Tax-Exempt Bonds, 2003-2004

Agency decision

Ask Donna

What actually matters in this document.

Text

by Cynthia Belmonte

tate and local governmental units issued over

$872 billion of tax-exempt bonds during Calendar Years 2003 and 2004. In 2003, over 28,000

Governmental bonds were issued, which raised a

total of $354.0 billion of proceeds for public projects

(such as schools, streets, and utilities). In addition,

over 4,100 tax-exempt private activity bonds were

issued, for a total $94.0 billion in proceeds used to

finance qualified private facilities (such as airports,

docks and wharves, and solid waste disposal facilities), as well as to benefit Internal Revenue Code

section 501(c)(3) organizations (such as hospitals and

private universities). Approximately 26,000 Governmental bonds were issued in 2004, totaling $330.4

billion. In the same year, over 3,600 taxexempt private activity bonds were issued; despite this

12.9-percent decrease in the number of bonds issued

over the last year, the total dollar volume of tax-exempt private activity bonds held at $94.0 billion.

A bond is an interest-bearing security of indebtedness, i.e., an obligation by the issuer to repay a

certain sum of money by a future date, with interest

payable at a specified rate. State and local governments issue bonds to raise capital for essential public

facilities, services, infrastructure, and general capital

improvements. These bonds are classified as either

“Governmental” or “private activity,” depending on

whether the proceeds are used and secured by public

or private entities and resources. For Federal income

tax purposes, investors who purchase Governmental

bonds and certain types of private activity bonds are

allowed to exclude the bond interest from their gross

incomes [1]. This tax exemption effectively lowers the borrowing cost of tax-exempt debt issuers,

since bondholders are generally willing to accept an

interest rate lower than that earned on comparable

taxable bonds.

More than $684 billion of tax-exempt Governmental bonds were issued during 2003 and 2004.

The majority of this amount (over 80 percent) was

for long-term bonds (i.e., having maturities of 13

months or more). New money issues--bonds whose

proceeds are used to finance new capital projects-accounted for 56.6 percent of the $552.1 billion of

long-term tax-exempt Governmental bond proceeds

Cynthia Belmonte is an economist with the Special Studies

Special Projects Section. This article was prepared under

the direction of Barry W. Johnson, Chief.

246

issued during this period, while refunding issues-bonds issued to retire outstanding debt--made up

the difference (43.4 percent). More than half (54.7

percent) of the dollar volume of all long-term Governmental bonds issued during this period was used

to finance projects related to education, utilities, and

transportation.

Almost $188 billion of tax-exempt private activity bonds were issued during 2003 and 2004.

The majority of this amount, $185.7 billion, was

long-term and was split almost equally between

new money issues and refunding issues. Qualified

Section 501(c)(3) bonds, which include qualified

hospital bonds and other qualified bonds issued to

benefit entities exempt from income tax under Internal Revenue Code section 501(c)(3), accounted for

43.2 percent of the dollar amount of long-term private activity bonds issued in 2003 and 2004. Private

activity bonds issued to provide housing assistance in

the form of qualified residential rental projects

and qualified mortgages accounted for another

28.7 percent.

The annual Budget of the United States Government includes estimates of revenue losses associated

with various income tax exclusions, deductions,

credits, and special tax rates. The exclusion from

gross income of the interest earned on bonds issued

by State and local governmental units represents

foregone revenue to the U.S. Treasury. For Fiscal

Year 2007, the U.S. Treasury Department estimate of

this revenue loss was $36.8 billion--$29.6 billion of

which was for tax-exempt Governmental bonds and

another $7.2 billion of which was for tax-exempt private activity bonds [2]. This article includes data on

both tax-exempt Governmental and private activity

bonds issued during 2003 and 2004, with particular

emphasis on those bonds issued in 2004.

Background

Since the inception of the modern-day Federal

income tax in 1913, interest received by holders

of debt obligations (i.e., bonds) of States and their

political subdivisions has been excludable from gross

income for Federal income tax purposes [3]. This

exclusion, set forth in section 103 of the Internal

Revenue Code of 1986, only applies to Governmental bonds and “qualified bonds” (as defined by

Internal Revenue Code section 141(e)). The exclu-

Tax-Exempt Bonds, 2003-2004

sion is not allowed for arbitrage bonds and bonds not

in registered form [4,5].

Both Governmental and private activity bonds

are obligations issued by or on behalf of State and local governmental units; it is the use of proceeds that

differentiates the two. Governmental bond proceeds

finance essential government operations, facilities,

and services that are for general public use. Private

activity bond proceeds are used by a private entity.

Internal Revenue Code section 141 defines a bond

as a private activity bond if both of the following

criteria are met: 1) more than 10 percent of the bond

proceeds are used for a private business purpose; and

2) more than 10 percent of the bond debt service is

derived from private business use and is secured by

privately used property. A private activity bond’s

tax-exempt status then depends on whether it is

deemed a qualified bond.

Qualified bonds, termed tax-exempt private

activity bonds in this article, include “exempt facility

bonds,” qualified mortgage bonds, qualified veterans’

mortgage bonds, qualified small issue bonds, qualified student loan bonds, qualified redevelopment

bonds, and qualified section 501(c)(3) bonds (all of

which are defined in the “Explanation of Terms” section at the end of this article). Several types of exempt facilities include airports; docks and wharves;

sewage facilities; solid waste disposal facilities;

qualified residential rental projects; and facilities for

the local furnishing of electricity or gas. Qualified

section 501(c)(3) bonds are issued by State and local

governments to finance the activities of charitable

and similar organizations that are tax-exempt under

Code section 501(c)(3). The primary beneficiaries of

these bonds are hospitals, universities, and organizations that provide low-income housing or assisted

living facilities.

Bonds can be characterized as either new money

issues or refunding issues. A new money issue refers

to a bond issued to finance a new capital project. A

refunding issue refers to any bond used to pay debt

service on and retire an outstanding issue. Generally,

this is done to reduce interest payments, extend the

maturity of the debt, or ease certain restrictions in the

original bond contract. Refunding issues are classified as either “current” or “advanced,” depending on

the time between the issuance of the new bonds and

the maturity date (or specified call date) of the outstanding issue [6]. Current refunding occurs when

the new bond is issued within 90 days of the final

payment of principal or interest (redemption) on the

prior issue. Advance refunding occurs when the new

bond is issued more than 90 days before the final

payment of principal or interest (redemption) on the

prior issue. Generally, for advance refundings, the

proceeds of the new (“refunding”) issue are invested

in Government securities, which are placed in escrow, and the interest and principal repayments on

these securities are then used to repay the refunded

bonds over time.

Advanced refundings result in two sets of bond

proceeds outstanding for one particular project, for

an extended period of time. Not only is this an inefficient allocation of bond proceeds, but the increase

in the total amount of outstanding tax-exempt debt

represents additional foregone revenue to the U.S.

Treasury. To limit this, there are restrictions on advance refundings of both Governmental and tax-exempt private activity bonds. Generally, tax-exempt

Governmental bonds are limited to one advance refunding [7]. Advance refundings are prohibited with

respect to most types of tax-exempt private activity

bonds. Two exceptions to this rule are qualified section 501(c)(3) bonds and private activity bonds designated as “liberty advance refunding bonds,” both of

which are allowed one advance refunding [8].

Tax-exempt private activity bonds are subject to

State volume limitations (i.e., volume caps). Most

types of tax-exempt private activity bonds are subject

to the unified volume cap, which limits the aggregate

dollar amount of bonds that each State can issue

annually. The unified State volume cap is adjusted

annually for population growth, and, effective January 1, 2003, the volume cap was indexed for inflation [9]. Other tax-exempt private activity bonds are

subject to separate volume limitations based on the

types of projects being financed. Refunding bonds

are not subject to volume cap limitations, as long as

there is no increase in the principal amount of the

outstanding bond. States are allowed to carry over

any unused portion of the volume cap of a particular

year for up to 3 years.

Tax-Exempt Governmental Bonds

Total Governmental Bond Volume

Figure A tracks the year-to-year changes in the total

dollar volume of tax-exempt Governmental bond

247

Tax-Exempt Bonds, 2003-2004

issuances over the last 10 years. The total dollar

volume of bonds issued annually more than doubled

between 1995 and 2004, with the largest increases

occurring between 2000 and 2002. Over $1 trillion

of tax-exempt Governmental bonds were issued from

2002 to 2004, compared to the $1.3 trillion combined

total for the 7 preceding years. For 2003, a total of

$354.0 billion of Governmental bonds was issued,

which marked the highest observed volume since SOI

began compiling tax-exempt bond data in 1995. Issuance volume then decreased 6.7 percent, to $330.4

billion, in 2004. This article will primarily focus on

tax-exempt bond issuances for 2003 and 2004.

The annual amount of new money issues of

Governmental bonds was fairly constant between

2002 and 2004. For 2003, a total of $216.5 billion of

new money Governmental bonds was issued, an increase of 5.9 percent over the 2002 level. The dollar

volume of new money issuances then decreased 3.8

percent, to $208.2 billion, in 2004.

Refunding issues of Governmental bonds increased slightly in 2003 (from $135.7 billion to

$137.5 billion) and decreased 11.1 percent in 2004

(to $122.2 billion). Refundings tend to be more

common when interest rates are falling, as borrowers seek to reduce interest payments over the life of

the bond. Refunding issues remained at historically

high levels for 2003 and 2004 (both in nominal dollars and as a percentage of all Governmental bond

issues), and average interest rates remained at historically low levels. Average annual State and local

bond interest rates fell slightly during this time, from

5.04 percent in 2002 to 4.75 percent in 2003 and 4.68

percent in 2004 (Figure A) [10].

Uses of Governmental Bond Proceeds

Bonds can be classified as either short-term or

long-term, depending on the length of time between

issuance and maturity. Bonds having maturities of

less than 13 months are typically classified as shortterm, while those having maturities of 13 months or

more are classified as long-term. The dollar volume

of long-term tax-exempt Governmental bond issues increased 2.5 percent between 2002 and 2003,

from $275.7 billion to $282.6 billion, then decreased

4.6 percent, to $269.5 billion, for 2004. The dollar volume of short-term tax-exempt Governmental

bond issues increased 10.9 percent between 2002

Figure A

Volume of Governmental Bonds Issued, by Type and

Issue Year, 1995-2004

Average Annual Interest Rate, 1995-2004 [1]

Billions of dollars

Interest Rate

400

8.00

354.0

350

330.4

340.1

300

264.3

227.0

200

100

183.7

171.7

179.5

117.2

52.4

36.4

62.3

204.4

169.3

136.8

140.0 119.3

103.6

216.5

7.37

7.62

7.27

133.2

176.8

137.5

134.9

90.2

208.2

135.7

5.50

122.2

87.4

50.5

34.5

New Money issues

6.49

6.53

5.95

5.76

5.71

5.66

5.43

5.52

5.63

5.15

5.09

5.04

5.00

4.75

4.50

Refunding issues

4.68

4.00

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Year

Issue year

All issues

6.00

7.08

7.05

6.50

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

248

7.59

7.00

250

150

7.50

Taxable Interest Rate on Corporate Bonds

Tax-Exempt Interest Rate on State and Local Bonds

[1] Data for interest rates obtained from Federal Reserve Board, "Federal Statistical Release H.15: Selected Interest Rates, Historical Data."

Tax-Exempt Bonds, 2003-2004

and 2003, from $64.4 billion to $71.4 billion, then

decreased 14.7 percent, to $60.9 billion, for 2004.

Of the $354.0 billion of tax-exempt Governmental bonds issued for 2003, about $282.6 billion (79.8

percent) were long-term issues, while the remaining

$71.4 billion (20.2 percent) were short-term issues

(Figure B). For 2004, short-term issues totaled $60.9

billion, which comprised an even smaller share of the

total dollar volume (18.4 percent).

Most short-term Governmental bonds are issued

as revenue anticipation notes (RANs), tax anticipation notes (TANs), or bond anticipation notes

(BANs). RANs and TANs generally mature within 1

year of issuance, at which time the proceeds are paid

from intergovernmental revenue or specific tax receipts. BANs are often used to cover certain upfront

costs associated with a long-term project for which a

future bond will be issued. A BAN is later paid off

from the proceeds of the sale of the future bond or

of a renewal BAN. Combined, RANs, TANs, and

BANs, comprised 89.5 percent of the $71.4 billion of

short-term tax-exempt Governmental bond proceeds

for 2003, and 89.6 percent of the $60.9 billion issued

in 2004. Figure C presents the various purposes for

which these short-term bonds were issued in 2003

and 2004.

Figure B

Tax-Exempt Governmental Bonds, by Term

of Issue, 2003-2004

[Money amounts in billions of dollars]

Percent of total dollar volume issued

100

$282.6

$269.5

$71.4

$60.9

2003

Issue year

Short-term

2004

Long-term

Most of this article focuses on long-term issues, since they comprise the majority of the total

dollar volume of tax-exempt bonds issued in 2003

and 2004. Table 2 shows the annual distribution of

long-term Governmental bond proceeds, by purpose

of bond issue. Together, bonds used for education, transportation, and utilities annually account

for more than half of total long-term Governmental

issuances. Education bonds alone comprised 29.1

percent of the total $282.6 billion in long-term bonds

issued for 2003 and 29.9 percent of the $269.5 billion for 2004. Bonds issued for transportation projects accounted for 12.0 percent and 11.9 percent of

the annual dollar volume of long-term Governmental

bond issues for 2003 and 2004, respectively. Utility bonds accounted for 15.8 percent of long-term

Governmental issues in 2003, before dropping to

only 10.7 percent of the total in 2004. Also for 2004,

there were $18.7 billion in long-term Governmental

bonds issued for environmental purposes accounting

for 7.0 percent of the total. Environmental bonds

include those issued for drainage, sanitation, and

wastewater projects. Bonds issued for public safety

(e.g., fire and police services) and health and hospital

comprised, on average, 2.5 percent and 2.0 percent of

annual long-term Governmental bond issues, respectively. Annually, a large share of bond issuances is

reported as being used for “other purposes” (i.e., specific purpose(s) did not apply or were not separately

allocated by the issuer). For 2003 and 2004, “other

bond purposes” accounted for 30.0 percent and 35.4

percent of the dollar volume of long-term Governmental bonds, respectively.

For 2003, total new money proceeds exceeded

refunding proceeds, accounting for 54.8 percent of

the total $282.6 billion of total long-term Governmental bond proceeds. Figure D illustrates the split

between the new money and refunding proceeds of

long-term Governmental bonds, by selected purpose.

Refunding proceeds exceeded new money proceeds

for three bond purposes--utilities, environment, and

health and hospital--accounting for 61.6 percent, 56.5

percent, and 54.0 percent of the total amount of longterm bonds issued for each purpose, respectively. For

2004, total new money proceeds exceeded refunding

proceeds, accounting for 58.5 percent of the total

$269.5 billion of long-term Governmental bond

proceeds. Refunding proceeds issued for utility

249

Tax-Exempt Bonds, 2003-2004

Figure C

Distribution of Proceeds from Short-Term Revenue Anticipation Notes, Tax Anticipation

Notes, and Bond Anticipation Notes, by Purpose of Bond, 2003-2004

2003

Education

26.6%

Other bond purposes

(not allocated)

66.4%

Health and Hospital

0.2%

$63.9

Billion

Transportation

2.6%

Safety

1.2%

Environment

1.4%

Utilities

1.6%

2004

Education

29.4%

Other bond purposes

(not allocated)

64.3%

$54.6

Billion

Health and Hospital

0.2%

Transportation

1.5%

Safety

1.1%

Environment

1.9%

Utilities

1.6%

250

Tax-Exempt Bonds, 2003-2004

Figure D

Long-Term Governmental Bonds, by Selected Bond Purpose and Type of Issue, 2003-2004

2003

Billions of dollars

$34.7

$31.1

$27.5

$16.3

$50.2

$51.3

$10.1

$17.1

$3.1

$17.7

Other [1]

Education

Utilities

Transportation

$2.9

$7.8

$4.8

$2.5

Environment

Public safety

Health and

hospital

Bond purpose

2004

Billions of dollars

100

$41.3

$30.8

$16.2

$54.0

$11.8

$49.8

$6.9

$12.5

$20.1

$11.8

Other [1]

Education

Utilities

Transportation

Environment

$2.1

$1.7

$3.7

$3.8

Public safety

Health and

hospital

Bond purpose

New money issues

Refunding issues

[1] "Other bonds" refer to obligations for which a specific purpose either did not apply or was not clearly indicated on the Form 8038-G

return.

251

Tax-Exempt Bonds, 2003-2004

bonds accounted for 56.6 percent of the total amount

of long-term bonds issued for that purpose. For all

other bond purposes, the majority of the long-term

bond proceeds were new money.

Table 3 presents uses of tax-exempt long-term

Governmental bond proceeds. A portion of bond

proceeds is often used to pay for associated issuance

costs (e.g., fees paid to trustees and bond counsel),

fund reserve accounts, and refund prior bond issues. For 2003, of the $282.6 billion of long-term

tax-exempt Governmental bonds issued, issuers used

$2.6 billion (0.9 percent) of the bond proceeds for

bond issuance costs, $1.2 billion (0.4 percent) for

credit enhancement, and $3.5 billion (1.2 percent)

for reserve fund allocations. The remaining $275.3

billion (97.4 percent) represented lendable proceeds,

$125.4 billion of which were used to refund or retire

prior bond issues, leaving $149.9 billion to be used

for new project costs. For 2004, of the $269.5 billion of long-term tax-exempt Governmental bonds

issued, issuers used $2.4 billion (0.9 percent) of the

bond proceeds for bond issuance costs, $1.0 billion

(0.4 percent) for credit enhancement, and $2.6 billion (1.0 percent) for reserve fund allocations. The

remaining $263.5 billion (97.8 percent) represented

lendable proceeds, $110.0 billion of which were used

to refund or retire prior bond issues, leaving $153.8

billion to be used for new project costs.

New Money Issues of Long-Term Governmental Bonds, Classified by Size of Issue

252

For 2004, a total of 14,419 new money long-term

tax-exempt Governmental bonds was issued, with

proceeds totaling $157.7 billion (Table 4). Almost

half of the total number of new money long-term

Governmental bond issues was for small bonds with

an entire issue price of less than $1 million [11].

However, in dollar terms, these bonds comprised

only 1.5 percent of the total bond proceeds. Bonds

with an entire issue price of less than $5 million accounted for almost three-quarters of the total number

of bond issues, but only 6.7 percent of total bond

proceeds. There were 437 bonds (3.0 percent) with

an entire issue price in excess of $75 million. The

combined proceeds of these bonds comprised 59.1

percent of the total money issued.

Bonds with an issue price less than $1 million

were generally issued by smaller towns for purposes

such as school buses, fire trucks, municipal improve-

ments, and other unspecified expenditures. Of the

issues exceeding $75 million, the top specified uses

of the proceeds were for education ($22.7 billion),

transportation ($16.7 billion), and the environment

($8.2 billion). In addition, bonds issued for “other

purposes” accounted for $36.1 billion of the total

new money long-term Governmental bond issues

in excess of $75 million for 2004. For these largest issues, the average bond issue for transportation

projects was $203.8 million, while those issued for

educational purposes averaged $156.7 million. The

distribution of bonds by size of issue followed a

similar pattern in 2003.

New Money Issues of Long-Term

Governmental Bonds, Classified by State

Table 5 shows how the volume of new money

long-term Governmental bond issues varied across

the States during 2003 and 2004. Total new money

long-term bond volume increased $6.7 billion (4.5

percent) from 2002 to 2003, and grew by another

$3.0 billion (1.9 percent) from 2003 to 2004. Despite

this seemingly modest increase in overall bond issuance, for several States, there were more pronounced

changes in the dollar amount of bonds issued. These

changes in year-to-year issuance reflect the timing of

particular infrastructure projects (and the associated

financing of such projects) within each State. New

York issued $8.0 billion more new money long-term

bonds in 2003 than in 2002--the largest increase (in

dollar value terms) of any State--before cutting total

issuance 31.9 percent to $12.1 billion in 2004. In

2003, California’s issuances increased $5.0 billion,

a 21.1-percent increase over the previous year, and

grew by another $4.9 billion in 2004. In 2003, bond

issuances in Tennessee, Maryland, and Pennsylvania

all increased by over $1.0 billion each, representing

88.6 percent, 58.1 percent, and 26.7-percent growth

over 2002 levels, respectively; however, each of the

three States experienced declines in 2004 that largely

negated the 2003 growth.

Several States, including Illinois, Massachusetts, Texas, Georgia, and Wisconsin, decreased new

money long-term bond issuances by over $1.0 billion

from 2002 to 2003. During 2003, Texas’s issuances

decreased $3.1 billion (25.0 percent) from the previous year, and then, in 2004, partially rebounded with

a $2.0-billion increase. New money long-term issuances in Illinois declined $2.3 billion (26.4 percent)

Tax-Exempt Bonds, 2003-2004

in 2003, before slightly rebounding in 2004. Issuances in Massachusetts decreased $1.5 billion (34.8

percent) from 2002 to 2003, only to increase $0.5

billion in 2004.

Figure E presents a State-by-State ranking of

new money long-term bond issuances and per capita

issuance, for 2004. About $78.5 billion (nearly 50.0

percent) of the $157.7 billion of new money longterm bonds issued for 2004 were issued in the following 6 States: California (21.2 percent), New York

(7.7 percent), Texas (7.2 percent), New Jersey (5.2

percent), Illinois (4.3 percent), and Florida (4.3 percent). According to 2004 Census estimates, together,

these 6 States accounted for 40.0 percent of the total

U.S. population [12].

On a per capita basis, however, New Mexico

($1,038), Alaska ($990), New Jersey ($946), California ($944), Colorado ($818), Nevada ($700), and

Connecticut ($662) accounted for the largest amounts

of new long-term tax-exempt Governmental bond

issues. Wyoming issued the least amount of bonds,

with only $71 million of new money long-term taxexempt Governmental bonds. On a per capita basis,

this amounted to $142 per resident. Idaho issued the

least new money long-term bonds per capita ($129).

Unlike private activity bonds, Governmental

bonds are generally not subject to the volume cap;

however, if more than $15 million of the proceeds

are used in private use or disproportionate use, then

the amount in excess of $15 million is subject to the

volume cap, and issuers are required to report the

amount of the State volume cap allocated to the Governmental issue [13]. For 2004, issuers reported allocating a combined $153.5 million of State volume

cap to the total $330.4 billion of total Governmental

bond issues.

Figure F presents the amount of bonds issued

by selected purpose, for the top 15 States in terms

of total dollar volume of new long-term Governmental bonds issued for 2004. Combined, these 15

States accounted for 72.5 percent of the total new

money long-term bond issues for the year. Overall,

for 2004, about 31.6 percent of the amount of new

money long-term Governmental bonds were issued

for educational purposes. However, there was some

variance in the purposes for which States issued

bonds. For example, of the total amount of new

money long-term bonds issued in Michigan, 58.4

percent were issued for education, compared to 39.4

percent in New Jersey and 12.1 percent in New York,

for the same purpose. Transportation projects accounted for 12.8 percent of States’ total amount of

new money long-term bond issues overall. In New

York, however, 29.4 percent of the total new money

long-term bonds issued were for transportation, followed by Arizona, which allocated 26.3 percent for

the same purpose. Transportation bonds accounted

for only 4.2 percent of Virginia’s total amount of new

money long-term bond issues. Georgia devoted a

larger portion of its total amount of new money longterm bonds (35.4 percent) to environmental projects,

considerably more than the national average, 7.5 percent. Michigan and Ohio also spent large portions of

their totals on environmental projects--17.1 percent

and 17.0 percent, respectively.

Tax-Exempt Private Activity Bonds

Total Private Activity Bond Volume

Figure G illustrates the dollar volume of tax-exempt

private activity bond issuances during the 10-year period extending from 1995 through 2004. During the

10-year period, combined, a total of $789.3 billion of

tax-exempt private activity bonds was issued. Generally, the overall pattern in annual issuances follows

that of Governmental bonds. For 1995, about $52.4

billion of tax-exempt private activity bonds were

issued. Issuances climbed to $91.6 billion in 1998,

before dropping off and then rising to $93.0 billion in

2002. Since then, there has been minimal change in

the total dollar volume of tax-exempt private activity

bonds issued annually, with $93.9 billion issued in

2003 and $94.0 billion issued in 2004.

In all but one of the 10 years depicted, the dollar

volume of new money tax-exempt private activity

bonds issued exceeded refunding issues. In 2003,

refunding issues of tax-exempt private activity bonds

totaled $47.9 billion, an increase of 13.1 percent

over the 2002 level, while new money issues totaled

$46.0 billion, a decrease of 9.1 percent over the 2002

level. The decline in average interest rates between

2000 and 2004 (from 5.71 percent to 4.68 percent)

contributed to the increase in the level of refunding

bonds over the same time period (from $28.3 billion

for 2000 to $45.9 billion for 2004). (Average annual

interest rates for the period covered are presented in

Figure A).

253

Tax-Exempt Bonds, 2003-2004

Figure E

New Money Long-Term Governmental Bonds, by State of Issue, 2004

[Money amounts are in millions of dollars, except where noted otherwise]

State of issue

Total [1]..............................................................

Alabama..............................................................

Alaska.................................................................

Arizona................................................................

Arkansas.............................................................

California.............................................................

Colorado..............................................................

Connecticut.........................................................

Delaware.............................................................

District of Columbia.............................................

Florida.................................................................

Georgia...............................................................

Hawaii.................................................................

Idaho...................................................................

Illinois..................................................................

Indiana................................................................

Iowa.....................................................................

Kansas................................................................

Kentucky.............................................................

Louisiana.............................................................

Maine..................................................................

Maryland.............................................................

Massachusetts....................................................

Michigan..............................................................

Minnesota............................................................

Mississippi...........................................................

Missouri...............................................................

Montana..............................................................

Nebraska.............................................................

Nevada................................................................

New Hampshire...................................................

New Jersey.........................................................

New Mexico.........................................................

New York.............................................................

North Carolina.....................................................

North Dakota.......................................................

Ohio.....................................................................

Oklahoma............................................................

Oregon................................................................

Pennsylvania.......................................................

Rhode Island.......................................................

South Carolina....................................................

South Dakota......................................................

Tennessee..........................................................

Texas..................................................................

Utah.....................................................................

Vermont...............................................................

Virginia................................................................

Washington.........................................................

West Virginia.......................................................

Wisconsin............................................................

Wyoming.............................................................

Amount of bonds issued

Total

Rank

(1)

(2)

157,717

1,708

594

3,572

1,043

33,501

3,765

2,317

395

6,734

4,163

639

180

6,773

3,001

970

1,587

1,262

1,689

303

2,087

3,403

4,050

3,142

661

1,714

131

465

1,540

282

8,137

1,973

12,076

3,636

219

4,916

1,184

999

4,332

470

2,190

181

1,480

11,318

843

3,677

3,654

739

1,804

State population (in

millions) [2]

(3)

n.a.

Per capita amount of bonds

(whole dollars)

Total

Rank

(4)

290.8

4.5

0.6

5.6

2.7

35.5

4.6

3.5

0.8

0.6

17.0

8.7

1.3

1.4

12.7

6.2

2.9

2.7

4.1

4.5

1.3

5.5

6.4

10.1

5.1

2.9

5.7

0.9

1.7

2.2

1.3

8.6

1.9

19.2

8.4

0.6

11.4

3.5

3.6

12.4

1.1

4.1

0.8

5.8

22.1

2.4

0.6

7.4

6.1

1.8

5.5

0.5

(5)

542

380

990

638

386

944

818

662

494

396

479

492

129

533

484

334

588

308

375

233

379

532

401

616

228

301

146

274

700

217

946

1,038

629

433

365

431

338

278

349

427

534

226

255

512

351

497

599

411

328

142

d - Data deleted to avoid disclosure of information for specific bonds. However, the data are included in the appropriate totals.

254

[1] Includes amounts for Puerto Rico and U.S. possessions.

[2] Resident population estimates released by the Bureau of the Census on December 18, 2003, in Press Release CB03-197 and published in Internal Revenue Bulletin

No. 2004-11 (Notice 2004-21). These are the population figures used to calculate the private activity volume cap for Calendar Year 2004.

n.a.

Tax-Exempt Bonds, 2003-2004

Figure F

New Money Long-Term Governmental Bonds by Selected Purpose of Bond, for Top 15 States,

Ranked by Issuance Volume, 2004

[Money amounts are in millions of dollars]

Selected purpose of bond

State

Total

amount of

bonds

issued

(1)

All States....................

California.........................

New York.........................

Texas...............................

New Jersey......................

Illinois...............................

Florida..............................

Ohio.................................

Pennsylvania...................

Georgia............................

Michigan..........................

Colorado..........................

Virginia.............................

Washington......................

North Carolina.................

Arizona............................

157,717

33,501

12,076

11,318

8,137

6,773

6,734

4,916

4,332

4,163

4,050

3,765

3,677

3,654

3,636

3,572

Education

Transportation

Amount

Percent of

total amount

issued

(2)

(3)

49,837

9,623

1,457

6,303

3,207

1,598

1,957

1,915

1,977

980

2,364

1,296

1,471

720

1,525

1,054

31.6

28.7

12.1

55.7

39.4

23.6

29.1

39.0

45.6

23.5

58.4

34.4

40.0

19.7

41.9

29.5

Utilities

Amount

Percent of

total amount

issued

(4)

(5)

20,148

2,036

3,554

586

1,300

801

894

501

427

589

241

608

155

596

352

939

Uses of Long-Term Private Activity Bond

Proceeds

From 2002 to 2003, the dollar volume of long-term

tax-exempt private activity bonds increased 1.7

percent, from $91.1 billion to $92.6 billion, and increased only slightly (0.5 percent) in 2004, to $93.1

billion. Similar to previous years, the vast majority

of tax-exempt private activity bond issues were longterm (Figure H). Short-term issues are rare, since

private activity bonds are used primarily to finance

capital improvement projects, which are generally

long-term in nature. Also, private-activity bond issuers typically do not issue bonds in the form of RANs,

TANs, or BANs. Of the about $93.9 billion of taxexempt private activity bonds issued for 2003, $92.6

billion (98.6 percent) were long-term issues. For

2004, about $93.1 billion (99.0 percent) of the $94.0

billion total tax-exempt private activity bonds issued

were long-term.

Table 7 shows the annual distribution of longterm private activity bond proceeds, by purpose of

bond issue, for 2003 and 2004. For 2003 and 2004,

on average, qualified section 501(c)(3) bonds, including qualified hospital bonds, accounted for 43.2

12.8

6.1

29.4

5.2

16.0

11.8

13.3

10.2

9.9

14.1

6.0

16.1

4.2

16.3

9.7

26.3

Environment

Amount

Percent of

total amount

issued

(6)

(7)

12,467

2,398

365

1,758

173

878

136

240

236

145

622

247

515

393

301

7.9

7.2

3.0

15.5

0.3

2.6

13.0

2.8

5.5

5.7

3.6

16.5

6.7

14.1

10.8

8.4

Public safety

Amount

Percent of

total amount

issued

Amount

Percent of

total amount

issued

(8)

(9)

(10)

(11)

11,798

2,182

277

426

230

232

108

836

284

1,472

691

239

204

286

7.5

6.5

2.3

3.8

2.8

3.4

1.6

17.0

6.6

35.4

17.1

0.5

6.5

5.6

8.0

3,715

672

149

121

174

127

103

119

160

107

328

126

2.4

2.0

1.2

1.1

1.0

2.6

1.9

2.1

1.7

2.9

1.5

4.2

2.9

0.8

9.0

3.5

percent of the dollar volume of all long-term private activity bond issues. These 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 Internal Revenue Code. Combined, bonds issued for qualified mortgages and

qualified residential rental projects accounted for

28.6 percent of the total $92.6 billion in long-term

bonds issued for 2003 and 28.8 percent of the $93.1

billion for 2004. Qualified residential rental bonds

(also referred to as multifamily housing bonds) help

developers finance construction, acquisition, and/or

rehabilitation of affordable housing projects, and

qualified mortgage bond programs assist prospective

first-time homebuyers with low-to-moderate incomes

by providing below-market interest rate loans and

down payment assistance. Combined, bonds used for

these four purposes accounted for almost three-quarters of the total long-term tax-exempt private activity

bond issuances in 2003 and 2004.

For 2003, other important types of tax-exempt

private activity bonds issued were airport bonds (9.1

percent) and student loan bonds (4.7 percent). Uses of

255

Tax-Exempt Bonds, 2003-2004

Figure G

Volume of Tax-Exempt Private Activity Bonds Issued, by Type and Issue Year, 1995-2004

Billions of dollars

100

70.0

69.9

60.1

52.4

46.5

28.3

24.1

31.4

28.7

49.9

47.9

50.6

32.2

46.0

42.3

45.2

32.9

48.1

47.9

41.7

37.7

94.0

83.5

80.9

93.9

93.0

91.6

45.9

33.6

28.3

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

Issue year

All issues

256

New Money issues

long-term bond proceeds in 2004 included certain Tax

Reform Act transition property (8.1 percent), airports

(5.4 percent), and student loan programs (5.1 percent).

For 2003, total refunding proceeds slightly

exceeded new money proceeds, accounting for 50.7

percent of the total $92.6 billion of long-term private

activity bond proceeds. Figure I illustrates the split

between the new money and refunding proceeds of

long-term private activity bonds, by selected purpose. Of the selected bond purposes shown in Figure

I, refunding proceeds exceeded new money proceeds

for only one bond purpose--mortgage bonds--which

accounted for 79.7 percent of the total $16.8 billion

of long-term bonds issued for that purpose in 2003.

For 2004, total new money proceeds exceeded refunding proceeds, accounting for 51.4 percent of the

total $93.1 billion of long-term private activity bond

proceeds. Refunding proceeds exceeded new money

proceeds for three bond purposes--mortgages, airports, and solid waste disposal facilities--accounting

for 72.6 percent, 50.5 percent, and 59.2 percent of

the total amount of long-term bonds issued for each

purpose, respectively. For all other private activity

bond purposes, the majority of the long-term bond

proceeds were new money.

Refunding issues

Figure H

Tax-Exempt Private Activity Bonds, by Term

of Issue, 2003-2004

[Money amounts are in billions of dollars]

Percent of total dollar volume issued

100

$92.6

$93.1

$1.3

$0.9

2003

2004

Issue year

Short-term

Long-term

Tax-Exempt Bonds, 2003-2004

Figure I

Long-Term Tax-Exempt Private Activity Bonds, by Selected Bond Purpose and Type of Issue, 2003-2004

2003

Billions of dollars

$7.7

$8.7

$13.4

$3.5

$2.9

$14.1

$1.5

$9.9

$6.2

$1.2

$5.6

$3.4

$2.9

$1.4

Other section

501(c)(3)

Section 501(c)(3)

hospital

Mortgage

Residential rental

Airport

Student loan

Solid waste

disposal

Bond purpose

2004

Billions of dollars

$7.0

$7.2

$13.4

$2.8

$15.7

$2.6

$11.1

$2.0

$5.6

$5.1

$2.5

Other section

501(c)(3)

Section 501(c)(3)

hospital

$0.8

Mortgage

Residential rental

Airport

$4.0

Student loan

$1.4

Solid waste

disposal

Bond purpose

New money issues

Refunding issues

257

Tax-Exempt Bonds, 2003-2004

For 2003, of the $92.6 billion of long-term taxexempt private activity bonds issued, issuers used

$0.6 billion (0.7 percent) of the bond proceeds for

bond issuance costs, $0.6 billion (0.6 percent) for

credit enhancement, and $1.3 billion (1.4 percent)

for reserve fund allocations (Table 8). The remaining $90.2 billion (97.3 percent) represented lendable

proceeds, $46.1 billion of which were used to refund

or retire prior bond issues, leaving $44.0 billion to be

used for new project costs. Of the $93.1 billion of

long-term tax-exempt private activity bonds issued

in 2004, issuers used nearly $0.6 billion (0.6 percent)

of the proceeds for bond issuance costs, almost $0.6

billion (0.6 percent) for credit enhancement, and

$1.2 billion (1.3 percent) for reserve fund allocations. The remaining $90.7 billion (97.5 percent) of

lendable proceeds were used to refund or retire prior

bond issues ($44.4 billion) and to finance new projects ($46.3 billion).

New Money Issues of Long-Term Private

Activity Bonds, Classified by Size of Issue

258

For 2004, a total of 2,544 new money long-term

tax-exempt private activity bonds was issued, with

proceeds totaling $47.9 billion (Table 9). Bonds with

an issue price of less than $10 million, including

399 qualified small issue bonds (or industrial

development bonds), accounted for 57.4 percent

of the total number of bond issues, but only 10.9

percent of total bond proceeds. Over 60 percent of

the total proceeds were attributable to the 12 percent

of bonds with an issue price in excess of $50 million.

Approximately $8.9 billion in proceeds were raised

by 165 bond issues priced between $50 million and

$100 million, while another $20.1 billion were raised

by 146 bond issues, each of which exceeded $100

million. Of the issues exceeding $100 million, the

top uses of the proceeds were for qualified section

501(c)(3) bonds, including those issued for qualified

hospitals, ($10.9 billion), student loan bonds ($3.0

billion), and mortgage bonds ($2.3 billion).

There was a 6.5-percent decrease in the number

of new money long-term tax-exempt private activity

bonds issued in 2004, as compared to 2003. However, the total dollar amount of new money longterm tax-exempt private activity bonds increased

4.9 percent, from $45.6 billion to $47.9 billion. The

average new money long-term bond issue in 2003

was $16.8 million, compared to $18.8 million in

2004. The increase was mainly limited to bond issues worth $100 million or more. In 2004, for bonds

in this size category, there was an overall increase of

$2.9 billion over the 2003 amount ($17.3 billion).

New Money Issues of Long-Term Private

Activity Bonds, Classified by State

Unlike Governmental bonds, most types of new

money private activity bond issues were subject to

State volume cap limitations determined by population [9]. States had leeway in allocating the cap

among the various qualified purposes subject to the

cap. Private activity bonds not subject to the unified

State volume cap included all new money issues for

airports, docks and wharves, Governmentally-owned

solid waste facilities, hydroelectric generating facilities, and Governmentally-owned high-speed intercity

rail facilities [14]. Refunding issues are not figured into the total for the cap, as long as there is no

increase in the principal amount of the outstanding

bond. In addition, carryforward rules allow States to

apply any unused amount of the cap to certain types

of new money issues up to 3 years into the future.

For this reason, it is legitimately possible for a State

to issue new money private activity bonds in an

amount that exceeds its cap for a given year. Qualified public educational facility bonds were subject to

their own special volume limitations, as were liberty

bonds, empowerment zone facility bonds, qualified

veterans’ mortgage bonds, and qualified section

501(c)(3) bonds [15].

Figure J shows the amount of total new money

long-term issuance, new issues subject to the volume

cap, and volume cap allocations, by State, for 2003

and 2004. Overall bond capacity (the total amount

of bonds allowed to be issued under the unified State

volume cap) grew by 6.5 percent, from $24.2 billion to $25.8 billion from 2003 to 2004. Despite

across the board increases in bond capacity from

2003 to 2004, some States scaled back issuances of

new money long-term private activity bonds in 2004.

Examining only the types of bond purposes subject

to the volume cap, Florida issued $133 billion less

of new money long-term bonds in 2004 than in 2003

[16]. New money issues subject to the volume cap

decreased $130 million in New Jersey, and $66 million in California, from 2003 to 2004. Texas increased issuance volume by $137 million.

Tax-Exempt Bonds, 2003-2004

Figure J

New Money Long-Term Tax-Exempt Private Activity Bonds and Volume Cap, by State of Issue,

2003 and 2004

[Money amounts are in millions of dollars]

2003

State of issue

All States [1]...............................................................

Alabama..........................................................................

Alaska..............................................................................

Arizona............................................................................

Arkansas..........................................................................

California.........................................................................

Colorado..........................................................................

Connecticut......................................................................

Delaware.........................................................................

District of Columbia.........................................................

Florida..............................................................................

Georgia............................................................................

Hawaii..............................................................................

Idaho................................................................................

Illinois...............................................................................

Indiana.............................................................................

Iowa.................................................................................

Kansas.............................................................................

Kentucky..........................................................................

Louisiana.........................................................................

Maine...............................................................................

Maryland..........................................................................

Massachusetts.................................................................

Michigan..........................................................................

Minnesota........................................................................

Mississippi.......................................................................

Missouri...........................................................................

Montana...........................................................................

Nebraska.........................................................................

Nevada............................................................................

New Hampshire...............................................................

New Jersey......................................................................

New Mexico.....................................................................

New York.........................................................................

North Carolina.................................................................

North Dakota...................................................................

Ohio.................................................................................

Oklahoma........................................................................

Oregon.............................................................................

Pennsylvania...................................................................

Rhode Island...................................................................

South Carolina.................................................................

South Dakota...................................................................

Tennessee.......................................................................

Texas...............................................................................

Utah.................................................................................

Vermont...........................................................................

Virginia.............................................................................

Washington......................................................................

West Virginia...................................................................

Wisconsin........................................................................

Wyoming..........................................................................

Amount of bonds issued

Total

Subject to volume

cap [2]

(1)

(2)

45,633

210

578

137

4,252

775

746

151

560

2,512

1,508

118

2,103

1,298

476

169

732

473

298

838

2,116

1,050

1,004

134

955

268

134

411

391

1,438

163

3,796

974

126

1,395

274

643

1,907

346

541

127

932

3,623

513

286

1,518

1,013

200

1,008

14,753

318

1,912

224

238

113

626

412

480

300

143

110

161

271

168

157

481

379

340

242

249

232

379

148

1,143

328

100

201

183

200

583

127

166

634

1,094

197

215

203

314

250

2004

Total volume

cap [3]

(3)

24,198.4

336.5

228.6

409.2

228.6

2,633.7

338.0

259.5

228.6

1,253.5

642.0

228.6

945.0

461.9

228.6

307.0

336.2

228.6

409.4

482.1

753.8

376.5

228.6

425.4

228.6

644.3

228.6

1,436.8

624.0

228.6

856.6

262.0

264.1

925.1

228.6

308.0

228.6

434.8

1,633.5

228.6

547.0

455.2

228.6

408.1

228.6

Amount of bonds issued

Total

Subject to volume

cap [2]

(4)

(5)

47,877

150

165

744

257

5,859

1,214

287

189

360

1,626

2,008

131

2,023

1,340

303

300

487

613

141

1,150

1,671

1,114

954

308

854

193

234

587

343

1,039

329

4,748

1,189

121

2,003

286

844

2,110

357

917

170

1,106

2,418

220

466

1,175

1,209

264

1,040

16,802

253

217

1,846

251

109

493

481

124

436

425

114

111

253

208

117

221

520

698

297

128

403

139

129

205

249

128

1,295

591

113

408

153

252

930

189

332

655

1,231

220

231

460

418

223

Total volume

cap [3]

(6)

25,766.4

360.1

233.8

446.5

233.8

2,838.8

364.1

278.7

233.8

1,361.5

694.8

233.8

1,012.3

495.7

235.5

233.8

329.4

359.7

233.8

440.7

514.7

806.4

404.8

233.8

456.4

233.8

691.1

233.8

1,535.2

672.6

233.8

914.9

280.9

284.8

989.2

233.8

331.8

233.8

467.3

1,769.5

233.8

590.9

490.5

233.8

437.8

233.8

d- Data deleted to avoid disclosure of information for specific bonds when compared to other published data. However, the data are included in the appropriate totals.

[1] Excluding U.S. possessions.

[2] These calculations are based on the data reported on Part II of Form 8038 for type of issue, and include the following: mass commuting facilities, water furnishing

facilities, sewage facilities, solid waste disposal facilities, qualified residential rental projects, local furnishing of electric energy or gas, local district heating and

cooling facilities, qualified hazardous waste facilities, high-speed intercity rail facilities, qualified mortgage bonds, qualified small issue bonds, qualified student loan bonds,

and qualified redevelopment bonds. No distinction was made for Governmentally-owned solid waste facilities (which are not subject to the volume cap). As a result, figures

could be slightly overstated.

[3] The amount of volume cap is based on State population. For 2003, the volume cap was equal to the greater of $75 per capita or $228.6 million. For 2004, the volume cap

was the greater of $80 per capita or $233.8 million. The resident population estimates were released by the U.S. Bureau of the Census and published in Internal Revenue

Bulletins No. 2003-10 (Notice 2003-16) and No. 2004-11 (Notice 2004-21).

259

Tax-Exempt Bonds, 2003-2004

Of the total $24.2 billion in total volume cap for

2003, only $14.8 billion in new money private activity bonds were issued, leaving $9.4 billion to carry

forward to future years. Of the total $25.8 billion in

total volume cap for 2004, only $16.8 billion in new

money private activity bonds were issued, leaving

$9.0 billion to carry forward to future years. Unused

volume cap amounts that are carried forward are often already earmarked for designated projects slated

to commence within the next few years. The large

amount of unused volume cap can also be attributed

to the relatively low interest rates in 2003 and 2004,

which applied not only to tax-exempt bonds, but

also extended to taxable bonds. The narrowing gap

between the interest rate on taxable bonds and that

of tax-exempt State and local bonds for the period

between 2000 and 2004 may have made taxable bond

financing a more feasible option for some private

borrowers who otherwise might have employed taxexempt bond financing.

Figure K presents the top 15 States, ranked by

the total dollar volume of new money long-term

issues for 2004. These 15 States accounted for 66.3

percent of the total new money long-term bond issues during the specified time period. About $24.5

billion (51.1 percent) of the $47.9 billion of new

money long-term bonds issued for 2004 were issued

in the following nine States: California (12.2 percent), New York (9.9 percent), Texas (5.0 percent),

Pennsylvania (4.4 percent), Illinois (4.2 percent),

Georgia (4.2 percent), Ohio (4.2 percent), Massachusetts (3.5 percent), and Florida (3.4 percent).

Combined, California and New York accounted

for slightly more than one-third (35.6 percent) of

the $5.6 billion of new money long-term residential

rental bonds and 31.5 percent of the section 501(c)(3)

bonds (excluding hospital bonds). Texas accounted

for another 8.8 percent of the amount issued for

residential rental projects. Table 10 shows all States’

new money long-term private activity bond issuances, classified by selected purpose of bond for 2003

and 2004. For a majority of States, more than half of

all new money long-term issues were used to finance

section 501(c)(3) projects, including hospitals.

Summary

260

For 2003, a total of $354.0 billion of Governmental

bonds was issued, compared to the $340.1 billion

issued in 2002. This marked the highest issuance

volume to date. Issuance volume then decreased 7

percent, to $330.4 billion, in 2004. Long-term new

money issues, bonds with maturities of 13 months

or more used to finance new projects, made up 43.7

percent of the total dollar volume in 2003 and 47.7

percent of the total in 2004. Bonds to refund prior

Governmental issues accounted for 38.8 percent

of the total $354.0 billion issued in 2003 and 37.0

percent of the total $330.4 billion in 2004. Similar to

past years, projects related to education, transportation, and utilities received the bulk of Governmental

bond financing for 2003 and 2004. Projects to fund

educational purposes received 33.2 percent of total

new money long-term Governmental bond proceeds

in 2003, and 31.6 percent in 2004.

Since 2002, there has been little growth in the

total issuance of tax-exempt private activity bonds.

Total tax-exempt private activity bond issuance averaged $93.6 billion annually over the last 3 years. Of

the $93.1 billion in long-term tax-exempt private

activity bonds issued in 2004, new money issues

accounted for 51.4 percent of the total amount issued. This was an increase over 2003, where new

money issues accounted for slightly less than half

(49.3 percent) of the total amount of long-term taxexempt private activity bonds issued. Bonds issued

for use by qualified section 501(c)(3) organizations

(including qualified hospitals) and those to promote

the development and purchase of affordable housing

(through residential rental and single-family mortgage bonds) accounted for just over 70 percent of all

long-term private activity bonds issued during 2003

and 2004.

Data Sources and Limitations

The data presented in this article are based on the

populations of Forms 8038, Information Return for

Tax-Exempt Private Activity Bond Issues, and Forms

8038-G, Information Return for Tax-Exempt Governmental Obligations, filed with the Internal Revenue

Service for bonds issued during Calendar Years 2003

and 2004. The data presented in this article exclude

returns filed for commercial paper transactions, as well

as issues that are loans from the proceeds of other taxexempt issues (pooled financings).

Bond issuers were required to file these tax-exempt bond returns by the 15th day of the 2nd calendar month after the close of the calendar quarter in

which the bond was issued. However, in an effort

Tax-Exempt Bonds, 2003-2004

Figure K

New Money Long-Term Tax-Exempt Private Activity Bonds by Selected Purpose of Bond, for Top

15 States, Ranked by Issuance Volume, 2004

[Money amounts are in millions of dollars]

Selected purpose of bond

State

All States........................

California.........................

New York........................

Texas..............................

Pennsylvania..................

Illinois..............................

Georgia...........................

Ohio................................

Massachusetts................

Florida.............................

Indiana............................

Colorado.........................

Washington.....................

North Carolina.................

Virginia............................

Maryland.........................

Total amount of

bonds issued

Other section Percent of total

501(c)(3)

amount issued

(1)

(2)

47,877

5,859

4,748

2,418

2,110

2,023

2,008

2,003

1,671

1,626

1,340

1,214

1,209

1,189

1,175

1,150

15,654

3,163

1,763

367

684

822

704

752

861

579

302

321

257

136

313

739

Section

501(c)(3)

hospital

Percent of total

amount issued

Residential

rental

Percent of total

amount issued

Mortgage

Percent of total

amount issued

(4)

(5)

(6)

(7)

(8)

(9)

(3)

32.7

54.0

37.1

15.2

32.4

40.6

35.1

37.5

51.5

35.6

22.5

26.4

21.3

11.4

26.6

64.3

11,074

616

452

486

468

657

275

843

280

359

155

551

266

376

386

190

23.1

10.5

9.5

20.1

22.2

32.5

13.7

42.1

16.8

22.1

11.6

45.4

22.0

31.6

32.9

16.5

5,551

1,055

923

489

287

388

102

218

276

237

106

11.6

18.0

19.4

20.2

14.2

19.3

5.1

13.0

17.0

3.4

2.6

19.6

2.9

4.8

9.2

5,063

511

284

304

311

127

106

10.6

8.7

6.0

12.6

14.7

7.6

2.4

5.3

8.9

7.8

d - Data deleted to avoid disclosure of information for specific bonds when compared to other published data. However, the data are included in the appropriate totals.

to include as many applicable returns for a particular issue year as possible, the study period extended

well beyond this timeframe. The study includes

returns processed from January 1, 2003, to December 31, 2005, for bonds issued in 2003, and returns

processed from January 1, 2004, to May 13, 2006,

for bonds issued in 2004. Returns received after the

cutoff date for each study year were not included in

the statistics.

During statistical processing, returns were subject to thorough testing and correction procedures to

ensure accuracy and validity. Further checks were

conducted to identify and exclude duplicate and

amended returns. In some instances, returns with incomplete information, mathematical errors, or other

reporting anomalies were edited to resolve internal

inconsistencies. In other cases, it was not possible

to reconcile reporting discrepancies. Thus, a certain

amount of nonsampling error may remain.

Explanation of Selected Terms

Allocation to Reserve Fund.--Proceeds that are

placed in reserve to be used to pay debt service if

pledged revenues are insufficient to satisfy the debt

service requirements. The amount deposited into

a reserve or replacement fund may not exceed 10

percent of the proceeds of an issue.

Bond Anticipation Note (BAN).--Obligation that

is issued in anticipation of a later issuance of bonds,

payable from the proceeds of the sale of the bonds or

of renewal notes. BANs typically have maturities of

3 years or less.

Bond Issuance Costs.--Issuance costs include

fees paid for trustees, bond counsel, and underwriters. Issuance costs paid out of private activity bond

proceeds generally may not exceed 2 percent of the

proceeds.

Commercial Paper.--Commercial paper consists

of short-term notes that are continually rolled over.

Maturities range up to 270 days but average about 30

days. Many localities use commercial paper to raise

cash needed for current transactions.

Credit Enhancement.--Fees paid for items such

as bond insurance premiums, letters-of-credit fees,

and other additional forms of guaranty, all of which

provide additional security in a bond financing.

261

Tax-Exempt Bonds, 2003-2004

Exempt Facility Bond.--Bond issue of which

95 percent or more of the net proceeds are used to

finance a tax-exempt facility (as listed in Code sections 142(a)(1) through (13) and 142(k)). These

facilities include airports, docks and wharves, mass

commuting facilities, facilities for the furnishing of

water, sewage facilities, solid waste disposal facilities, qualified residential rental projects, facilities for

the local furnishing of electric energy or gas, local

district heating or cooling facilities, qualified hazardous waste facilities, high-speed intercity rail facilities, environmental enhancements of hydroelectric

generating facilities, and qualified public educational

facilities. The Revenue Reconciliation Act of 1993

created a new category of bonds, qualified enterprise

zone facility bonds, that may be issued for certain

businesses in “empowerment zones” or “enterprise

communities.” Empowerment Zone and Enterprise

Community designations are made by the Secretaries

of Agriculture and Housing and Urban Development,

and last for a 10-year period. The Taxpayer Relief

Act of 1997 provided certain economically depressed

census tracts within the District of Columbia designation as the “D.C. Enterprise Zone.” Qualified

enterprise zone facility bonds are generally subject

to the same rules as exempt facility bonds. The Job

Creation and Worker Assistance Act of 2002 created

section 1400L of the Internal Revenue Code of 1986

to provide various tax benefits for the area of New

York City damaged or affected by the terrorist attack

on September 11, 2001. Section 1400L(d) authorizes

the issuance of an additional type of exempt facility

bond, namely, “Liberty Bonds.” Liberty Bonds are

subject to the following additional requirements: (a)

95 percent or more of the net proceeds of such issue must be used for qualified project costs; (b) the

bond must be issued by the State of New York or any

political subdivision thereof; (c) the Governor of the

State of New York or the Mayor of the City of New

York must designate the bond for purposes of section 1400L(d); and (d) the bond must be issued after

March 9, 2002, and before January 1, 2005. The

maximum aggregate face amount of bonds that may

be designated as Liberty Bonds is $8 billion.

Governmental Bond.--Any obligation issued by

a State or local government unit that is not a private

activity bond (see below). The interest on a Govern262

mental bond is excluded from gross income under

section 103 of the Internal Revenue Code.

Nongovernmental Output Property Bond.--Bonds

used to finance the acquisition of property used by a

nongovernmental entity in connection with an output

facility (such as an electric or gas power project).

This bond must meet additional tests under Internal

Revenue Code section 141(d).

Pooled Financing.--An arrangement whereby a

portion of the proceeds of a Governmental bond issue

is used to make loans to other Governmental units.

Private Activity Bond.--Bond issue of which

more than 10 percent of the proceeds is used for any

private business use, and more than 10 percent of the

payment of the principal or interest is either secured

by an interest in property to be used for private business use (or payment for such property), or is derived

from payments for property (or borrowed money)

used for a private business use. A bond is also considered a private activity bond if the amount of the

proceeds used to make or finance loans (other than

loans described in Internal Revenue Code section

141(c)(2)) to persons other than Governmental units

exceeds the lesser of 5 percent of the proceeds or $5

million.

Qualified Mortgage Bond.--Bond issue of which

the proceeds (except issuance costs and reasonably

required reserves) are used to provide financing assistance for single-family residential property, and

which meets the additional requirements in Internal

Revenue Code section 143. Bond proceeds can be

applied toward the purchase, improvement, or rehabilitation of owner-occupied residences, as well as to

finance qualified home-improvement loans.

Qualified Redevelopment Bond.--Bond issue of

which 95 percent or more of the net proceeds are

used to finance certain specified real property acquisition and redevelopment in blighted areas (see

Internal Revenue Code section 144(c) for additional

requirements).

Qualified Section 501(c)(3) Bond.--Bonds issued

by State and local governments to finance the activities of charitable, educational, hospital, and similar

organizations that are tax-exempt under Internal

Revenue Code section 501(c)(3). A bond must meet

the following conditions to be classified as a section

501(c)(3) bond: 1) all property financed by the net

proceeds of the bond issue is to be owned by a sec-

Tax-Exempt Bonds, 2003-2004

tion 501(c)(3) organization or a governmental unit,

and 2) the bond would not be a private activity bond

if section 501(c)(3) organizations were treated as

governmental units with respect to their activities

that are not related trades or businesses, and the private activity bond definition was applied using a 5percent threshold rather than a 10-percent threshold.

The primary beneficiaries of these bonds are private,

nonprofit hospitals, colleges, and universities. A section 501(c)(3) hospital bond issue is one in which 95

percent or more of the net proceeds are to be used for

a hospital. The category of bond issues referred to as

“other section 501(c)(3)” includes bond issues that

are not related to hospitals.

Qualified Small Issue Bond.--Bond issue generally not exceeding $1 million, and of which 95 percent or more of the net proceeds are used to finance

the acquisition of land and depreciable property or

to refund such issues. In certain instances, an election to take certain capital expenditures into account

can increase the limit on bond size, from $1 million

to $10 million. These bonds may only be used to

finance manufacturing facilities and to benefit certain

first-time farmers.

Qualified Student Loan Bond.--Bond issue of

which 90 percent or more of the net proceeds are

used to make or finance student loans under a program of general application to which the Higher

Education Act of 1965 applies (see Internal Revenue

Code section 144(b)(1)(A) for additional requirements), or of which 95 percent or more of the net

proceeds are used to make or finance student loans

under a program of general application approved by

the State (see Code section 144(b)(1)(B) for additional requirements).

Qualified Veterans’ Mortgage Bond.--In general, a bond issue of which 95 percent or more of

the net proceeds are used to provide residences for

veterans who: 1) served prior to January 1, 1977;

and 2) applied for such a mortgage prior to the date

30 years after leaving active service or January 31,

1985, whichever is later. The payment of interest

and principal must be secured by a general obligation

of the State, and the bond must meet certain of the

requirements of Internal Revenue Code section 143.

The issuance of qualified veterans’ mortgage bonds

was limited to the following five States: Alaska,

California, Oregon, Texas, and Wisconsin, each of

which had a veterans’ mortgage bond program in effect prior to June 22, 1984.

Tax Reform Act Transition Property Bond.-- A

bond issued under transitional rules contained in

the Tax Reform Act of 1986. Proceeds from bonds

issued under these rules include issues used to fund

items such as pollution control facilities, parking

facilities, industrial parks, sports stadiums, and convention facilities. Proceeds from other bonds issued

under the transitional rules are included in this category only if they could not be identified as another

issue type.

Notes and References

Additional tax-exempt bond data, including data by

type of issue, State, size of issue, and uses of proceeds, for various years can be found on the SOI

Web site: <http://www.irs.gov/taxstats> (click on

“Tax-Exempt Bonds”).

[1] In addition, for State income tax purposes, some

States allow for the exclusion of interest on

bonds issued by government agencies within

their own State, thus increasing the benefit to

bondholders.

[2] This estimate is based on tax-exempt bonds that

will bear interest in Fiscal Year 2007, regardless

of when the bonds were originally issued. Revenue loss estimates are from the annual Budget

of the United States Government, Fiscal Year

2007, Analytical Perspectives, Table 19-1: Estimates of Total Income Tax Expenditures <http://

www.whitehouse.gov/omb/budget/fy2007/pdf/

spec.pdf>.

[3] The term “State” includes the District of Columbia and any possession of the United States.

[4] An arbitrage bond is one in which any portion of the proceeds is intentionally invested

in higher-yielding investments, or is used to

replace proceeds which have been intentionally

invested in higher-yielding investments. Certain

rules allow for arbitrage earnings with respect

to tax-exempt bonds within a specified time

period, so long as these earnings are rebated to

the Department of the Treasury.

[5] A registered bond is defined as: “a bond whose

owner is designated on records maintained by

263

Tax-Exempt Bonds, 2003-2004

a registrar, the ownership of which cannot be

transferred without the registrar recording the

transfer on its records.” (From the Municipal

Securities Rulemaking Board’s Glossary of Municipal Securities Terms <http://www.msrb.org/

msrb1/glossary/>.) See also Internal Revenue

Code section 149(a) for additional information.

[6] Call provisions allow the issuer to retire all or a

portion of the bonds prior to the stated maturity

date. Many State and local bonds were issued

with call provisions that allowed the issuer to

retire the bonds beginning 10 years from the date

of issue, usually at par (face value) or at a small

premium above par.

[7] A transition rule allows bonds issued before the

effective date of the Tax Reform Act of 1986 to

be advance refunded twice (once if they had already been advance refunded one or more times

before that date).

[8] The Job Creation and Worker Assistance Act

of 2002 (Public Law 107-47) included changes

to tax-exempt bond law intended to provide recovery assistance to businesses in the New York

City area in the aftermath of the terrorist attacks

of September 11, 2001. Specifically, the new

law allowed for an additional advance refunding

for certain bonds that had already been advance

refunded prior to September 12, 2001. The

refunding bonds must have been outstanding

on September 11, 2001, and at least 90 percent

(95 percent for 501(c)(3) bonds) of the facilities

financed under the original issue must have been

located within the area designated as the “New

York Liberty Zone.” (Certain facilities located

outside New York City were also deemed eligible.) Qualified bonds were designated by the

Governor of New York or the Mayor of New

York City as “liberty advance refunding bonds.”

The provision was effective for bonds issued

after March 9, 2002, and before January 1, 2005.

See Internal Revenue Service Notice 2002-42,

2002-27 Internal Revenue Bulletin 36, for additional information.

264

[9] For 2003, the volume cap was equal to the

greater of $75 per capita or $228.6 million. For

2004, the volume cap was the greater of $80 per

capita or $233.8 million. Volume caps for U.S.

possessions, with the exception of Puerto Rico,

are determined under Internal Revenue Code

section 146(d)(4).

[10] Obtained from the Federal Reserve Board, “Federal Statistical Release H.15: Selected Interest

Rates, Historical Data” <http://www.federalreserve.gov/releases/H15/data/m/slbond.txt>.

[11] Form 8038-G returns with a total issue price

less than $100,000 are excluded from the study.

Issuers of these bonds are instructed to file

Form 8038-GC, Information Return for Small

Tax-Exempt Governmental Bond Issues, Leases, and Installment Sales. Statistics of Income

(SOI) does not process data from Forms 8038GC filed with the Internal Revenue Service.

[12] The resident population estimates were released

by the U.S. Bureau of the Census and published

in Internal Revenue Bulletin No. 2004-11 (Notice 2004-21).

[13] Internal Revenue Code section 141(b)(5) states

that a Governmental bond will be treated as a

private activity bond if: 1) the “nonqualified

amount” exceeds $15 million, but is less than

the amount needed to meet any of the private

activity bond tests; and 2) the issuer does not

allocate a portion of its volume cap to the issue

in an amount equal to the excess of such nonqualified amount over $15 million.

[14] For privately-owned high-speed intercity rail

facilities, only 25 percent of the bonds issued

are included in the volume cap calculation.

[15] Educational facility bonds are limited to the

greater of $10 per capita or $5 million. Liberty

bonds are subject to an $8-billion aggregate

issuance limitation. Section 501(c)(3) bonds

(other than qualified hospital bonds) were subject to a cap of $150 million per organization.

[16] Amounts subject to the volume cap were calculated using the data reported on Part II of Form

8038 for type of issue, prorated according to

the percent of the issue that was new money.

The types of bonds include the following: mass

commuting facilities, water furnishing facilities, sewage facilities, solid waste disposal

facilities, qualified residential rental projects,

Tax-Exempt Bonds, 2003-2004

local furnishing of electric energy or gas, local

district heating and cooling facilities, qualified

hazardous waste facilities, high-speed intercity rail facilities, qualified mortgage bonds,

qualified small issue bonds, qualified student

loan bonds, qualified redevelopment bonds,

and “other bonds” (i.e., obligations for which

a specific purpose either did not apply or was

not clearly indicated on the Form 8038 return).

No distinction was made for Governmentallyowned solid waste facilities (which are not

subject to the volume cap), and, as a result,

estimated amounts subject to the cap could be

slightly overstated.

265

Tax-Exempt Bonds, 2003-2004

Table 1.--Volume of Governmental Bonds by Type and Term of Issue, 2003 and 2004

[Money amounts are in millions of dollars]

Issue year

2003

Type and term of issue

2004

Number

Amount

Number

Amount

(1)

(2)

(3)

(4)

All issues, total [1]...........................................................................

28,085

353,994

25,889

Short-term......................................................................................

7,485

71,380

6,992

330,413

60,931

Long-term.......................................................................................

20,600

282,614

18,897

269,481

New money issues, total.................................................................

20,600

216,503

19,649

208,201

Short-term......................................................................................

5,753

61,751

5,230

50,484

Long-term.......................................................................................

14,847

154,752

14,419

157,717

Refunding issues, total....................................................................

10,086

137,491

8,424

122,212

Short-term......................................................................................

2,341

9,629

2,372

10,448

Long-term.......................................................................................

7,745

127,862

6,052

111,764

[1] A given bond issue can include both new money and refunding proceeds. Thus, the number of new money issues plus the number of refunding issues will not always equal

the number of total issues. However, the money amounts are additive to the totals.

NOTE: Detail may not add to totals because of rounding.

SOURCE: IRS, Statistics of Income Division, September 2006.

266

Tax-Exempt Bonds, 2003-2004

Table 2.--Long-Term Governmental Bonds, by Purpose of Bond and Type of Issue, 2003 and 2004

[Money amounts are in millions of dollars]

2003

All issues

Purpose of bond

Number

(1)

Total [1]..................................................

Education....................................................

Health and hospital.....................................

Transportation.............................................

Public safety...............................................

Environment................................................

Housing.......................................................

Utilities........................................................

Bond and tax/revenue anticipation notes…

Other bond purposes [2].............................

20,600

6,672

505

1,254

2,358

1,717

203

2,721

335

6,087

New money issues

Amount

Percent of

total

amount

(2)

(3)

(4)

100.0

29.1

1.9

12.0

2.8

6.3

0.9

15.8

1.1

30.0

14,847

4,653

403

983

2,082

1,121

156

1,673

292

4,415

282,614

82,368

5,386

33,973

7,877

17,944

2,572

44,601

2,981

84,912

Number

Refunding issues

Amount

Percent of

total

amount

Number

(5)

(6)

(7)

100.0

33.2

1.6

11.4

3.1

5.0

1.2

11.1

1.0

32.5

7,745

2,626

147

430

421

836

1,437

2,433

154,752

51,309

2,478

17,660

4,754

7,800

1,809

17,132

1,585

50,225

Amount

Percent of

total

amount

(8)

(9)

127,862

31,060

2,908

16,313

3,123

10,145

763

27,468

1,397

34,687

100.0

24.3

2.3

12.8

2.4

7.9

0.6

21.5

1.1

27.1

2004

All issues

Purpose of bond

Amount

Percent of

total

amount

Number

(10)

(11)

(12)

18,897

6,154

471

1,244

2,180

1,501

184

2,309

312

5,814

269,481

80,630

5,481

31,934

5,819

18,746

1,293

28,701

1,593

95,285

100.0

29.9

2.0

11.9

2.2

7.0

0.5

10.7

0.6

35.4

Number

Total [1]..................................................

Education....................................................

Health and hospital.....................................

Transportation.............................................

Public safety...............................................

Environment................................................

Housing.......................................................

Utilities........................................................

Bond and tax/revenue anticipation notes…

Other bond purposes [2].............................

New money issues

Refunding issues

Amount

Percent of

total

amount

Number

Amount

Percent of

total

amount

(13)

(14)

(15)

14,419

4,553

396

995

1,933

1,062

138

1,537

295

4,403

157,717

49,837

3,788

20,148

3,715

11,798

931

12,467

1,024

54,008

100.0

31.6

2.4

12.8

2.4

7.5

0.6

7.9

0.6

34.2

(16)

(17)

(18)

6,052

2,064

113

420

380

649

1,047

2,003

111,764

30,793

1,693

11,786

2,104

6,948

362

16,234

569

41,276

100.0

27.6

1.5

10.5

1.9

6.2

0.3

14.5

0.5

36.9

[1] A given issue can include more than one purpose and can include both new money and refunding proceeds. Thus, the summation of number of issues by purpose or by type of

issue will sometimes exceed the total number of issues. However, the money amounts are additive to the totals.

[2] For purposes of this table, "other bond purposes" refer to obligations for which a specific purpose either did not apply or was not clearly indicated on the Form 8038-G return.

NOTE: Detail may not add to totals because of rounding.

SOURCE: IRS, Statistics of Income Division, September 2006.

267

Tax-Exempt Bonds, 2003-2004

Table 3.--Computation of Lendable Proceeds for Long-Term Governmental Bonds, by Purpose of Bond,

2003 and 2004

[Money amounts are in millions of dollars]

Issue

year

Purpose of bond

Entire issue price

Bond issuance

costs

Credit

enhancement

Allocation to reserve

fund

Number

Amount

Number

Amount

Number

Amount

Number

Amount

(1)

(2)

(3)

(4)

(5)

(6)

(7)

(8)

2003

Total [1]..................................................

Education....................................................

Health and hospital......................................

Transportation.............................................

Public safety................................................

Environment................................................

Housing.......................................................

Utilities.........................................................

Bond and tax/revenue anticipation notes....

Other bonds [2]............................................

20,600

6,672

505

1,254

2,358

1,717

203

2,721

335

6,087

282,614

82,368

5,386

33,973

7,877

17,944

2,572

44,601

2,981

84,912

13,661

4,595

246

893

822

1,261

141

2,242

261

4,385

2,577

717

256

174

435

821

5,562

2,211

346

297

484

955

1,679

1,213

223

215

228

376

1,563

244

101

153

399

575

3,499

304

403

196

633

1,753

2004

Total [1]..................................................

Education....................................................

Health and hospital......................................

Transportation.............................................

Public safety................................................

Environment................................................

Housing.......................................................

Utilities.........................................................

Bond and tax/revenue anticipation notes....

Other bonds [2]............................................

18,897

6,154

471

1,244

2,180

1,501

184

2,309

312

5,814

269,481

80,630

5,481

31,934

5,819

18,746

1,293

28,701

1,593

95,285

12,330

4,122

226

901

749

1,091

119

1,878

229

4,183

2,363

729

243

165

308

787

5,148

2,146

369

294

396

785

1,596

1,007

198

168

149

358

1,458

280

106

157

307

518

2,568

325

106

436

347

364

917

Issue

year

Purpose of bond

Total lendable proceeds

Proceeds used to

refund prior issues

Nonrefunding proceeds

Number

Amount

Number

Amount

Number

(9)

(10)

(11)

(12)

(13)

Amount

(14)

2003

Total [1]..........................................................................................

Education............................................................................................

Health and hospital..............................................................................

Transportation.....................................................................................

Public safety........................................................................................

Environment........................................................................................

Housing...............................................................................................

Utilities.................................................................................................

Bond and tax/revenue anticipation notes............................................

Other bonds [2]....................................................................................

20,600

6,672

505

1,254

2,358

1,717

203

2,721

335

6,087

275,326

81,124

5,233

33,098

7,703

17,500

2,435

43,304

2,967

81,961

7,745

2,626

147

430

421

836

1,437

2,433

125,379

30,633

2,840

15,929

3,074

9,939

744

26,874

1,391

33,956

14,847

4,653

403

983

2,082

1,121

156

1,673

292

4,415

149,946

50,491

2,393

17,169

4,629

7,562

1,691

16,429

1,576

48,006