WASHINGTON - A new General Accounting Office report says small-issue industrial development bonds are not notably effective in creating jobs, and suggests that Congress may want to scrap proposals for renewing the exemption for the bonds, which expired last June 30.

Municipal lobbyists, however, disputed the GAO's conclusions, saying the findings were not borne out by the data gathered by the agency. The lobbyists also noted that the GAO found that IDB issues are meeting federal requirements and are not displaying a high default rate.

In its report last week, the agency said that while proponents claim IDB financing creates jobs, assists economically distressed areas, and fosters start-up companies, "GAO found that it was unclear whether IDBS significantly achieve these benefits."

For that reason, "Congress may wish to consider not renewing the IDB provision," the agency said. Lawmakers are already well on the way to doing so, however. Last week, the House passed President Clinton's budget and tax package, which includes a provision that would make the IDB exemption permanent.

Lobbyists said they were not worried that Congress would follow the agency's advice. The report "is not likely to have any significant adverse effect on the broad support that IDBs enjoy in Congress," said Guy Land, a lobbyist for the Council of Development Finance Authorities.

The agency said that if Congress decides to renew the IDB exemption, "it may wish to specify requirements to better direct IDBs toward achieving public benefits that would not occur from alternative investment of the money." For example, Congress could require IDB financing to be used only in economically depressed areas or for start-up companies.

The GAO studied 68 projects in Ohio, Indiana, and New Jersey that represented about 20% of total IDB issuance in the country during 1991. Of the 68 projects, the agency found that 27, or 40%, would have been canceled without IDB financing, while 41, or 60%, would have moved forward without IDB financing.

"Because it is unlikely that IDBs create more jobs than would be created through alternative investment of the money elsewhere in the country, job creation may not be a meaningful or measurable public benefit requirement for IDBs," the agency said.

But lobbyists said closer scrutiny of the statistics produces a more positive picture of IDB use. For example, they said, even though 41 projects would have gone forward without IDB financing, 22 of them would have been scaled down and another five would have been

The lobbyists pointed out that if those 27 projects are added to the 27 that would have been canceled without IDB financing, it is possible to say that 54 of the 68 projects, or 80%, would have been in some way impeded by the absence of IDB financing.

"Someone could have taken the same facts and written a very positive report," said Timothy P. Agnew, chief executive officer for the Finance Authority of Maine. Agnew is also president of the development agencies council.

The GAO data "show the critical importance of IDBs in contributing to manufacturing sector job growth," Land said.

Contrary to their conclusion, GAO's data demonstrates convincingly that in the overwhelming majority of projects financed by IDBs, the IDB contributes directly and substantially to significant, immediate job creation that would not have occurred without the IDB," Land said.

But the agency also said in its report that other benefits often ascribed to IDBs also do not seem to be borne out by the data. For example, while proponents often say that IDBs help launch new small businesses, most of the 68 projects in the three states benefited entities that "were generally well established, financially sound companies that had been in operation for many years," the agency said.

Lobbyists, however, pointed out that helping start-up companies is not a requirement for IDBs under the law, nor is using IDB financing in economically depressed areas. The report acknowledges, in fact, that in the projects reviewed "all the bonds were used to finance activities that are eligible under the Internal Revenue Code."

The agency also said that it investigated whether IDBs experienced high default rates or early calls, but found they did not.

"Concerns that the public benefits generated by IDBs might be affected by a high rate of defaults or prepayments are not borne out by our work," the agency said. "In the three states we reviewed, IDBs are seldom subject to default or prepayment."

Amy K. Dunbar, director of governmental affairs for the National Association of Bond Lawyers, said the report "basically said the IDB program is doing what it was established to do, and is not violating any rules."

For that reason, the report "is not a particularly troubling study for proponents of small-issue IDBs," Dunbar said. "I think the report is fairly innocuous in its conclusions."

The report was prepared at the request of the late Rep. Ted Weiss, D-N.Y., who died last year. Weiss was the chairman of the House Government Operations Committee's subcommittee on Human Resources and Intergovernmental Relations. The report was sent to his successor as chairman, Rep. Edolphus Towns, D-N.Y.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.