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Stimulus Plan Gets Plaudits

WASHINGTON - Municipal market participants generally are pleased with muni bond provisions in the economic stimulus tax package the House Ways and Means Committee plans to vote on today, which would provide private-activity bonds temporary relief from the alternative minimum tax.

However, several participants are concerned that some of the provisions either are not workable or do not go far enough in offering relief, such as a proposed taxable bond option.

The stimulus package the tax committee plans to consider today, which was introduced late Friday, would authorize over $50 billion of new tax-credit bonds, as well as create two new bond categories that can be issued by economically distressed areas, and allow tax-exempt governmental issuers to issue taxable bonds in exchange for a cash subsidy or tax-credit.

"I think it's very positive," said Michael Decker, co-chief executive officer of the Regional Bond Dealers Association. "It's a strong statement that the federal government and Congress are prepared to provide some help to the muni market, and there are provisions here that will be very meaningful in lowering costs for state and local governments and thawing the market."

Other provisions drew mixed reviews. One provision would allow financial institutions to purchase tax-exempt bonds issued in 2009 and 2010 without having tocount them under the de minimis rule. Under that rule, corporations do not have to prove that they are writing off the cost of borrowing to buy muni bonds if they make up no more than 2% of their assets.

Another provision would allow banks to deduct 80% of the cost of buying and carrying tax-exempt bonds issued by states, counties, and local governments whose annual bond issuance is $30 million or less, an increase from the current $10 million limit. That provision would clarify that the annual issuance limit would apply to small conduit borrowers in pooled financings rather than the issuers.

"Bringing banks back to the market will produce a new source of demand and hopefully replace some of the marginal buyers that the market has lost," Decker said. "Some banks will, I think, participate very actively in the muni market."

However, Charles Samuels, a lawyer with Mintz Levin Cohn Ferris Glovsky & Popeo PC here who is counsel to the National Association of Health and Educational Facilities Finance Authorities, said the so-called bank deductibility provision, which is designed to encourage banks and other financial institutions to purchase tax-exempt bonds, misses the mark and will not help small issuers struggling to access the market.

"We are very grateful to the committee for recognizing the need to assist state conduit financers," he said. "Unfortunately, their provision does not appear to be useful and may not actually result in the assistance of small charities. Pools are extremely difficult to organize, disfavored by the IRS, and probably will not end up being useful to these small charities."

Samuels pointed to legislation that was introduced but died in both the House and Senate last year that would allow small conduit borrowers to organize individual deals through state issuers, which could then be purchased by banks and other financial institutions, as the best way to provide this type of relief to borrowers.

He added that he and others have expressed concerns about such provisions to the committee, as well as to the Senate Finance Committee, which has not released its version of the stimulus package yet.

Another provision that has some market participants scratching their heads is the so-called taxable bond option, which would allow tax-exempt issuers to offer taxable debt in exchange for a cash subsidy or tax credit for the investor.

Under the legislation, an issuer of general obligation bonds struggling to find buyers in the tax-exempt market could opt to offer taxable debt that in 2009 and 2010 would provide the issuer with a cash subsidy from the federal government.

Beginning in 2011, issuers would no longer get cash subsidies but investors would receive tax credits in lieu of the cash subsidies and exempt interest payments. The idea behind this two-phased provision is that issuers that sell taxable bonds will find a much larger group of investors interested in the bonds.

Some market participants questioned how effective the provision would be in aiding state and local governments and noted that similar provisions were considered and ultimately rejected by lawmakers numerous times since the 1960s.

The last time such a provision was considered, in 1994 as part of President Bill Clinton's legislation to finance infrastructure projects, several governmental groups spoke out against it. They said that since Congress would have to appropriate funds to pay for the credit every year, they could not count on the subsidy, especially when lawmakers faced a growing federal deficit.

But at this point, most market participants are welcoming any options to help issuers to the table.

"It's too early to tell whether the program will be well-received in the market, but it provides a source of financing state and local governments don't have now, and it'll be interesting to see how well it's used," Decker said. "The key issue to keep in mind is that these proposals are options that are available to issuers."

"If an issuer feels that that's an option that works better for them, then it's there for them to use," said Scott DeFife, senior managing director of government affairs for the Securities Industry and Financial Markets Association. But he emphasized that SIFMA is still studying the package and has not yet taken on official position on this specific provision.

Most market participants welcomed the provision that would repeal the AMT, which currently applies to interest earned on private-activity bonds and some governmental and 501(c)(3) bonds. But the provision would only apply to private-activity bonds issued in 2009 and 2010. While many muni groups have lobbied for a permanent repeal of the tax, the temporary repeal is a great start, they said.

"We think the AMT provision in particular is something that can be very helpful," DeFife said.

Furthermore, the AMT repeal could be revisited in 2010 and made permanent, some participants noted.

The legislation would also create two new bond categories for "recovery zones," which are areas hit particularly hard by unemployment and foreclosures.

The bill would authorize $10 billion of recovery zone economic development tax credit bonds. It would also authorize $15 billion of recovery zone facility bonds, which are private-activity bonds. The bonds would be allocated to states, who could then sub-allocate them to local municipalities based on job losses. They would have to be issued over the next two years for infrastructure, job training, education, and economic development projects.

State and local governments also could issue up to $20 billion over two years of qualified school construction bonds, another new type of tax credit bond that would be created under the package. Indian tribal governments would receive $400 million of these bonds. In addition, a pre-existing tax credit bond program for schools, qualified zone academy bonds, would receive an additional $1.4 billion of authority under the bill.

The package would authorize $2 billion of tax-exempt tribal economic development bonds for Indian tribal governments that would not be subject to the "essential governmental function" requirement, which limits the types of projects that they can finance with bonds. The new bonds could be used for anything but casinos and projects outside of reservations.

The bill would authorize an additional $1.6 billion of clean renewable energy bonds, of which a third would be for state, local, and tribal governments, another third for public power providers, and the final third for electric cooperatives.

Projects designed to reduce greenhouse gas emissions could be financed by municipalities with an additional $2.4 billion of qualified energy conservation bonds under the legislation as well.

The bill would also permanently repeal a provision in a law enacted in 2005 that would require state and local governments to withhold 3% of any payments made for property or services. Government groups, including the Government Finance Officers Association have strongly opposed the provision, calling it an unfunded mandate on state and local governments.

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