Congressman Gerald E. Connolly introduced legislation Monday to jumpstart the issuance of municipal bonds.  Many state and local governments, already hamstrung by declining revenues, are unable to issue bonds for capital projects due to the faltering economy and skittish investors in the municipal bond market.

Connolly’s legislation – the Federal Municipal Bond Marketing Support and Securitization Act of 2009 – would provide direct assistance to municipal ++bond issuers by giving the Treasury Department, the Federal Reserve, and the Federal Financial Bank new authority to guarantee and purchase municipal securities.
“It is a financial nightmare out there for many of the tens of thousands of issuers of municipal bonds,” Connolly said. “The drying up of bond markets and lack of bond insurance has created a double-whammy of steep shortfalls and tough financial choices for state and local governments.”

The Virginia Democrat said, “State and local governments, are experiencing limited access to the capital markets due to the liquidity crisis despite the fact that munis are and always have been among the safest of investments. Further complicating the issue is the fact that the private insurance market has virtually disappeared, eliminating a viable means of credit enhancement, which allows a small town water authority, for example, to attain the same credit-worthiness as a metropolitan transportation authority.”

Until his election to Congress last November, Connolly was the Chairman of the Board of Supervisors of Fairfax County, Virginia, with a population of 1.1 million and an annual budget of $4.5 billion.  “I understand state and local governments, and I believe they are the most effective engines for creating jobs on Main Street, whether by building new schools, fire stations and water treatment plants, or repairing our nation’s ailing infrastructure and implementing our environmental agenda,” he said.

Connolly said that the inability of state and local governments and other municipal bond issuers to float bonds could blunt the positive impacts of the federal economic recovery program, while a vibrant municipal bond market would pump more money into the economy and create jobs across the country.  “If we can put the municipal bond market back on a solid footing, it will help to reinvigorate our economy.”

The Connolly bill would give the Secretary of the Treasury the authority to approve the method, source, and financial timetable for the purchase of municipal bonds directly or through the Federal Financing Bank, establish a program to pool munis as Treasury securities, and provide guarantees or credit enhancement for the bonds.  The legislation also would clarify the Federal Reserve’s authority to establish a credit facility to guarantee short-term municipal bonds.

In January during consideration of TARP legislation, Connolly participated in a colloquy on the House floor with House Financial Services Committee Chairman Barney Frank, who called states and municipalities among the most sympathetic victims of the economic turmoil.

Connolly said he has been consulting with Chairman Frank, his committee staff, House colleagues, municipal and state government leaders, and others who are active in the municipal bond market to craft a solution. “What I proposed today may not provide the ultimate solution, but I believe it provides a starting point to begin addressing this critical situation.”