By Larry Jones
February 2, 2009

Dallas Mayor Thomas C. Leppert told mayors attending the January 17 Metro Economies Committee that our national economy continues to worsen with huge job losses, rising unemployment, mounting housing foreclosures and business failures. In response, he said Congress has been working very closely with the new Administration to put together an economic recovery package to turn the economy around.

Jon Sheiner, Chief Tax Counsel to House Ways and Means Committee Chairman Charles B. Rangel spoke to mayors about the status of the House Economic Recovery proposal and Michael Decker, Co-Chief Executive Officer of the Regional Bond Dealers Association discussed the impact of the current credit crisis on local governments as well as the status of pending legislation.

Sheiner told mayors that the House has put together an $825 billion Economic Recovery package that includes approximately $550 billion in new spending and $275 billion in additional tax cuts, which will help create three to four million jobs. On the spending side, Sheiner said the new Administration and Congressional leaders understand the need at the state and local level. He pointed out that a significant amount of funds have been included in the bill to help state and local governments.

A total of $87 billion was included to provide a temporary increase in the Medicaid matching rate to preserve health care for the needy at a time when many states are experiencing a budget crisis. He mentioned that the bill includes significant increases for state and local infrastructure projects, including $32 billion for transportation, $10 billion for transit and rail systems, $3.5 billion for Energy Efficiency Block Grants, $4.2 billion for the Neighborhood Stabilization Program, an additional $1 billion for Community Development Block Grants and $4 billion for state and local law enforcement.

On the tax side, Sheiner told mayors about a number of new proposals in the bill that are designed to assist local governments:

• Tax credit bond option that would give state and local governments the option of issuing a tax credit bond instead of a tax-exempt government obligation bond;

• A provision excluding Tax-Exempt Private Activity Bonds from the alternative minimum tax (AMT);

• School construction bonds that would assist state and local governments with the construction, rehabilitation and repair of public schools;

• A provision repealing a 3 percent withholding requirement, which forces state and local governments to withhold 3 percent on any payment made to contractors providing goods and services if such contractors receive federal funds; and

• A new category of recovery zone bonds designed to spur investment in economically distressed communities that have high incidence of poverty, unemployment and home foreclosures.

Decker explained that the downturn in the economy has made it very difficult for many local governments to borrow money at reasonable rates both for short-term and long-term needs. He said the loss of liquidity in the securities market has diminished demands for municipal bonds. And, Auction Rate Securities, often used to address short-term financing needs have been abandoned by investors.

Decker told mayors that the Treasury Department, under the Bush Administration had taken the position that the Troubled Asset Relief Program (TARP), which is designed to buy up troubled assets, applies to commercial paper held by banks and financial institutions but not state and local governments. However, the House has passed legislation clarifying that TARP can be used to assist state and local governments, and the new Administration has also expressed the view that TARP should be used to assist state and local governments.

He also mentioned that provisions have been included in the Economic Recovery bill that would: (1) increase the annual issuance limit for bank purchases of bonds by small municipalities from $10 million to $30 million annually and allow banks to hold up to two percent of their assets in municipal bonds; and (2) excluding tax-exempt private activity bonds from the alternative minimum tax. These provisions should increase bank demand for municipal bonds and lower financing costs for state and local governments.