WASHINGTON - The Treasury Department Friday released allocations for states, counties and large municipalities as well as interim guidance for $25 billion of recovery zone bonds, two new types of debt created by the stimulus law to foster economic development in distressed areas.

The 20-page notice covered the $10 billion of recovery zone economic development bonds and $15 billion of recovery zone facility bonds authorized by the American Reinvestment and Recovery Act that was enacted in February.

The Treasury allocated the bonds to all 50 states, the District of Columbia, and American territories, and then sub-allocated the bond capacity to every county and large municipality in the country.

The department determined the sub-allocations, which were detailed in a separate 80-page document, to "facilitate prompt availability of recovery zone bonds" and to avoid imposing "administrative burdens" on states, which otherwise would have had to do the sub-allocations themselves, according to the notice containing the guidance.

The bonds were allocated based on the increases in unemployment in the municipalities and counties compared to the national unemployment increase during 2008. However, every state is ensured of at least 0.9% of the national volume cap for both types of bonds under the stimulus law.

California received the largest allocations - $806.2 million of recovery zone economic development bonds and $1.21 billion of recovery zone facility bonds.

"Creating the conditions for economic recovery requires addressing the challenges facing state and local governments," said Treasury Secretary Tim Geithner. "State budgets have been scaled back and local services cut at a time when they are most needed. Turning things around requires innovative strategies, which is what the Recovery Act has provided in the form of the recovery zone bonds."

Recovery zone economic development bonds are like the direct-pay Build America Bond program, which permits municipal issuers to sell taxable debt and receive a cash payment from the federal government equal to 35% of their interest costs. RZEDBs differ in that they provide issuers with payments equal to 45% of interest costs and must be used to finance "qualified economic development purposes" within designated "recovery zones."

Recovery zone facility bonds, or RZFBs, function similarly to exempt facility private activity bonds, but must be used to finance "recovery zone property" in recovery zones.

The Treasury defined a recovery zone as any area designated by the issuer as having significant poverty, unemployment, rate of home foreclosures, or general distress; economic distress because of the closing or realignment of a military installation due to the Defense Base Closure and Realignment Act of 1990; or an empowerment zone or renewal community before the stimulus was signed into law on Feb. 17.

After issuance costs and a reasonably required reserve fund, 100% of available proceeds from RZEDBs must be used for qualified economic development purposes. The Treasury defined these as capital expenditures paid or incurred for property within a recovery zone, expenditures for public infrastructure and construction of public facilities, or expenditures for job training and educational programs.

The notice states that RZEDBs can be issued to reimburse qualified expenditures incurred since the enactment of the stimulus, as well as to refund temporary short-term debt issued for qualified projects since Feb. 17. The yield on RZEDBs is to be reduced by the 45% credit, according to the notice.

For RZFBs, 95% or more of the net proceeds of the bonds must be used for recovery zone property, which is defined as property that was constructed, reconstructed, renovated, or acquired by purchase after it was deemed in a recovery zone; property first used in a recovery zone by the taxpayer; and substantially all the property is in the recovery zone and is being used as a qualified business.

A qualified business is defined as any trade or business except residential rental property or certain businesses such as private golf courses, massage parlors, hot tub facilities, suntan facilities, racetracks and other gambling facilities, or liquor stores.

The guidance was applauded by several bond lawyers.

Frederic Ballard Jr., a partner in Ballard Spahr Andrews & Ingersoll LLP, said the amount of information contained in the Treasury documents is impressive. "This is just an awesome piece of work," he said. It's "something that obviously has taken a fair number of people long hours over many weeks to prepare."

The stipulation that states can reclaim unused allocations and reallocate them to other areas should help move things along, Ballard said, adding: "I think that is the only practical way to handle that situation, but that also means that there will be some constructive pressure on municipalities and counties" to use their allocations in a timely fashion.

Jeremy Spector, a partner at Mintz, Levin, Cohn, Ferris, Glovsky and Popeo PC, praised the guidance for providing flexibility to issuers.

"Recipients of volume-cap may make zone designations in any reasonable manner applying the statutory criteria using their good faith discretion," he said. "Further, volume-cap allocations may be made by the recipient entities to ultimate beneficiaries in any reasonable manner as determined in their good faith discretion for eligible costs."

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