State and Local Governments: Stimulus Act Provides Project Funding Options

February 17, 2009

Today, President Obama signed into law the American Recovery and Reinvestment Act of 2009 (the “Act”), a sweeping stimulus bill featuring spending items and tax cuts worth $787 billion. The Act touches virtually every function of state and local governments, so it is important to be aware of changes in the law that affect the options for financing a wide variety of state and local government projects.

The Act changes and creates several important mechanisms to enhance the marketability of municipal debt and improve borrowing conditions for state and local governments. For example, the annual limit for small issuers of “bank-qualified” tax-exempt obligations is increased from $10M to $30M, and restrictions are lifted on banks’ ability to hold tax-exempt investments. Also, governmental issuers will have the choice of issuing Build America Bonds in lieu of tax-exempt debt. While the interest on Build America Bonds is taxable, the issuer or the bondholder can claim a valuable tax credit. Finally, tax-exempt interest on private activity bonds issued in 2009 and 2010 will no longer be subject to the Alternative Minimum Tax.

The Act also provides a great deal of federal grants and loans to fund a broad range of state and local government projects and authorizes bonds for specific types of projects, such as schools and economic development projects.

Transportation loans and grants are available for construction and repair of highways, roads, bridges, light rail systems, transit systems, trolley cars, HOV lanes, and airports. In education, funds are earmarked for school operations and student programs. Additionally, new tax credit bonds are available to finance public school construction, and the Act extends and increases the authorization for qualified zone academy bonds. The Act includes funding to construct and improve water and sewer systems, to build dams and undertake other flood prevention projects, to clean up environmentally compromised properties, and to fit public buildings and equipment with energy efficient upgrades.

To promote economic development, funding is provided for broadband infrastructure, new job training facilities and programs, and youth worker training. Tax credit bonds are authorized for projects that invest in economic recovery zones. In addition, funding is made available for public safety projects for law enforcement, firefighting, and transit and port security. Finally, the Act establishes construction and operations funding for public housing agencies, grants or loans for energy retrofits on affordable housing, grants to be spent in high foreclosure areas, and funds for homeless assistance.

The Act mandates that most of the money be spent before the end of 2010, so it is important to act early to become familiar with programs that could affect your budget and provide critical funding for your projects. If you have any questions regarding the Act and its effects on state and local governments, please a member of our Public Finance group or contact one of the attorneys listed.