Treasury Announces $25 Billion Recovery Zone Bonds Program

The Treasury Department has announced that it will begin a program to provide $25 billion to subsidize municipal bond issuances for local governments in economically hard-hit areas to raise needed funds.  Generally, states, counties and municipalities raise funds by issuing tax-exempt municipal bonds.  However, when the credit crisis hit last autumn, the municipal bond market suffered and liquidity dried up, meaning demand for municipal bonds all but disappeared at a time when supply was growing.  As a result, municipal bonds prices crashed and, thus, interest rates rose dramatically, placing more of a burden on the government issuers by increasing their cost of borrowing.

The American Recovery and Reinvestment Act sought to alleviate this problem by the creation of the Build America Bonds program, designed to stabilize the municipal bond market by easing the oversupply of municipal bonds.  Build America Bonds offer a 35 percent rebate from the Federal government to issuers on their interest payments. This means that issuers can offer higher rates on their debt than they typically would be able to afford, and so take their offerings into the taxable bond market. 

Access to the taxable bond market, and its greater liquidity, should be a boon to government issuers.  However, corporate bond market participants expect a high level of transparency and disclosure—something about which the municipal bond market is generally more lax.  Thus, investors in the taxable market may require more corporate-style disclosure from municipal bond issuers.

 The Recovery Zone Bond program is an off-shoot of the Build America Bonds program and is intended to assist areas that have suffered job losses as a result of the deep economic recession.

 The full press release from the Treasury Department, including a link at the end to a detailed database showing where the funds will go, is below:

 June 12, 2009
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Treasury Announces $25 Billion in Direct Allocations of Recovery Zone Bonds

New Program to Help State, Local Governments Finance Economic Development

 

WASHINGTON–As part of the Obama Administration’s efforts to stimulate economic growth and jumpstart the availability of financing critical for economic recovery, the U.S. Treasury Department announced $25 billion in bonds authority available under the Recovery Zone Bonds program. Created by the American Recovery and Reinvestment Act (Recovery Act), Recovery Zone Bonds are targeted to areas particularly affected by job loss and will help local governments obtain financing for much needed economic development projects, such as public infrastructure development.

“Creating the conditions for economic recovery requires addressing the challenges facing state and local governments,” said Treasury Secretary Tim Geithner. “State budgets have been scaled back and local services cut at a time when they are most needed. Turning things around requires innovative strategies, which is what the Recovery Act has provided in the form of the Recovery Zone Bonds. The new financing tools provided by Recovery Zone Bonds will help state and local governments obtain the funds needed to revitalize our communities.”

The Recovery Act included $25 billion for two new types of Recovery Zone Bonds – $10 billion for Recovery Zone Economic Development Bonds and $15 billion for Recovery Zone Facility Bonds.  Recovery Zone Economic Development Bonds are one type of taxable Build America Bond that allow state and local governments to obtain lower borrowing costs through a new direct federal payment subsidy, for 45 percent of the interest, to finance a broad range of qualified economic development projects, such as job training and educational programs. Recovery Zone Facility Bonds are a type of traditional tax-exempt private activity bond that may be used by private businesses in designated recovery zones to finance a broad range of depreciable capital projects.

To make this program as easy as possible for state and local governments to administer and use, the Treasury Department has also detailed the bond volume cap allocations at the local level for counties and large cities.  The total state allocations and the complete list of direct county and large city allocations can be found here.