Public Finance Update - February 2009 February 17, 2009
In This Issue

Congress Compromises On Stimulus Bill

Congress has approved a compromise stimulus package, which contains approximately $787 billion in spending and tax cuts. Congressional negotiators worked around the clock to reconcile the differences between the $819 billion bill adopted by the House in January and the Senate’s $838 billion version adopted last week in an effort to deliver a bill to President Obama by President’s Day.

The following table provides a brief outline of the major spending provisions of the bill that may affect infrastructure finance and the municipal bond market. There are many other provisions of the bill, including increased contributions to social security, extended unemployment benefits, and numerous tax credits, that, while not directly related to infrastructure finance, may stimulate the economy sufficiently to free up the credit markets and reinvigorate the housing and municipal bond markets.





Infrastructure Assistance

  • $27 billion for highway and bridge construction and repair
  • $8.4 billion for mass transit
  • $9.3 billion for high-speed railways and Amtrak
  • $4.6 billion for the Army Corps of Engineers

Energy and Communication

  • $50 billion for energy programs, primarily efficiency and renewable
  • $7 billion to bring broadband Internet service to underserved areas

Environmental and Science

  • $6.4 billion for clean- and drinking-water projects
  • $5.6 billion for science and engineering research, including climate science, biofuels, high-energy physics, and nuclear physics


  • $10 billion for school repair

  • $26 billion for special education and No Child Left Behind

  • $17 billion for Pell Grants

  • $2 billion for Head Start

Health Care

  • $21 billion to subsidize COBRA health care insurance premiums

  • $87 billion to help states with Medicaid

  • $19 billion to modernize health information technology systems


  • $4 billion for public housing improvements

Homeland Security and Law Enforcement

  •  $2.8 billion for homeland security programs
  • $4 billion in grants to state and local law enforcement

California AG Condemns Cash-Out Refundings

California school districts finance much of their school construction with general obligation bonds, the issuance of which requires the approval of 55% of district voters. In recent years, economic conditions have allowed many districts to repay their outstanding general obligation bonds with refunding bonds that produce additional proceeds for the district. These so called “cash-out refundings” have attracted critics who contend that the school districts are circumventing the will of the taxpayers by generating more bond proceeds than were originally approved by voters. California Attorney General Jerry Brown recently issued an opinion supporting the critics and condemning the use of cash-out refundings. In his opinion, the Attorney General notes that bonds used in cash-out refundings create “new indebtedness for purposes of the constitutional debt limit, and therefore require new voter approvals before they may be issued.”  Although the opinion is not legally binding, most industry participants expect that school districts will avoid future cash-out refundings in deference to the Attorney General’s position.

Municipal Bonds Versus Public/Private Partnerships

The California State Treasurer Bill Lockyer recently published an editorial in the Sacramento Bee touting the tried-and-true municipal bond system as the key to reinvigorating California’s economy and preferable to the increasingly popular public/private partnership model. Lockyer argues that using tax-exempt municipal bonds to finance infrastructure saves California taxpayers millions of dollars each year – savings that would be forfeited if private enterprise is permitted to share the load or the wealth. According to the Treasurer, “[The private sector] will provide capital only if it receives a profitable return, generally 15% to 25%. The state typically pays 5% or less on municipal bonds, so you have to wonder how the public benefits from private equity infrastructure.”

Bond Market Indicators

The following tables highlight certain economic indicators that may provide insight into the municipal bond market

Source: Bloomberg

As of 01/15/2009

As of 02/15/2009

Yield on 10-Year Treasury Notes:



Yield on 30-Year Treasury Bonds:



Yield on 10-Year Municipal Bonds:



Yield on 30-Year Municipal Bonds:



Gross Domestic Product (4Q versus 3Q, 2008):


Consumer Price Index (12/08 versus 11/08):


Existing Home Sales (12/08 versus 11/08):


New Home Sales (12/08 versus 11/08):


Housing Starts (12/08 versus 11/08):




Gross Domestic Product:  U.S. Bureau of Economic Analysis (
Consumer Price Index: U.S. Bureau of Labor Statistics (
Existing Home Sales, New Homes Sales, and Housing Starts:National Association of Realtors (
Bond and Note Yields: Bloomberg (