On February 17, 2009, President Obama signed into law the American Recovery and Reinvestment Act of 2009. The Act will provide much needed relief to the municipal bond community. As anticipated, the Act provides significant assistance to state and local governments for initiatives relating to economic development, education, infrastructure, transportation, and renewable energy. Provisions also have been included to incentivize banks to acquire tax-exempt municipal bonds. The pertinent provisions of the Act related to municipal bonds are summarized below.
Clean Renewable Energy Bonds
An additional $1.6 billion of new clean renewable energy bonds is authorized for renewable energy generation projects. The new volume cap will be allocated one-third each to the following: (1) state and local governments, (2) municipal utilities, and (3) electric cooperatives.
High Speed Rail
High speed rail facilities can qualify for exempt facility private activity bond financing if the trains to be financed can reach a top speed of 150 mph, as opposed to traveling at least 150 mph.
Provisions Relating to Tax-Exempt Bonds Held by Financial Institutions
- Interest expense (up to 80%) that is allocable to investments in tax-exempt municipal bonds issued in 2009 and 2010 may be deducted to the extent that the tax-exempt holdings do not exceed 2% of the bank’s assets.
- For 2009 and 2010, the "qualified small issuer" exception that previously allowed banks to deduct interest expense for bonds issued by small issuers – essentially issuers with less than $10 million in annual issuance – has been increased to $30 million. For conduit deals, the limit is applied to the borrower instead of the issuer.
Qualified Energy Conservation Bonds
An additional $2.4 billion of qualified energy conservation bonds is authorized to finance programs designed to reduce greenhouse gas emissions.
Qualified Zone Academy Bonds
An additional $1.4 billion of qualified zone academy bonds is authorized to state and local governments in 2009 and 2010 to finance renovations and repairs at existing school facilities.
Recovery Zone Bonds
A new category of tax credit bonds called "Recovery Zone Economic Development Bonds" may be issued in the amount of $10 billion, and an additional allocation of $15 billion of exempt facility bonds may be issued in 2009 and 2010 to finance economic development purposes in certain designated recovery zones – essentially areas stressed from unemployment.
Small Issue Industrial Development Bonds
Small issue industrial development bonds can be used to finance manufacturing facilities that create or produce intangible projects or facilities, such as software or biotechnology.
Taxable Bond Option
For 2009 and 2010, issuers of government bonds (other than private activity bonds) will be permitted to issue taxable debt for capital expenditures in exchange for a direct cash subsidy from the federal government or a tax credit for investors. The tax credit or subsidy would be equal to 35% of the interest paid on bonds.
Tax Credit Bonds for Schools
A new category of tax credit bonds in the total amount of $22 billion may be issued in 2009 and 2010 ($11 billion each year) to finance the construction, rehabilitation, and repair of public school facilities or for the acquisition of land on which a public school facility will be constructed.
Temporary Repeal of AMT for Private Activity Bonds
All tax-exempt bonds issued in 2009 and 2010 are exempt from the alternative minimum tax ("AMT"). AMT relief also is provided for refunding of bonds issued from December 31, 2003to January 1, 2009.
Tribal Economic Development Bonds
Indian tribal governments are authorized to issue up to $2 billion of tax-exempt bonds to finance any purpose that could be financed by a state or local government on a tax-exempt basis (as opposed to the current "essential government function" requirement).