2008 plummeted 61.2% from 2007 levels.

Issuance of multifamily housing bonds, which are mainly used to finance large rental complexes, totaled $1.2 billion, down 8.4% from 2008, when $1.3 billion were issued.

The “housing not broken out” category — used by states that do not separate out single-family and multifamily housing bonds as well as mortgage credit certificates — shrank to $926.3 million, a 62.8% decrease from the $2.5 billion issued in 2008.

But bonds issued to finance mortgage-credit certificates, which provide a tax credit to first-time homebuyers, saw a significant increase in 2009. Twelve states issued $1.3 billion of the certificates, up 248% from the $377 million that eight states sold in 2008.

OTHER CATEGORIES

Of the four PAB categories not tied to housing, three experienced decreases in 2009, while the “other” category, which includes bonds that were not part of the other seven specific categories, showed increased issuance.

Exempt facility bonds, the only PAB category to grow in 2008, shrank in 2009, with $2.4 billion issued, a 12.2% or $325.7 million decrease from 2008. The bonds are issued to finance a variety of projects, including airports, solid-waste disposal facilities, sewage facilities, district heating and cooling systems, docks, wharves, and mass commuting facilities.

Issuance for student loan PABs continued to drag, with $1.4 billion issued in 2009, a 11.6% decrease from 2008. The drop came after $1.5 billion of the bonds were issued in 2008, a 65% decrease from 2007.

Industrial development bond issuance also was down, dropping to $946.5 million, $319.8 million or 25.3% less than the $1.3 billion issued in 2008. Fewer IDBs were issued in spite of the ARRA provision allowing them to be issued through 2010 to finance facilities that produce or manufacture intangible property such as software or patents.

Toby Rittner, president and chief executive officer of the CDFA, acknowledged that times are still tough for getting IDB deals done for ailing manufacturers.

“It’s pretty clear to see that there was probably a correlation between the national economy and the ability to do these financings,” he said. “We’re looking at the most difficult industry to finance.”

But Rittner said he is hearing anecdotally that the ARRA provision has kept things from getting worse.

The CDFA is planning to push Congress to extend the ARRA provision beyond the end of the year, even though the issuance levels are down.

“Anecdotally … we do think that the definition had an impact,” Rittner said. “We’ve got to extend it.”

Although percentage-wise, the “other” category grew by 55%, the actual volume of the category remained insignificant. A total of $317 million of “other” PABs were issued in 2009, compared to $204.5 million in 2008.

CAPACITY

Congress began limiting PAB issuance in 1986, creating a statutory formula to determine individual capacity ceilings for states. At first states were given a $75 per-capita annual limit or an annual minimum of $225 million in each of 1986 and 1987.

But the 1986 tax reform act reduced the limit to $50 per resident, or a minimum of $150 million per state. Those new levels were used from 1988 to 2001.

In late 2000, Congress enacted a two-year increase in the cap, which took effect in 2002 by returning to the $75 per capita or $225 million minimum annual limit. Beginning in 2003, increases to the per capita and minimum levels were tied to inflation, but the per capita figure was restricted to $5 incremental gains.

More recently, population gains published by the Census Bureau in 2009 led the Internal Revenue Service to raise the minimum level for 21 states plus the District of Columbia with populations small enough that they qualified for the minimum level. They received an increase of 4.3% to $273.3 million, from $262.1 million in 2008.

For 2010, the per capita rate of $90 remained unchanged, but the small-state minimum increased slightly to $273.8 million.

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