WASHINGTON - State and local governments must be given federal assistance through tax code revisions, stimulus legislation, and financial aid to help with operational costs, governors from New Jersey, Vermont, and Wisconsin told the House Appropriations Committee at a hearing here yesterday.

The Regional Bond Dealers Association also submitted testimony to the committee, urging Congress to ease limits on bank-qualified bonds and push the Treasury Department to provide liquidity facilities to support municipal variable rate debt.

"There's been a lot of talk about concentrating the federal stimulus package on infrastructure spending," said New Jersey Gov. Jon S. Corzine. "But unless we help states plug the hole in their operating budgets, any good we do through infrastructure stimulus will be offset by cuts in vital social services and education."

Corzine warned that a two-year stimulus package providing $300 billion to $400 billion to state and local governments would be "a wash" if the same governments are forced to more than decimate their expenditures in order to maintain the balanced budgets that are legally required in 49 states. He asked for $75 billion to $100 billion to help states with their operating costs and programs, $150 billion to $175 billion for infrastructure projects, and $225 billion to $250 billion in tax relief.

Vermont Gov. James H. Douglas said states should be given broad discretion on how to use stimulus funds, and infrastructure investments should include an array of projects in such areas as highways, broadband, transit systems, clean water and sewer systems, airports, and possibly education and environmental infrastructure.

The National Governors Association, of which Douglas is vice chair, identified about $57.4 billion of projects that could be started within 90 days, or $136 billion within 24 months, if federal funding is provided.

Douglas said the stimulus bill also should relax federal rules to allow the funds to be spent on maintenance work, materials, and equipment. Additionally, time limits on spending of funds would be unreasonable for states with limited construction seasons, he said.

Wisconsin Gov. Jim Doyle said his state also has various infrastructure projects ready to go.

The governors stressed that state financial conditions are worsening. States will have budget shortfalls of nearly $180 billion over the next two years if current economic conditions and declining tax revenues continue, Douglas said. But he also said investment tax credits and tax benefits for lower-income households would stimulate state economies.

Members of the committee zeroed in on infrastructure spending as the way to assist the states, although chairman Dave Obey, D-Wis., noted that political differences may prevent state-focused stimulus spending from moving forward. Rep. John Murtha, D-Pa., said he was concerned that bureaucracies on the state and local level could delay stimulus funding too long to be effective at stimulating state economies.

Rep. Norman D. Dicks, D-Wash., questioned whether such mechanisms as state revolving funds would be better replaced by grants. The cost of taking loans from SRFs is prohibitive to rural municipalities, he said.

Asked about the demand for a national infrastructure bank, Corzine said he believes states would take advantage of loans from such a bank, which President-elect Barack Obama supported during his campaign.

"I'm very supportive of that concept. I think it's one whose time has come," Corzine said.

He cited the Port Authority of New York and New Jersey's failure this month to find a bidder for $300 million of taxable bonds, despite high credit ratings.

Rep. James P. Moran, D-Va., emphasized the irony of low- or no-interest Treasury notes being grabbed up by investors while low-risk municipal issuers are stuck having to sell debt at relatively high rates.

Municipal issuer access to credit is "something that Treasury and the [Federal Reserve] are going to have to help us with," Moran said.

As a solution to the spike in municipal borrowing costs and the resulting decline in issuers' ability to fund projects, the RBDA proposed that Congress not only give states a cash injection but also pressure the Treasury to provide backstop liquidity facilities to support variable-rate debt issued by state and local governments.

The RBDA also asked Congress to pass legislation that has been introduced in both the House and the Senate that would ease limits on bank-qualified bonds. It 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.

The $30 million limit, which would be higher than the current $10 million annual issuance limit that was set in 1986, would be pegged to inflation and, the RBDA argued, would more realistically reflect current issuance levels.

"Bringing banks back to the municipal bond market as significant investors would help restore the market to normalcy, reduce interest expenses for states and localities, and allow state and local governments to finance investment projects that would help stimulate the economy," the group said in its written testimony.

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