WASHINGTON -- The private-activity bond volume cap does not seem to have curtailed environmental infrastructure investment in the United States, a new study by the General Accounting Office has concluded.

But the GAO also found that issuance decreased in a significant minority of states over the last several years, and private companies are complaining that some state allocation system hindler the use of bonds for environmental projects.

The study was requested by Rep. Nita M. Lowey, D-N.Y., and Rep. Christopher Shays, R-Conn. The two asked the agency to study the effect on environmental projects of the volume cap law, which permits states to allocate the greater of $50 per capita or $150 million in privat-activity bond authority each year. The GAO released the study last month.

Despite the imposition of the volume cap in 1986, tax-exempt bond issuance for environmental projects stood at $11.2 billion in 1990, an increase from the $10.1 billion issued in 1982, the GAO said in its report.

"The volume of bonds issued and the level of capital spending for environmental infrastructure have changed relatively little since the provisions of the Tax Reform Act of 1986 took effect, suggesting that national investment has not been reduced as a result of the volume cap," the GAO said.

But even though the nationwide total for bond-financed environmental projects held steady, the GAO found that a large number of states -- 18 in 1989 and 24 in 1990 -- issued fewer private-activity bonds for such projects. The GAO said the decreases were probably offset by an increase in the amount of public-purpose bonds issued for environmental projects.

Although the overall level of environmental bond issuance appears stable, the GAO said that issuance is not keeping pace "with the increase in federal environmental mandates, which will require considerably higher levels of investment in the future."

New federal standards for waste-water, drinking water, and solid waste will sharply increase costs for local governments, the GAO said. Their costs will rise to $27.7 billion in 2000 from $18.5 billion in 1990, while the gross domestic product is expected to grow by only 2.6% a year and population by 0.8%.

"The resulting slow growth in fiscal capacity will reduce the ability of state and local governments to meet these increasing costs," the GAO said.

In studying environmental financing needs, the GAO found that private investors complained about the way many states allocated bond authority under their volume cap, blaming the allotment systems for inadequate spending on environmental facilities.

"Allocation processes have been major obstacles for companies seeking tax-exempt financing for environmental projects," the GAO said.

"One bond counsel told us that in states that allocate a large percent of their total to housing, such as California, Maryland, and Minnesota, private companies are reluctant to consider undertaking an environmental project that depends on tax-exempt bonds, "the GAO said.

In states where the bond authority is allocated on a first-come, first-served basis, "multiyear financing [is] very difficult and risky to obtain," the GAO said. Such a system "can make it very difficult to plan for environmental projects, which often require more than one year's allocation, because investors cannot rely on getting money in subsequent years," the study says.

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