Private Activity Bond Allocation
Tax-exempt financing of "private activities" has
been limited by federal law since the passage of the Tax Reform Act of 1986
(the "Tax Act"). Private activity bonds are those which have met any or all of
the following tests: 1) Private Business Use Test - more than 10 percent of the
proceeds are to be used for any private business use; 2) Private Security or
Payment Test - payment on principal or interest of more than 10 percent of the
proceeds is directly or indirectly secured by, or payments are derived from, a
private business use; and 3) Private Loan Financing Test - proceeds will be
used to make or finance loans to persons other than governmental units.
The Tax Act also restricts the types of privately-owned public purpose projects
which can take advantage of tax-exempt financing. The types of issues
authorized, which are relevant to this section, are mortgage revenue bonds
(MRBs), small-issue industrial development bonds (IDBs), certain state-voted
bond issues, student loan bonds, and those for a variety of "exempt
facilities", including qualified residential rental projects (multi-family
housing), sewage facilities, solid waste disposal facilities, and hazardous
waste disposal facilities.
Additionally, the Tax Act imposes a volume ceiling on the aggregate principal
amount of tax-exempt private activity bonds that may be issued within each
state during any calendar year.
Section 146(e) of the Internal Revenue Code provides for each state to devise
an allocation formula or a process for allocating the state's ceiling. This
provision has given each state the ability to allocate this limited resource in
a manner consistent with the needs of that state. Since different states have
different needs and demands, there are many varied allocation systems in place.
In an effort to address demand for most types of private activity bond
financing, Texas has devised a system that ensures an opportunity for some
allocation for each eligible project type. Because of the limited state
ceiling, it is impossible to meet all the demands, but a system must be in
place that ensures an equitable method of allocation.