Private Activity Bond Allocation
Program Overview

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. The ceiling, imposed by the Tax Act, is $85 per capita for program year 2007.

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 high 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.

For the 2007 program year, the Act specifies that, until August 15th, the state's ceiling must be set aside as follows:
28.0 percent is to be made available for single-family housing to issuers of qualified mortgage bonds (MRBs). Of that amount, one-third is available to the Texas Department of Housing and Community Affairs (TDHCA), $50,000,000 is available to the Texas State Affordable Housing Corporation (TSAHC) for their Professional Educators Home Loan Program ($25,000,000) and their Police and Firefighters Home Loan Program ($25,000,000), and the remaining amount is available to local issuers. A local issuer may apply for an amount determined by a formula which is based on their population, but in no event for more than $25,000,000.

8.0 percent is to be made available for issues authorized by a state constitutional amendment. The Texas Higher Education Coordinating Board may apply for a maximum of $75,000,000 and the Texas Water Development Board may apply for a maximum amount of $125,000,000 for large scale water projects, but other issuers eligible in this category are limited to a maximum of $50,000,000.

2.0 percent is to be made available for issuers of qualified small issue IDBs and empowerment zone bonds (EZ bonds) for use in federally-designated empowerment zones and enterprise communities. Of that amount, one-third is available to the Texas Agricultural Finance Authority for rural industrial development projects per House Bill 3329. The maximum application amount for all other issuers in this subceiling is $10,000,000.

22.0 percent is to be made available for issuers of qualified residential rental project issue bonds (multi-family housing). Of that amount, ten percent is available to the Texas State Affordable Housing Corporation (TSAHC), twenty percent is available to the Texas Department of Housing and Community Affairs (TDHCA), and seventy percent is available to local issuers. Applicants within this category have a maximum application limit of $15,000,000.

10.5 percent is to be made available for issuers of qualified student loan bonds authorized by §53.47, Education Code. Each Issuer is guranteed a minimum reservation amount of $27,500,000 but may request more if cap is available and the issuer demonstrates a greater annual need.

29.5 percent is to be made available for issuers of "all other" bonds requiring an allocation. This final subceiling receives applications from local issuers of exempt facility bonds and any other eligible bonds not covered by other subceilings. Applications in this subceiling may not exceed $50,000,000.

All issuers must complete their transaction and close on the bond issue within a designated number of days of the reservation date. Issuers of MRBs and state-voted bonds must close within a 180-day time limit. Residential rental issuers have 150 days to close on their bonds; all other issuers have 120 days to close. If an applicant receives a reservation for allocation and is unable to consummate the transaction, or closes for a lesser amount, the original request is considered satisfied. Subsequently, the unused reservation or excess allocation is redistributed and used by another applicant. This often results in an actual distribution which varies from the predetermined set-asides at the beginning of the program year.

Texas has the second largest state ceiling in the nation, second only to California in population and volume cap. Texas once again experienced an increase of volume cap for the 2007 Private Activity Bond Allocation Program. Based on the population estimate for Texas, the 2007 volume cap was set at $2.0 billion.