WASHINGTON - Market participants are pleased that the $787 billion economic stimulus package expected to be approved by Congress and signed by President Obama before today contains several provisions that would expand the use of municipal bonds and provide funds to state and local governments for education, transportation, and housing projects.

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But as of last week, many were still trying to digest the package, which totaled more than a thousand pages, and to gauge the impact those provisions would have on the market.

The House passed the package by a vote of 246 to 183 and the Senate was quickly advancing toward passing it as well late Friday.

"All in all, we're very happy with what was in the package," said Steve Traylor, associate legislative director for the National Association of Counties. "What we got is great and it should help out the counties."

"It's a very favorable package for state and local governments," said Michael Bird, federal affairs counsel at the National Conference of State Legislatures. "The members who have voted for this, in the House and in the Senate, understand the current conditions and our need to be a partner in this economic recovery, and they have addressed that with this piece of legislation."

"Congress afforded state and local governments many tools - both with direct funding and with these bond provisions - that will allow governments to build necessary and essential infrastructure throughout the country," said Susan Gaffney, director of the Government Finance Officers Association's federal liaison center.

She said that even though governments will receive substantial funding from the federal government as a result of the bill, they will still be able to take advantage of the bond provisions to finance needed projects.

"There are many pending projects, and we believe that governments will be able to use the new bonding authority accordingly, in addition to the direct funds provided in the act," she said.

Some market participants were especially pleased with provisions that will exempt all private-activity bonds issued in 2009 and 2010, as well as any refundings of bonds issued between 2004 and 2009, from the alternative minimum tax, but it is unclear at this point how much savings this will translate into for issuers.

Matt Fabian, managing director at Municipal Market Advisors, said that while tax relief is always helpful, "the problem for private-activity issuers right now is their sector, not their tax status."

"Retail buyers remain focused on high-grade, safe-sector issuers, which have seen the best performance and are thus attracting institutional buyers seeking positive price momentum. So the immediate benefit of the change for private-activity-type issuers may be limited," he said.

"From a longer-term perspective, a more diverse population of available credits should help attract and retain investors," Fabian added. "However, remember that most muni sector defaults have historically occurred among private-activity issuers, so by increasing the relative number of private-activity versus safe-sector bonds, overall muni default rates will rise, making the general muni market appear slightly less safe."

MUTUAL FUNDSThe final bill includes a provision that makes clear that mutual funds buying taxable tax-credit bonds can pass through those credits to shareholders. The provision could spur mutual fund interest in the bonds, lawyers said.

"My impression is that in the past there was so little dollar volume, it wasn't that worthwhile" for the funds to buy the bonds and set up the pass-through programs, said William Paul, a partner at Covington & Burling LLP. "But now with the increased dollar caps and the new kind of credit bonds [provided under the bill] ... you'd expect there would be some interest."

Paul referred to the increased authorizations for tax-credit bonds and the new Build America Bonds program, under which state and local governments can issue taxable bonds in 2009 and 2010 and get cash subsidies from the federal government or provide investors with tax credits. The subsidy and credit would equal 35% of the taxable rate.


Housing groups were eager to laud bond-related provisions that will benefit housing, including a much sought-after provision that would allocate $2.25 billion to states to fill the gap left by the lack of demand for low-income housing tax credits.

Demand for the credits has fallen along with corporate profits and their tax burdens, pushing down the prices for the credits. Developers typically sell the credits to increase equity in the development, which reduces the amount of bonds needed, and therefore the rents and the cost of debt service.

"It is designed to fill the gap, with respect to projects where private equity has not been sufficient, so that the projects would move forward," said Jim Miller, a partner at Winston and Strawn LLP and legislative counsel to the Affordable Housing Tax Credit Coalition.

The money will be directly given to state housing credit allocating agencies to be distributed competitively to developments awarded credits in federal fiscal years 2007, 2008, and 2009.

The money must be directed to housing credit allocating agencies that have developments that are expected to be completed within three years of the enactment of the bill, and the agencies must commit no less than 75% percent of the funds within one year of the bill's enactment.

In addition, 75% of the funds they receive under this program must be spent within two years of the bill's enactment and 100% within three years. The Department of Housing and Urban Development will redistribute any funds not spent three years after the bill's enactment to other states that have fully utilized their funds.

The bill also includes a housing credit "exchange" provision that will allow state housing credit allocating agencies to trade in up to 40% of their 2009 credit authority and up to 100% of any unused or returned 2008 credits for 85 cents on the dollar to fill funding gaps in otherwise "ready to go" developments.

The exchange provision could generate an additional $3 billion for state housing credit agencies' projects, said Barbara Thompson, executive director of the National Council of State Housing Finance Agencies.

Thompson said the combination of the $2.25 billion allocation and the exchange program will significantly benefit state HFA projects.

"It's a temporary program, but we think it will get us over the hump," she said. "This is one thing they can truly point to, that these developments are ready to go. In this case, we know that we're going to hit the ground running with this money."

The bill also will provide $1 billion for the community development block grant program, which allocates grants to state and local governments to fund economic development projects and can be used in projects financed by municipal bonds.

John Murphy, executive director of the National Association of Local Housing Finance Agencies, said the group had been seeking at least an additional $10 billion for the program. "But we realize that this bill didn't get larger, it got smaller [in conference]," he said.

The bill also includes $2 billion for the Neighborhood Stabilization Program, which can be used to redevelop vacant or foreclosed properties and help low- to moderate-income homebuyers purchase those properties.


States may be able to refinance or restructure bond deals using state revolving funds provided by the stimulus, said Rick Farrell, executive director of the Council of Infrastructure Financing.

The clean and drinking water SRFs will get stimulus funding allocations of $4 billion and $2 billion, respectively. Under the terms of the stimulus package, the revolving funds are not allowed to buy, refinance, or restructure debt incurred prior to Oct. 1, 2008, or the first day of this fiscal year.

The Nebraska Investment Finance Authority, Kansas Development Finance Authority, Missouri State Environmental Improvement Authority, Michigan Municipal Bond Authority, and Florida Water Pollution Finance Corp. have all come to market with SRF bonds since that date and may be able to refinance that debt under the package.

In addition, the package waives mandatory 20% matching requirements on SRF outlays. It also requires states to use at least 50% of the capitalization grants to provide negative-interest loans, grants, or to forgive loan principal using SRF allocations.

The package does not require communities receiving the funds to meet affordability criteria but does allow the federal government to reallocate any money doled out for projects that are not under contract or construction within a year of the bill's enactment. It also forces states to direct "priority funding" to so-called shovel-ready projects, or projects that are ready to go within a year.


Transportation advocates lauded the package for providing massive outlays to states for ready-to-go projects.

States will receive $27.5 billion for highway infrastructure, distributed by a highway funding formula with a portion of the funds divided within each state based on population areas. However, not all of the funding will have to be used for typical highway projects; the package sets aside stimulus funding for management and oversight and a range of projects. It also has set-asides for Puerto Rico and the territories and for environmental transportation enhancements.

American Road and Transportation Builders Association officials said the funding should be considered a down payment on $200 billion to $500 billion in funding needs that should be included in the upcoming surface transportation reauthorization bill, and should not be seen as filling in the gap for long-term funding.

They also said high-speed and intercity passenger rail were the big winner in lawmakers' final deliberations. The House had proposed $3 billion and the Senate had proposed $2.25 billion for transit, but the final stimulus package that emerged from the conference committee provided transit with $8 billion.

In addition, airports will receive $1.1 billion for repairs and improvements to their infrastructure and transit will receive $6.9 billion.

A more general provision gives $53.6 in stabilization aid to states, mostly in the form of education funding.

While the state fiscal stabilization fund is described in the conference report as intended "to prevent tax increases and cutbacks in critical education and other services," it requires governors to use 81.8% of their state allocations to support elementary, secondary, and higher education.

Funds have to be used first to restore state funding to school districts and public higher education. Governors must use the remaining 18.2% of their funds for public safety "and other government services, which may include education services."

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