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Title: Prioritization in Private-Activity-Bond Volume Cap Allocation

Citation Type: Working Paper

Publication Year: 2011

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Abstract: This paper proposes and tests a structural model reflecting the process of authorizing private-activity municipal bond issuance. Private-activity municipal bonds offer tax-exempt financing for programs including industrial development, utilities, low-income housing, and student loans. The Federal tax code sets annual caps on the total tax-exempt issuance within each state, so authorization becomes a scarce resource distributed via a political process. Interviews with program administrators in several states suggested the authorization process involves prioritizingcategories of use, authorizing bonds for high-priority uses first, and then authorizing bonds for lower-priority uses until the cap is exhausted. A model representing this process suggests variables to include in reduced-form estimations and an alternative interpretation of the coefficients. The fit of the model can be improved by adding measures of political influence and imposing a structure thatreflects the political prioritization process. In general, industrial development and utilities appear to be the highest priority uses of private-activity municipal bonds.Mortgage revenue bonds are the residual category most frequently.

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Authors: Whitaker, Stephan

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Publication Number: 11-10

Institution: Federal Reserve Bank of Cleveland

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Data Collections: IPUMS CPS

Topics: Housing and Segregation, Other

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