WASHINGTON - The $787 billion stimulus package signed into law by President Obama yesterday may spur smaller issuers to increase debt issuance through tax code changes, but may also limit the debt that is sold for transportation, water and wastewater, and other infrastructure projects in the near term because of the new federal funds provided for them.
Moody's Investors Service reached these conclusions in a report issued yesterday that also said that the package's combination of direct funding, tax-related provisions, and tax credits will provide near-term relief from declining revenues and will likely mitigate short-term credit pressures for state and local issuers. However, the package is unlikely to create longer-term credit benefits for most municipal issuers that face "entrenched" credit challenges, the report said.
"If economic recovery is not substantial enough to restore revenue by the time most federal assistance runs out within the next two years, municipal issuers may face renewed, or even greater, credit stress," Moody's said.
The provision in the package that increases the qualified small-issuer limit to $30 million from $10 million for bank-qualified bonds could improve access to the muni markets for lower-rated entities by increasing the incentive for local banks to buy their bonds, Moody's said.
But the capital infusion of $8.5 billion to mass transit agencies, $28 billion to highway infrastructure funds, and $6 billion to state revolving funds for water and sewer projects may replace planned borrowing in the near-term or "jump start" projects that were reliant on "now-questionable capital markets funding," the report said.
But even before Obama's signature on the historic package began to dry yesterday, municipal market participants cautioned the funds included in it may take weeks, or even months in some cases, to trickle into state and local government coffers because of both the need for federal guidance and for transparency from the governments on how the funds are being used.
"I just think it's a matter of searching for answers to difficult questions, all related to the implementation [of the package]," said Michael Bird, federal affairs counsel at the National Conference of State Legislatures. He added that the requirements are "different for every funding stream."
"There is a brand new accountability and transparency scheme that is nothing like we've seen before," Bird said.
While muni market participants can immediately take advantage of the elimination of the alternative minimum tax for tax-exempt bonds, the expansion of the 2% de minimis provision to banks, the increase in the qualified small issuer limit to $30 million for bank deductible bonds, and the easing in the use of small-issue industrial development bonds - even for bonds already issued this year - they may have to wait for Treasury or Internal Revenue Service guidance on other bond-related tax provisions, tax lawyers said.
Issuers who want to use the taxable Build America Bonds or Recovery Zone Bonds, which provide issuers with cash subsidies, will have to wait for Treasury to figure out the mechanics of how the department will provide the subsidies, they said.
"I suspect many issuers will want to wait," said Gary W. Bornholdt, a lawyer at Nixon Peabody LLP here. "The rebate to the issuer could be more generous than the tax credit to investors. But the IRS does not have a procedure right now for cutting checks" to issuers.
For the new tribal economic development bonds and the new tax-credit bond programs, Treasury or the IRS will have to determine how those bonds are to be allocated among tribal governments and the states, the lawyers said. The one exception is the increased authority for clean renewable energy bonds, also taxable, tax credit bonds, which will be dependent on Treasury approval of projects rather than allocations.