STIMULUS PACKAGE - The American Recovery and Reinvestment Act of 2009
New Information from Federal Agencies (updated July 24, 2009)
President Obama signed the $787 billion American Recovery and Reinvestment Act (ARRA) of 2009 on February 17. The legislation provides significant amounts of direct funding to state and local governments and contains various tax provisions of interest to GFOA members. A summary is provided below.
One-Year Delay in the Implementation of the 3 percent withholding on government payments law
The Act changes the effective date of this law to January 1, 2012. The law mandates governments that spend more than $100 million a year on goods and services to withhold 3 percent from most payments made to a vendor or contractor and remit that money to the IRS. The GFOA has advocated for repeal of this provision since it was passed in 2006, as it constitutes an unfunded mandate on governments and would be extremely burdensome to implement.
Tax-Exempt Bonds: More information about these programs can be found on the Tax-Exempt Bonds, Tax Credit Bonds, AMT and Tax Exempt Bonds, and Bank Deductibility issue briefs.
- Increases Bank Qualified Debt Limit to $30 million. ARRA increases the small issuer bank qualified limits to $30 million from its current $10 million level. This will allow smaller governments to place their debt directly with the community or with other banks, which in turn can deduct 80 percent of the purchasing costs for the bonds issued in 2009 and 2010.
- Provides New Incentives for Banks to Purchase all Types of Bonds. Banks have been able to deduct the carrying costs of only bank-qualified bonds since 1986. ARRA allows banks to deduct 80 percent of the carrying costs of purchasing all types of newly issued bonds in 2009 and 2010, to the extent investment in the bonds does not exceed 2 percent of the bank’s total assets.
- Eliminates Application of the Alternative Minimum Tax (AMT) on Private Activity and Governmental Bonds. The interest on private activity bonds and some governmental bonds is not deductible for individuals and corporations, who must pay the AMT. ARRA eliminates the application of the AMT on all bonds issued in 2009 and 2010, including refunding of bonds that were initially issued after 2003.
- New Taxable Bond Option (Build America Bonds). Under ARRA, governments can elect to issue taxable tax-credit bonds in lieu of tax-exempt bonds for governmental purposes for bonds issued in 2009 and 2010. The taxable bond option allows issuers to receive a 35 percent reimbursement of interest paid from the federal government OR provide a 35 percent tax credit to investors. All of the tax laws applicable to tax-exempt bonds apply to the taxable tax-credit governmental bonds.
- New “Recovery Zone Bonds.” A new category of tax-exempt private activity bonds has been created for use in “recovery zones,” which are designated areas with significant unemployment, poverty, and home foreclosure rates. A total of $15 billion in private activity Recovery Zone Facility Bonds would be allocated based on a proportion of a jurisdiction’s unemployment rate versus that of the nation’s unemployment rate. The bonds need to be issued by January 1, 2011. The legislation also authorizes $10 billion in taxable bonds called Recovery Zone Economic Development Bonds to be used to promote economic development in a Recovery Zone, and the state or local government would receive a 45 percent reimbursement of interest paid, with no option to apply the credit to investors.
- Creates New Tax Credit Bonds: Qualified School Construction Bonds. These tax credit bonds may be used to finance new construction, rehabilitation, or repair of public school facilities. ARRA authorizes $11 billion annually for 2009 and 2010. Forty percent of the allocation is dedicated to large school districts,
- Expands Qualified Zone Academy Bond Authority. Congress has routinely reauthorized $400 million for this program, and ARRA gives an additional $1.4 billion annually in 2009 and 2010.
Local governments and school districts interested in issuing tax credit bonds should consult with their state treasurer’s office about programs that might be in place to more easily facilitate the selling of educational tax credit bonds.
- Increases New Clean Energy Bond Limits. The new law authorizes a total of $ 2.4 billion (an increase of $1.6 billion) for Clean Renewable Energy Bonds used to finance renewable energy facilities. The authorization is subdivided into thirds: one-third for state, local, and tribal governments; one-third for qualifying projects of public power providers; and one-third for qualifying projects of electric cooperatives.
- Increases Qualified Energy Conservation Bonds Limits. ARRA provides for $3.2 billion (an increase of $2.4 billion) of tax credit bonds to be issued for green community programs, including allowing bonds to be issued to finance loans to individual homeowners to retrofit existing houses with energy conservation products.
- Expands Definition of Industrial Revenue Bonds. ARRA expands the definition of “manufacturing facility” to include facilities used for the manufacturing, creation, or production of intangible property. Until now, Industrial Revenue Bonds have only been able to be issued for the manufacturing of tangible property.
- Prevailing Wage Requirements to Tax Credit Bond Programs. The new law mandates that wage requirements under the Davis-Bacon Act apply to the Recovery Zone Economic Development Bonds, Qualified Zone Academy Bonds, Qualified School Construction Bonds, Clean Renewable Energy Bonds, and the Qualified Energy Conservation Bonds.
Sales Tax Deduction for Vehicle Purchases. If a taxpayer purchases a new car, light truck, recreational vehicle, or motorcycle in 2009, they may deduct the state and local sales and excise taxes on their federal tax return.
Refundable First Time Home Buyer Credit. Allows an $8,000 tax credit to first-time homebuyers, for homes purchased before December 1, 2009.
- $53.6 billion for a State Fiscal Stabilization Fund, including $39.5 billion to local school districts which can be used for preventing cutbacks, layoffs, as well as school modernization; $8.8 billion to states to provide flexible funding for governors’ priorities, which can include public safety, further assistance for K-12 and higher education, modernization, renovation, or repair of public school facilities and higher education institutions, and other government services; and $5 billion to the State Incentive Fund, a competitive grant program which states can apply for. Additionally, the law provides $13 billion for Title I grants for disadvantaged students and $12.2 billion for special education. No funds were allocated for new school construction.
- $36 billion to states for extending and expanding unemployment benefits, including $27 billion for extending the 33 weeks of extra unemployment benefits (up from 26 weeks) until December 31, 2009, and $9 billion to increase the current average unemployment insurance benefit.
- $3.95 billion for job training, including funding through the state formula grants program set forth in the Workforce Investment Act for adult, dislocated worker and youth programs dedicated to job training.
- $3.2 billion for the Energy Efficiency and Conservation Block Grant Program (EECBG), which provides grants to states and local governments to fund renovation projects of public facilities that would install more energy efficient building technologies and materials. More specifically, $2.8 billion is strictly dedicated to EECBG formula created through the Energy Independence and Security Act of 2007. Pursuant to that Act, the distribution of funds should take place accordingly: 68 percent of appropriated funds for grants to eligible units of local government (usually determined by population); 28 percent to states; and 2 percent to Indian tribes. The remaining $400 million will be awarded on a competitive grant basis.
- $3.1 billion for the Energy Department’s State Energy Program, which provides grants to states to fund state government energy technology research and development programs.
- $300 million for the Energy Department to distribute grants through its Clean Cities Program, to state and local governments and other entities, which would be used to purchase and demonstrate alternatively fueled vehicles.
- $4.5 billion for the Smart Grid Investment Program, which provides funds for regional demonstrations of energy transmission projects and provides matching grants to states to implement smart grid demonstration projects.
- The Act provides $6 billion for water infrastructure capitalization grants: $4 billion for the Clean Water State Revolving Funds and $2 billion for the Drinking Water State Revolving Funds. The state matching requirement is waived. A chart providing the allocation of funds is available. Projects to be funded must be under contract or construction by January 18, 2010, or the funds will be subject to reallocation by the EPA. States are required to use at least 50% of their capitalization grants to provide additional subsidization to recipients in the form of principal forgiveness, negative interest loans or grants. Furthermore, at least 20% of the funds must be used for projects that address green infrastructure, water or energy efficiency, and environmental innovation.
- $600 million for Superfund remedial cleanup.
- $200 million to states for the Leaking Underground Storage Tank Enforcement and Clean-up Program.
- $87 billion for a temporary increase to the Medicaid federal medical assistance percentage (FMAP) for states and some local governments from October 1, 2008, through December 31, 2010. This would amount to an increase to all states of 6.2 percent. States will be required to pass the FMAP increase on to local governments that contribute to the non-federal share of Medicaid.
- $19 billion to ensure the widespread adoption and use of interoperable health information technology (health IT) from 2009 through 2013, including providing grants to states that commit to either in-kind or financial matching contributions to help facilitate its development and use. The new law codifies the Office of the National Coordinator for Health Information Technology and establishes a process to develop standards by 2010 that would allow for secure nationwide electronic exchange of health information.
- A government-funded subsidy that would pay for 65 percent of the COBRA premium charged to employees who are involuntarily terminated from employment between September 1, 2008, and December 31, 2009. Employers, including governmental employers and insurers, would initially pay the subsidy amount, and then would receive a credit against their federal payroll taxes.
- $610 million in competitive grants for states and local governments, including $150 million for public transportation and railroad security assistance, $150 million for Port Security Grants, $100 million for Federal Emergency Management Agency’s (FEMA) Emergency Food and Shelter Program, and $210 million for FEMA’s Firefighter Assistance Grant Program for modifying, upgrading or constructing local fire stations. The new law also removes the $5 million cap on FEMA’s Community Disaster Loan Program for major disasters occurring in 2008.
Housing and Economic Development
- $4 billion to the public housing capital fund to enable local public housing agencies to address significant backlog in local building repair and construction projects, as well as improving energy efficiency in older buildings.
- $1 billion to the Community Development Block Grant Program, which provides grants to local governments for critical housing services and infrastructure needs.
- $2 billion to the Neighborhood Stabilization Program awarded to local governments and states on a competitive basis to purchase and rehabilitate housing made vacant by foreclosures.
- $ 2.3 billion to the HOME program, which will be allocated to state housing finance agencies for low-income housing projects.
- $100 million to states and local governments to evaluate and reduce lead-based paint hazards in low-income housing.
- $5 billion for Temporary Assistance for Needy Families (TANF) state block grant’s emergency fund; $2 billion for the Child Care Development state block grant; $1 billion for the Head Start state block grant; and $1 billion for the Community Services state block grant.
- $4 billion for state and local law enforcement funding, including $2 billion for the Edward Byrne Memorial Justice Assistance Grants, $1 billion for the Community Oriented Policing Services (COPS) Hiring Grants with all local matching requirements and salary caps waived, and $225 million for competitive grants to improve the functioning of the criminal justice system, to assist victims of crime (other than compensation), and for youth mentoring grants. Funding is available through September 30, 2010.
- The new law divides broadband grant funding between the National Telecommunications and Information Administration (NTIA - $4.7 billion) and Rural Utility Service (RUS - $2.5 billion). The NTIA grant program has very flexible criteria, giving the NTIA considerable leeway in determining grant award winners, which may include both public and private providers of broadband service. The RUS program will focus on rural areas and 75 percent of the funds must go to both public and private providers that plan to serve areas that lack sufficient access to broadband.
- $27.5 billion to the states for Highway Infrastructure Investment, which includes highway projects such as resurfacing and pavement preservation projects, traffic signal system upgrades, bridge projects and intelligent transportation systems. Fifty percent of the money will be distributed to the states based on states’ 2008 share of highway and bridge dollars and 50 percent using the Surface Transportation Program (STP) formula. The funds can be used for any STP-eligible project with no state or local match required. The new law also requires that 30 percent of the funds apportioned to each state be sub-allocated to local governments within a state using the existing STP formula, which distributes funds to areas based upon population. The approximately $8 billion in funds sub-allocated to local governments have a year to be obligated.
- $1.5 billion to the Department of Transportation for new competitive/discretionary grants to state and local governments for transportation projects, including highways, bridges, transit, rail, and ports.
- $9.3 billion for mass transit projects, such as subways, light rail, commuter rail, buses and vans, most of which goes directly to local governments and all with a 100 percent federal share, meaning no local match is required. $5.4 billion will be distributed to urban communities and $600 million to transit agencies that serve rural communities. Funds will be distributed through the existing urban and rural transit formulas.
- $1.1 billion for the Airport Improvement Program (AIP), which provides grants to locally owned airports, with a 100 percent federal share. Grants will all be discretionary rather than by formula and must be applied for.
Working and Retiree Tax Credits
- A “Making Work Pay” refundable tax credit of up to $400 for working individuals and $800 for working families. This tax credit would be calculated at a rate of 6.2 percent of earned income, and would phase out for taxpayers with adjusted gross income in excess of $75,000 ($150,000 for married couples filing jointly). Taxpayers can receive this benefit through a reduction in the amount of income tax that is withheld from their paychecks, or through claiming the credit on their tax returns. The credit is applicable for taxable years 2009 and 2010.
- For retirees, individuals with disabilities, and SSI recipients who receive benefits from the Social Security Administration and the Department of Veterans Affairs, the measure would provide a one-time payment of $250 for taxable year 2009. For certain federal and state government employees who are not eligible for Social Security benefits because they are receiving a federal or state pension, the measure would provide a refundable tax credit of $250, also for the 2009 taxable year. Recipients of both the $250 payment and the $250 refundable tax credit would be required to deduct this amount from any allowable “Making Working Pay” credit.
- How funds are spent, all announcements of contract and grant competitions and awards, and formula grant allocations must be posted on a special Web site created by the president (www.recovery.gov). It must also include the names of agency personnel to contact with concerns about infrastructure projects.
- Public notice of funding must include a description of the investment funded, the purpose, the total cost, and why recovery dollars should be used. Governors, mayors, or others making funding decisions must personally certify that the investment has been fully vetted and is an appropriate use of taxpayer dollars. This information will also be posted online.
- A Recovery Act Accountability and Transparency Board will be created to review management of recovery dollars and provide early warning of problems. The board is made up largely of Inspectors General.
- The Government Accountability Office and the Inspectors General are provided additional funding and access for special review of recovery funding.
- State and local whistleblowers who report fraud and abuse are protected.