Accessing capital through the tax-exempt bond market is challenging even highly rated issuers, and state and local tax revenues are expected to decline even further in 2010. The American Recovery and Reinvestment Act of 2009 provides relief with financing options that can be tapped long after stimulus dollars are spent.
With a lack of traditional investors driving up yields and locking some issuers out of the municipal bond market entirely, Congress created a new form of tax-advantaged debt called Build America Bonds (BABs). Available only for government purposes such as building roads and water treatment plants, they can be issued through 2010.
These taxable bonds give issuers the option of receiving a direct reimbursement of 35% of the associated interest from the U.S. Treasury or offering investors a federal tax credit equal to 35% of the cash interest payment.
The new structuring options have greatly expanded the municipal investor market by attracting new “taxable” investors such as pension funds and taxable bond funds. As a result of the expanded base, and the associated demand pressures placed on traditional tax-exempt investors due to reduced tax-exempt debt supply, liquidity has increased for municipal debt issuers and borrowing yields have declined significantly. During the second quarter, 142 Build America Bonds totaling $15.9 billion were issued.
In addition to instituting the Build America Bonds program, the federal government significantly expanded eligibility for issuance of tax credit bonds.
Designed to provide issuers with an interest-free loan, tax credit bonds are an alternative to traditional tax-exempt bonds. The U.S. Treasury provides a tax credit in lieu of cash interest and the issuer repays the principal at maturity. The Treasury sets the tax credit rate daily for new issues, and new issue bond amortization is generally limited to 15 years. Most significantly, unused credits can be carried into future tax years. They also can be stripped from principal repayments and sold to separate investor classes, significantly broadening investor appeal.
The stimulus package established new tax credit bond programs to encourage issuance by public agencies for new school construction (Qualified School Construction Bonds) and projects that decrease greenhouse gas emissions (Qualified Energy Conservation Bonds).
It also expanded existing programs. The programmatic bond allocation for Clean Renewable Energy Bonds (CREBs), for example, was raised to $2.4 billion.
Although allocations to specific projects won't be determined until later this summer, previous allocations have been the catalyst to moving green projects forward. In June, the California DOT closed a $20 million transaction that funded solar panel installations in 70 facilities and is expected to lock in $52.5 million of savings over the installations' 25-year asset life.
This is just one example of how state, county, and city infrastructure departments are taking advantage of the desperately needed financing tools provided by the stimulus package.
— Jenkins (firstname.lastname@example.org) is a director in the U.S. Infrastructure Advisory group of audit-and-tax-services firm KPMG (www.kpmg.com).