Looking back on 2008 and anticipating the challenges of 2009.(Federal Focus)

Congress dedicated most of its time and energy in 2008 to the growing economic crisis gripping the country. Congressional hearings and legislative activity on the failures of the capital markets and the financial regulatory system, the housing crisis, and the demise of long-standing financial institutions were held on nearly a weekly basis. This included specific hearings and legislative efforts to assist state and local governments and the municipal bond market. As President Barack Obama has noted, the economic turmoil did not happen overnight, nor will the economic recovery. Therefore, it may take well into 2009--or longer--to measure the success of the recovery initiatives from 2008. Below is an overview of these efforts and their impact on state and local governments.

HOUSING

Throughout 2008, Congress pursued avenues of assistance to homeowners and communities. After several months of negotiations between House and Senate leaders and the White House, the president signed the Housing and Economic Recovery Act (Public Law 110-289) into law on July 30, 2008. A comprehensive measure hailed as landmark legislation, the new law includes provisions that are of critical importance to states and local governments.

The law makes available $3.92 billion in Community Development Block Grant (CDBG) funds to cities and states to assist communities that are significantly affected by rising rates of vacant properties as a result of foreclosures. The block grant funds can be used to purchase, rehabilitate, or demolish these abandoned properties in order to stabilize neighborhoods and stem the losses in property values of neighboring homes. The funds are to be distributed by the Department of Housing and Urban Development and allocated to communities based on state and local home foreclosure percentages, the number of homes financed by subprime mortgage loans, and the number of homes in default on existing loans.

Other parts of the new housing law that are significant to the state and local government community include provisions authorizing state housing finance agencies to issue an additional $11 billion in housing bonds, which would fall outside of the private activity volume cap. The funds raised can be used to refinance some subprime loans, provide loans to first-time home buyers, and finance the construction of low-income rental housing. The law also repeals the alternative minimum tax (AMT) on all housing bonds, which could save state and local governments between 60 and 65 basis points on their issuances because they would no longer have to offer higher interest rates to compensate investors for the interest lost to the AMT. Finally, the new provides a new credit enhancement for bond issuers by allowing Federal Home Loan Banks to extend letters of credit to their member institutions for tax-exempt bonds.

EMERGENCY ECONOMIC STABILIZATION ACT

Members of Congress quickly recognized that the enactment of comprehensive housing legislation was but the first stop on the road to economic recovery. As the economic crisis continued to spiral to downward, Congress turned its attention to initiatives that would kick-start the nation's credit markets. Relief came in the way of a $700 billion rescue measure signed by the president on October 3, 2008. The Emergency Economic Stabilization Act of 2008 (Public Law 110-343) was intended to help stabilize the financial markets and ease the credit crisis plaguing private companies and state and local governments.