WASHINGTON - House Financial Services Committee chairman Barney Frank is expected to introduce legislation today that will give the Treasury Department and the Federal Reserve explicit authority to purchase or guarantee municipal debt under their economic recovery programs, congressional sources briefed on the legislation said.
Meanwhile, the National Association of Bond Lawyers issued a white paper yesterday suggesting Congress consider several tax-law changes to include in the forthcoming stimulus package that would spur increased issuance of municipal bonds. The six-page document provides options for how Congress could employ muni bonds to help finance infrastructure projects and state and local government activities, as well as increase demand for tax-exempt bonds.
Frank's legislation, which would be separate from the stimulus package and would authorize the second $350 billion portion of the Troubled Asset Relief Program, was summarized in a memo the Massachusetts Democrat distributed to fellow House members Wednesday night. The memo outlines special conditions the Massachusetts' Democrat would like placed on disbursement of the second tranche of TARP funds. The memo calls for Treasury and the Federal Reserve to help state and local governments, among other things.
Specifically, the memo says that to achieve support from a majority of lawmakers for the next TARP disbursements, the bill should include assistance to "municipalities and other tax-exempt issuers who are finding, because of this crisis, that even full faith and credit general obligation bonds - which have an historic record almost as good as good as Treasuries - cannot find investors."
Frank's legislation will explicitly clarify that, under the Emergency Economic Stabilization Act, which Congress approved in October to authorize TARP, the federal government can include municipal debt in its economic recovery programs. EESA currently allows the Treasury to purchase or commit to purchase "troubled assets" and to guarantee troubled assets that were issued prior to March 14, 2008.
Until this week, neither the Treasury nor the Fed has indicated a willingness to help out municipal issuers, with Fed officials suggesting the governments seek help from the Treasury, and Treasury officials insisting that they ask for aid from the Fed. But on Wednesday, the Fed offered to make state and local government investment pools eligible for its Money Market Investor Funding Facility. The bulk of the other Fed and Treasury programs remain closed to the municipal market with the exception of a temporary guarantee program for tax-exempt and other money market funds.
Frank has scheduled a hearing on the second TARP disbursement for Tuesday and is expected, along with Democratic leaders, to urge the full House to vote on the legislation by the end of the next week.
In its six-page white paper, NABL stopped short of issuing recommendations to Congress about what bond provisions should be included in the forthcoming stimulus measure and instead offered a number of options for using tax-exempt bonds in implementing the bill.
"NABL felt it would be useful to provide a document that described potential options that might be used to coordinate the tax-exempt bond provisions with congressional stimulus objectives," said Carol Lew, a shareholder at Stradling Yocca Carlson & Rauth in Newport Beach, Calif., who headed the working group that wrote the document. "We believe these are good ideas, but our role is to be helpful in saying, 'If you wanted to accomplish these particular objectives, these would be things to do.' "
The white paper stated that NABL is focusing its recommendations on traditional tax-exempt bonds instead of "newer financial products such as tax-credit bonds because traditional tax-exempt bonds have an established marketing infrastructure and significant market familiarity, and hence provide a better means for raising capital quickly and efficiently."
NABL said Congress could temporarily allow state and local governments to issue private-activity bonds for stimulus projects outside of the current categories of projects eligible for PAB financing, and could extend to five from three years the carryforward period for unused PAB capacity. If PAB financing is permitted for a significant amount of stimulus infrastructure projects, Congress should consider temporarily increasing the PAB volume cap, the group added.
NABL also said the 10% private business limit for governmental bonds could be increased to 25% for stimulus projects to encourage public-private partnerships.
To increase the demand for muni bonds, which has fallen off in recent months, NABL suggested a number of tax law changes, some of which are already being floated for the stimulus package.
Congress, for example, could eliminate the alternative minimum tax for private-activity bonds, and increase to $30 million from $10 million the tax code's so-called bank deductibility limit to allow banks to buy more muni bonds, NABL said.
The AMT, which applies to interest earned on private-activity bonds and some governmental and 501(c)(3) bonds, was created to prevent high-income households eligible for several tax breaks from paying little or no taxes. Currently banks are allowed to deduct 80% of the costs of purchasing and carrying the cost of tax-exempt bonds issued by states and localities who issue less than $10 million of bonds annually.
The group also said Congress could make munis more appealing if it suspended the law's prohibition on providing federal guarantees for muni bonds and allowed pension plans to pass through the tax-exempt benefits of bond investments to beneficiaries.