Build America Bonds

After the Judicial Center Bond issue, I said that I thought the Build America Bond program would lead to a permanent, and bubble like, change in municipal bonds.

I saw this article today regarding the Administration’s budget:

Budget Cites Cost Of BABs
Estimate Is About $750M Per Year
Wednesday, February 3, 2010
By Peter Schroeder

Obama Floats BAB Extension – February 2, 2010

WASHINGTON — The current Build America Bond program is costing the federal government roughly three-quarters of a billion dollars a year, according to the Obama administration’s recently released budget documents.

The president’s fiscal 2011 budget documents show that while the federal government actually made money on tax revenue obtained from the taxable bonds in fiscal year 2009, it expects the program ultimately would cost a total of $5.6 billion through fiscal 2015, assuming it expired at the end of 2010.

According to the Treasury, the government obtained $200 million in tax revenue from the bonds in fiscal 2009, and only spent $20 million on subsidy checks for the program, for a net revenue gain of $180 million. The gain was largely due to the fact that the program did not get underway until April and subsidy checks did not go out to issuers until months after that.

However, in fiscal 2010, the government would spend $2.9 billion on the program while only recouping $1.3 billion in taxes, for a net revenue loss of $1.6 billion, according to the budget documents. For fiscal years 2011 through 2015, the government would have annual net revenue losses of between $760 million and $930 million from the program.

However, these numbers would change if Congress agrees with the administration’s proposal to make BABs permanent with the lower subsidy rate of 28%. The goal of the lower subsidy rate is to ensure the program costs roughly the same as tax-exempt bonds.

Meanwhile, Treasury Secretary Timothy Geithner, speaking at a Senate Finance Committee hearing on the Obama budget proposals yesterday, said that BABs have proven to be “remarkably effective” and should be made permanent.
However, Sen. Ron Wyden, D-Ore., questioned whether expanding BABs to cover such things as refundings will lead to more job growth, while Sen. Charles Grassley of Iowa, the committee’s top Republican, raised concerns about extending stimulus programs that were intended to be temporary.

Geithner said BABs have helped to significantly reduce the cost of borrowing for state and local governments, which was crucial during the last year when they were faced with dire fiscal straits.

“The cost of borrowing by state and local governments has come down very, very dramatically,” he said, while adding that states and municipalities are not out of the woods yet.

“State and local governments still face really, really difficult challenges that they haven’t seen in many, many decades,” Geithner said. “We need to keep working at trying to help them get through this, and we think this program is one way to do that.”

Besides making BABs permanent at a reduced subsidy of 28%, the administration has proposed allowing issuers to sell them to finance refundings and working capital, and has suggested that 501(c)(3) organizations be permitted to issue them as well.

But Wyden — who sponsored the original legislation creating BABs that was eventually included in the American Recovery and Reinvestment Act — asked Geithner whether expanding the program’s reach would lead to more job creation.

“What concerns me is if the country goes that route, that won’t do as much to create new jobs … particularly in transportation where there is a great economic multiplier,” he said. But Wyden reiterated his support for BABs, saying they wildly exceeded expectations and that “clearly this is now the boldest effort in municipal finance as it relates to generating the improvements we need in infrastructure.”

Speaking generally, Grassley worried about the costs of extending temporary ARRA programs. He did not specifically say whether his remarks included BABs and his staff could not be reached for comment.

Geithner agreed that some ARRA programs should remain temporary, but said that others should be made permanent because they “have a powerful impact on investment and job creation.”

“Our basic test should be: What’s going to add jobs? What’s going to add spark to investments?” he said.


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