WASHINGTON, Jan 18 (Reuters) - The U.S. Congress is likely to help cities' struggling economies not only through the stimulus bill it is expected to pass soon but through measures to boost the municipal bond market, Rep. Barney Frank told a mayors' meeting Sunday.
Frank has put high on his agenda the creation of a bond insurer that the federal government would operate, and which would charge premiums based on the risk of bonds' defaults, he told Reuters. Most bonds do not default and, therefore, do not need insurance but "the market may still want it," said Frank, who heads the House Financial Services Committee.
Lower-rated municipal bond issues frequently used insurance to boost their credit ratings, which drove down the interest payments they had to pay to attract buyers. Over a year ago, credit rating agencies began downgrading the insurers and bonds were left trading on their underlying ratings.
Since then bond issuers have struggled to bring new debt to market and many have to pay higher interest rates. That has proven difficult during the year-long recession when municipalities have seen their tax revenues drop and demand for their social services spike.
The National League of Cities and other groups have proposed creating a collective insurance group with seed money from the federal government that would be operated by cities and states. Frank, though, told Reuters he envisioned a program administered by the federal government to back full faith and credit general obligation bonds.
Frank has introduced legislation to tighten oversight of the Troubled Asset Relief Program, which the U.S. government has used to bailout financial institutions, that would authorize some of the program's funding to support municipal bonds. President-elect Barack Obama, who will take office Tuesday, has requested the second installment of $350 billion of TARP funds.
"We put into our bill, which the administration has told us they plan to abide by even if it does not pass the Senate, specific authority to help municipal bonds," Frank told the U.S. Conference of Mayors. "We will get help in the short-term for municipal bonds for this."
A poll released by Zogby International on Saturday found most Americans believe there was little to no transparency in how the first chunk of the bailout money was used. Frank said the Obama administration had agreed to ask for more disclosure from financial institutions helped by the program.
"No institution will get new money without the requirement that they tell us exactly how they are going to spend it," he said.
State and local governments are facing their most serious financial challenges in decades, Moody's Investors Services said on Friday.
Obama has called for an economic recovery package that would include heavy public works spending as well as assistance for state and local governments. Last week the House presented a version that Speaker Nancy Pelosi, a California Democrat, said would likely be passed in February.
Frank said many grants for towns are included in the proposed plan and the Community Development Block Grant program, used to combat blight, would get a 25 percent boost. (Reporting by Lisa Lambert; editing by Richard Chang)
