September 18, 2008

Bingaman, Crapo Introduce Legislation To Aid States, Counties And CitiesBy Strengthening Municipal Bond Market

Washington, DC - Senators Jeff Bingaman (D-NM) and Mike Crapo (R-ID) introduced legislation today aimed at helping localities build essential infrastructure at a lower cost to taxpayers.

State, county, and local governments have long relied on bonds to pay up-front for essential infrastructure enhancements - to schools, hospitals, public utilities, roads, and public housing - that they pay back through future revenues. But the credit crunch has severely curtailed demand for municipal bonds, forcing municipalities to raise the interest rates they pay in order to attract investors. Some municipalities, unable to pay today's high rates, have put off projects altogether. And the situation is likely only to get more difficult for municipalities, given the shocking financial sector developments in recent weeks.

The Senators' Municipal Bond Market Support Act of 2008 will enhance demand for municipal bonds by allowing banks a greater role in purchasing them, which in turn will bring down the interest rates that municipalities must pay.

"Municipalities have been innocent bystanders to Wall Street's troubled financial state, which is making it difficult for them to affordably borrow for such important projects as building roads, schools, and hospitals. By allowing banks to play a greater role in the bond market, more capital will be available to municipalities, particularly small and rural ones, at lower interest rates," Bingaman said. "Our bill is aimed at helping ensure states and local governments can continue to make necessary investments."

"In these slow economic times, when financing can be difficult to obtain, this bill will make it easier for small rural communities and banks in Idaho and across the country to make investments and proceed with important projects. We need to provide more certainty that our local communities and states can move ahead with planned improvements without delay, and this legislation is one way to assist with that," Crapo said.

Tax laws regulating municipal bonds were last amended in 1986, and provide that banks can purchase municipal bonds only from municipalities that issue $10 million or less in debt each year. But that figure has not increased since 1986, and today, many small municipalities need to issue more than $10 million in debt each year in order to meet their capital needs. The bill will raise that limit to $30 million, enabling banks to purchase bonds from a greater number of municipalities. Additionally, the bill will create a "safe harbor" that enables banks to invest up to two percent of their assets in municipal debt. Taken together, the moves will make it possible for states and municipalities to borrow at lower-interest rates at a time when capital is tight.

The bill, which largely mirrors a bill already introduced in the House, has been endorsed by at least ten national organization, including the National Association of Counties; National League of Cities; U.S. Conference of Mayors; and Education Finance Council.