Raw Finance

Municipal market participants are asking Congress to provide more assistance for municipal bonds in 2010 by extending or expanding many of the bond-related provisions in the American Recovery and Reinvestment Act, especially those authorizing the Build America Bond program.

Many municipalities will face shortfalls in the coming years, and, to avert a crisis, the municipal bond market will need to attract more investment. For example, New Jersey cities and towns are leading the downgrade parade for municipal bonds, amid a slashed aid budget and 11 percent declines in property values. It could start a trend: “In many of the large states, this is going to become the norm: California, New York, New Jersey and Illinois,” says McDonnell’s Richard Ciccarone.

The Build America Bond program assists municipal bonds by offering a federal tax credit to investors.  The American Recovery and Reinvestment Act created the Build America Bonds program, which was 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.

Direct Payments

A bill (The Jobs for Main Street Act of 2010, included within H.R. 2847) passed by the House of Representatives on Dec. 16, 2009, would expand two tax-credit bond programs for school projects to allow state and local issuers to receive direct Build America Bond-style payments from the Treasury Department, instead of investors receiving tax credits.

State and local governments this year have issued more than $63 billion of direct-pay BABs, which provide them with federal payments equaling 35 percent of their interest expense. That compares to a much-smaller $2.46 billion of tax-credit bonds that were issued during the same period, according to Thomson Reuters.

Extension

Majority Chief Counsel for the House Ways and Means Committee John Buckley suggested in November that the direct-pay BAB program could even be made permanent, although probably at a lower subsidy rate than the current 35 percent of interest expenses. Buckley said at a conference co-hosted by the National Association of Bond Lawyers and American University’s Washington College of Law: “I do believe that there will be an extension of BABs, and the only question is when that happens and for what duration …. There is a good case to be made for the sooner the better, and the longer, if not permanent.”

Many market participants have urged Congress to approve a BAB extension as soon as possible because it would give the still-developing market some stability and show investors that the bonds will not merely be a one-year wonder.

Expansion

Market participants are beginning to consider how the program could be expanded to other sectors of the municipal bond market. Currently, BABs are limited to new-money issue by governmental bodies to finance capital expenditures, with the idea that they be used for projects that stimulate the economy. Some market participants have suggested Congress permit BABs to be used for working capital purposes such as refunding.

Exemption from Alternative Minimum Tax

When the ARRA was signed into law in February, it contained a number of provisions that eased tax law restrictions or expanded the market for municipal bonds through the end of 2010. All municipal bonds were exempted from the individual and corporate alternative minimum tax. Banks were permitted to purchase and hold more tax-exempt debt without losing tax deductions. Market participants are turning their attention and energy towards keeping those provisions beyond their Dec. 31, 2010, expiration dates.

Details of the Jobs for Main Street Act of 2010

INFRASTRUCTURE
The bill redirects $48.3 billion from the Troubled Asset Relief Program (TARP) to the following areas:

• Highway Infrastructure: $27.5 billion to make additional highway infrastructure investments.
• Transit: $8.4 billion for public transportation investments including $6.15 billion for urban and rural formula grants; $500 million for capital investment grants for new or expanded fixed guideway projects; and $1.75 billion in formula funds to address repair needs of existing subway, light rail and commuter rail systems. Amtrak: $800 million for capital grants to Amtrak for the acquisition and rehabilitation of rolling stock and passenger equipment to improve the speed and capacity of intercity passenger rail service. This investment will increase the fuel efficiency of Amtrak’s locomotives and support domestic production of passenger rail equipment.
• Airport Improvement Grants: $500 million for airport improvement projects that will support putting people to work to improve safety and reduce congestion at our nation’s airports. An estimated $49.7 billion is needed between 2009 and 2013 to fully fund eligible airport infrastructure projects.
• Maritime Administration: $100 million for the Maritime Guaranteed Loan (Title XI) program to allow vessel and shipyard owners to obtain long-term financing for growth and modernization projects.
• Clean Water: $2 billion to help communities provide clean and safe water for both their citizens and the environment, including $1 billion for the Clean Water State Revolving Fund and $1 billion for the Safe Drinking Water State Revolving Fund. This funding would assist more than 670 communities address the ever-growing backlog of sewer and water repairs and rehabilitation. Half of the funds will include additional subsidies, such as principal forgiveness and grants, to make it easier for more communities to access the programs.
• Bureau of Reclamation: $100 million to provide clean, reliable drinking water to rural areas and to ensure adequate water supply to areas impacted by drought.
• Corps of Engineers: $715 million for environmental restoration, flood protection, hydropower, and navigation infrastructure projects by the Corps of Engineers. The Corps has a construction backlog of $61 billion.
• Energy Innovation Loans: $2 billion for the Department of Energy Innovative Technology Loan Guarantee Program, to promote the rapid deployment of renewable energy and electric transmission projects.
• School Renovation Grants: $4.1 billion to allow State, local, or tribal governments to receive a federal grant equal to the cost of tax credits that would otherwise be payable on bonds issued to finance school construction, rehabilitation or repair.
• Housing Trust Fund: $1 billion for the National Housing Trust Fund to provide communities with funds to build, preserve, and rehabilitate rental homes that are affordable for extremely and very low-income households; and $65 million for project-based vouchers to support units built by the Trust Fund.
• Public Housing Capital Fund: $1 billion for the Public Housing Capital Fund for additional repairs and rehabilitation of public housing. Every dollar of Capital Fund expenditures produces $2.12 in economic return. In fiscal year 2009, HUD received applications totaling $3.7 billion for Capital Fund projects, but was only able to fund $1 billion in awards. This funding will spur construction quickly, as HUD has ready-to-go applications for projects on hand.

PUBLIC SERVICE
The bill redirects $26.7 billion from TARP toward public service jobs such as teachers, firefighters, and police officers, including:

• Education Jobs Fund: $23 billion for an Education Jobs Fund to help States support an estimated 250,000 education jobs over the next two years.
• Law Enforcement Jobs: $1.18 billion to support putting over 5,500 law enforcement officers on patrol throughout the United States.
• Firefighter Jobs: $500 million to retain, rehire, and hire firefighters across the United States. According to the International Association of Firefighters, nearly 6,000 firefighters have been laid off or are subject to layoffs. An additional 6,000 positions have been lost through attrition. Any unused funds may be transferred to firefighter assistance equipment grants.
• AmeriCorps: $200 million for AmeriCorps programs and the National Service Trust, to support an additional 25,000 AmeriCorps Members.
• Summer Youth Employment: $500 million for a summer employment program for youth. According to the Bureau of Labor Statistics (BLS), the unemployment rate for teenagers (age 16 to 19) reached 26.7 percent in November 2009 – the highest level recorded since BLS began collecting data.
• College Work Study: $300 million to support the College Work Study program, which supports low and moderate-income undergraduate and graduate students who work while attending college.
• Parks and Forestry Workers: $270 million to support putting people to work improving and protecting federal, state, and local public lands. These funds would support approximately 14,000 short-term jobs, improving service to visitors, reducing the large backlog in facilities and habitat restoration needs, and reducing hazardous fuels that lead to damaging and expensive wildfires.
• Job Training for High Growth Fields: $750 million for competitive grants to support job training for approximately 150,000 individuals in high growth and emerging industry sectors, particularly in the health care and green industries that are adding jobs despite difficult economic conditions. Grants for job training in green industries would focus on programs that train workers living in areas of high poverty.

CONTINUING EMERGENCY FUNDING
The bill would also continue emergency help to working families at a cost of $79 billion, including:

• Unemployment Insurance: $41 billion to extend, for six months, expanded unemployment benefits, including increased payouts and longer duration of benefits.
• Help with Health Insurance for Unemployed Workers (COBRA): $12.3 billion to extend from nine to 15 months the 65 percent COBRA health insurance subsidy for individuals who have lost their jobs. The job lost eligibility date is extended in the provision to June 30, 2010.
• Small Business Loans: $354 million, fully offset, to allow the Small Business Administration (SBA) to continue two temporary loan guarantee authorities through the end of fiscal year 2010 to make loans more attractive to borrowers and lenders and to free up capital. Small businesses represent a major engine for the U.S. economy, but many small business owners have had a difficult time securing needed loans in these tight economic times.
• FMAP Extension: $23.5 billion to extend the higher federal match for payments to doctors providing services to low-income families under Medicaid through June 2010. The higher federal match would provide an incentive for states to commit resources to their Medicaid programs and helps ensure services for Medicaid beneficiaries.
• Child Care Tax Credit: $2.3 billion to increase eligibility for the refundable portion of the child tax credit by removing the $3,000 floor for 2010. That will cut taxes for 16 million families, by making the Child Tax Credit available to all low-income working families with children in 2010.
• Assistance Eligibility: $305 million to freeze Department of Health and Human Services (HHS) poverty guidelines at 2009 levels in order to prevent a reduction in eligibility for certain means-tested programs, including Medicaid, Supplemental Nutrition Assistance Program (SNAP), and child nutrition.
• Income Tax Refund Disregard: Provides that individuals may exclude counting tax refunds as income for the purpose of assessing eligibility for means-tested programs supported by Federal funds for one year.
• Social Security Legal Assistance: The bill would permanently authorize a provision to help Social Security and Supplemental Security Income disability claimants retain legal representation. The provision limits attorney fees to 25 percent of the claimant’s past-due benefits, only paid if the claimant wins and subject to a $6,000 cap.

OTHER ITEMS

• Surface Transportation Authorization Extension: Extends the authorization for the highway, transit, highway safety and motor carrier safety programs of the Department of Transportation until Sept. 30, 2010. In addition, the bill includes language that provides 100 percent federal share for the transportation programs authorized in the title, repeals the provision that prohibits Highway Trust Fund balances from earning interest and restores $20 billion to the Highway Trust Fund.
• USDA Civil Rights Claims: The bill would extend the statute of limitations for claims of discrimination in USDA’s credit programs that have been pending for years at USDA and provides funding for remedies.