WASHINGTON -- Large environmental and energy projects were the big winners last year in the private-activity bond volume cap sweepstakes -- but in 1994 their luck is likely to run out.
In 1993, for the second year in a row, issuers of bonds for so-called exempt facilities, such as sewage treatment plants and electric utilities, received allocations under the cap that would otherwise have gone to mortgage revenue bonds and small-issue industrial development bonds, according to a survey by The Bond Buyer.
The authority to issue mortgage bonds and IDBs expired on June 30, 1992, and was not reinstated until Aug. 10, 1993, when it was made permanent by Congress. That was too late for all but a handful of IDB and mortgage bond issues to make it to market by the end of the year.
Many state officials say they expect demand for mortgage bonds and IDBs to come roaring back this year, the first year since 1991 that the bond exemptions will be in existence for the full 12-month period.
That means the party is likely to be over for exempt-facility bonds and for student loan bonds, which also benefited from the dearth in mortgage bond and IDB demand in 1992 and 1993.
In 1993, the overall private-activity bond cap was $14.59 billion, up slightly from $14.53 billion in 1992. The volume cap law, adopted as part of the Tax Reform Act of 1986, permits each state to allocate $50 per capita or $150 million to the bonds each year, whichever is greater.
Twenty-eight states are large enough to follow the per-capita formula, with the other 22 and the District of Columbia at the $150 million level.
The largest portion of the cap in 1993 did not go toward any bonds issues sold that year, but was carried forward by the states for future use. In 1993, 44 states carried forward a total of more than $5.9 billion, up from about $5.3 billion the previous year.
Some carryforward amounts were staggering. Maryland carried forward 93% of its $245.4 million cap, Ohio 92% of its $550.8 million cap, Massachusetts 84% of its $299.9 million cap, and Pennsylania 83% of its $600.5 million cap.
But that trend is over, state officials said. They predict that next year's carryforward amounts will plummet now that IDB and mortgage bond issuers are back in business.
States reported issuing a total of about $8 billion of debt using 1993 volume cap authority, including $1 billion for mortgage credit certificates. Another, $634.7 million was not accounted for, reflecting incomplete records kept by Illinois, along with Alabama's and Connecticut's refusal to provide information for the survey.
By far the biggest area of bond issuance under the volume cap in 1993 was for exempt facilities, which ate up nearly a quarter of the cap, or $3.55 billion, up from $3.3 billion in 1992.
The next largest area of issuance was student loan bonds, at $1.27 billion, followed by $1.15 billion for mortgage credit certificates, $495.9 million for mortgage revenue bonds, $477.0 million for multifamily housing, and $403.0 million for IDBs. States also reported an additional $477.4 million for housing, but because of incomplete records were unable to say whether the issues were for multifamily or mortgage bond projects.
California's experience with exempt facilities reflected that of a large number of states. "We were able in 1992 and 1993 to allocate a pretty high amount to exempt facilities that have really been on the backburner since the late 1980s," said Mary Kittleson, executive director of the California Debt Limit Allocation Committee.
Issuance for exempt facilities in the state totaled more than $1 billion over the two years. But Kittleson doesn't expect the bonanza for exempt facilities to last.
In terms of demand for the cap, 1993 was "the calm before the storm," Kittleson said. "By next year you'll see the competition that California had in the late 1980s and early 90s" when demand was two to three times supply.
Similarly, in Arkansas, for the last couple of years "we've had a lot of our cap go for exempt facilities. Perhaps that is just pent-up demand and they're getting it out of the way," said Kay Bell, development finance officer for the state's development finance authority.
"If interest rates [continue to] go back up, and it appears that's the trend at this point, then we will start getting pressure from housing," Bell said. "There's just not enough room in there for large exempt activities and a lot of housing."
New York is another state where generally weak demand the last two years in other areas gave finance officials "the ability to allocate volume cap for a number of large exempt facility projects," said Ray Paolino, deputy director of the state's department of economic development. A total of $221.5 million was issued in the state for exempt facilities in 1993.
Small states have gotten into the act as well. Maine, for example, has been stockpiling cap authority in the form of carryforward allocations for a particular solid waste project. "We knew it was coming," said David Markovchick, the director of business development for the Finance Authority of Maine. In 1993, the project was allocated $10 million.
Even Delaware, which traditionally has allocated most of its cap each year to the state housing agency to carry forward, has gotten bitten by the exempt facility bug.
"We had always carried forward for housing because we never had anything else to use it on," said Debra Van Koch, bond allocation officer for the state's department of finance.
But in 1993 the state's entire cap allotment, $150 million, went to a solid waste project. Van Koch said the project will need another allocation before it can be completed.
At least one state, Utah, believes it has its exempt facility demands taken care of for the time being.
"All of those projects are essentially financed. We've been working on them for the last four years," said Keith Burnett, program specialist for the state's Department of Community and Economic Development. "There are some additional funds they would like to look at, but they're pretty much out of the way."
Which is fortunate, because otherwise, "we've got an awful lot of things conspiring to keep our demand levels up" overall, Burnett said. For example, "we're seeing an awful lot of interest in multifamily housing" as vacancy rates in apartment buildings plummet.
In addition to exempt facilities, another big winner in the volume cap competition the past two years has been student loan bonds. The $1.27 billion issued in 1993 was up slightly from $1 billion in 1992. In 1990, by contrast, states reported only $416 million in student loan bond issuance.
Officials in several states said issuers of students loan bonds were prompted to push for larger-than-usual allocations in 1993 because that's when Congress passed an overhaul of the federal student aid system. Under the new law, private bank loans for students are likely to be phased out in favor of direct federal loans.
The expected changeover is causing a short-term uptick in student loan bond issuance because many banks want to sell their portfolios, and state agencies are stepping in and buying them up.
The effect of the student loan changes is evident in Virginia, according to Charles Gravatt, financial assistance coordinator for the state's Division of Community Development.
"The education loan authority is trying to poise itself to buy out everything it can possibly buy," Gravatt said. In 1993, $42.4 million of Virginia's cap of $318.9 million went for student loan bonds.
Officials in Arkansas also saw "a very large request for student loans, because the student loan rules are changing," Bell said.
The student loan authority in the state "said it wouldn't be feasible in the future to be issuing, so they asked for quite a large amount of cap," Bell said. Student loan bond issuance in Arkansas totaled about $70 million in 1993, nearly half the state's $150 million cap.
Meanwhile, for most of the year, issuers of IDBs and mortgage bonds were forced to sit on the sidelines and wait for Congress to renew the exemptions. In 1992, issuers rushed to market before the June 30 expiration date, boosting issuance that year to $1 billion for IDBs and about $2 billion for mortgage bonds.
In 1993, the late reinstatement gave issuers little time to gear up again, and issuance under the cap fell dramatically, to $495.9 million for mortgage bonds and $403.0 million for IDBs.
A number of states said they were able to give allocations to mortgage bond and IDB issuers late in 1993, though many planned IDB projects failed to materialize by the end of the year.
In one western state, the allocating agency "did a booming business from September on," said an official in the state, who asked not to be identified. A number of IDB projects sought allocations, but only two managed to use their allocation before the end of the year, the official said. Under the law, IDB issuers must forfeit allocations not used by year's end.
In other states, like Florida, the mortgage bond and IDB business in the final quarter of 1993 was slow. Florida reported $27.9 million in mortgage bonds and $7.0 million in IDBs issued under the 1993 cap.
"There weren't that many requests because it was so late in the year and people weren't ready to do bonds," said Charlene Waltz, bond development specialist with the state's division of bond finance. But "for those that did apply, there were allocations."
More IDBs could have been issued in Nevada in 1993 than the $11.2 million that did come to market, but time ran out, said Jolene Rose, the deputy director of Nevada's Department of Business and Industry. "The ones we are working on now probably could have been closed last year," she said.
Planning Ahead
In Kansas, officials planned ahead for the expected onslaught of IDB projects in the fourth quarter of 1993, said a state official who asked to remain anonymous.
"So that we didn't have a big rush of projects come in all at once, I had people essentially get in the queue in advance. I was taking allocation requests and had a number of them in hand," the official said. "So when authority did come through, we were able to [approve] them pretty quickly."
Kansas ended up selling about $18.3 million in IDBs for seven or eight projects, the officials said. In a normal year Kansas does $40 million in IDBs, he said.
In 1994, Kansas "will probably have a steady flow" of IDBs requests, the official said. "I anticipate it to be a strong year" in that area.
Similarly, in California, "the IDBs are slowly coming back," Kittleson said. But they will not move forward very quickly because "they're hard deals, they're small." In addition, "there's confusion about whether people can do them or not," she said.
New York State officials already see demand picking up, Paolino said. Normally, the first part of the year is slow there, but not in 1994.
"There were a whole lot of projects in the planning stage at the end of 1993 that just didn't have time [to close], so now they're going to market," he said.
While economic conditions change from year to year, there are always several states that complain there is never enough volume cap authority to go around.
~Overwhelming Need'
In South Carolina, demand continues to outstrip supply because "we always have an overwhelming need for student loan bonds, and just a few of the solid waste facilities can really use up a large portion" of the volume cap, said Donna Williams, assistant executive director for the state's budget and control board.
Texas had $700 million in unfilled requests at the end of 1993, and that was without applications from IDB issuers, who failed to come forward for the most part when authority to issue was reinstated, said Jeanne Talerico, program administrator for the state's private-activity bond program.
In Iowa, "we always use ours, and we always run out," said Janet Pressey, program administrator for the state's Finance Authority. Iowa, at the $150 million level, carried forward only $15 million into 1994. Most of its 1993 cap went to exempt facilities and student loan bonds.
"We have as much economic development activity as states that have much higher caps because they have much higher populations," Pressey said. "So we really get cheated in Iowa," by the way the cap is calculated.
On the other hand, several states never seem to have a problem with excess demand for cap authority. Oregon, which receives $150 million a year, is a case in point, having carried forward $129.6 million into 1994.
"Do we have enough? We always do," said Larry Groth, an analyst in the state treasurer's office. "We're not really big on using that here yet."
