According to congressional lobbying records and interviews with market participants, 78 organizations have either hired lobbyists or lobbied on their own for BABs, and as many as 202 lobbyists have taken on the issue since the taxable stimulus bonds were created in February 2009. But activity spiked most noticeably this year, as muni market participants began pushing for a BAB extension and Republicans started complaining the program was expensive and was lining the pockets of Wall Street firms.
About 40 of the 78 organizations that reported lobbying for BABs did so during the first quarter of 2010, and that figure grew to about 55 in the second quarter. In contrast, only eight organizations reported lobbying for BABs in 2009.
Records that lobbyists are required to submit on a quarterly and annual basis list BABs among the dozens or hundreds of issues lobbyists have worked on for municipal governments and Wall Street trade groups. As a result, it is impossible to discern the extent of their focus on BABs or how much money they are spending on the effort. The records also do not distinguish between lobbying lawmakers and meeting with regulators and agencies such as the Treasury Department or the Internal Revenue Service.
The records show that lobbyists, or those that hired lobbyists, include the top three BAB underwriters, more than two dozen cities and counties, as well as muni market trade groups and individual bond issuers in the higher education, health care, transportation, and energy sectors.
Many of the groups that lobbied for BABs have also issued the bonds, accounting for a total of about $6 billion, or about 5% of all BAB volume so far.
The fiscally strained University of California, which reported three in-house lobbyists for BABs and other issues in the second quarter of this year, has sold a total of $1.45 billion of the bonds.
New York’s Metropolitan Transportation Authority joined two other metro-area authorities in paying Vierra Associates Inc. to lobby on BABs and has sold $3 billion of the debt so far. Denver, which has issued $377 million of BABs, paid Patton Boggs LLP to lobby for the expiring bond program. The Northern California Power Agency’s two lobbyists took up cause this year, and the agency has sold $287 million of BABs.
The muni market initially harbored some skepticism about BABs, fretting that they were a sign of lawmakers trying to steer the market away from traditional tax-exempt debt. But the market quickly responded to a direct-pay option that Congress attached to the bonds, providing a federal subsidy to defray 35% of the issuer’s interests costs. BAB issuance started soaring, with governments eager to take advantage of the two-year window for lower-cost borrowing.
As of Tuesday, $123 billion of BABs have been issued, far surpassing the expectations of the lawmakers who created them. The Obama administration recommended in its fiscal 2011 budget request that BABs be made permanent at a 28% subsidy rate. But so far Congress has been reluctant to consider anything longer than a two-year extension because of the cost of subsidizing the bonds, which would be difficult to offset with revenue-raising tax provisions.
House Ways and Means chairman Sander Levin, D-Mich., introduced a bill late last month that would extend BABs for two years and gradually reduce the subsidy rate to 30%, but the measure will not be voted on until at least mid-September because the House has adjourned for its August recess. Levin had sponsored an earlier measure to extend the bonds by two years and three months, but it failed to gain traction in the House.
However, budget concerns have not stopped Congress from providing a direct-pay option for other types of tax-credit bonds — qualified school construction bonds, qualified zone academy bonds, clear renewable energy bonds, and qualified energy conservation bonds.
In spite of the popularity of BABs, not everyone is bullish about them. Several Republicans have launched a campaign against the program, including the Senate Finance Committee’s ranking Republican, Charles Grassley of Iowa. In March, he lashed out against broadening BABs or increasing their subsidy rates, claiming they are a “very rich spending program disguised as a tax cut.”
Senate Minority Whip Jon Kyl, R-Ariz., has complained that many of the BABs are being sold by states with poor credit ratings. Those states receive more subsidies from the Treasury than borrowers with good credit because they pay a higher interest rate on their bonds.
Grassley also warned that Wall Street underwriters “skim the cream” by charging municipal bond issuers higher fees. Earlier this year, he demanded that Goldman, Sachs & Co. disclose its income from BAB deals and whether fees for those deals were higher than those for traditional tax-exempt bonds, claiming bankers are siphoning off the federal subsidy intended to help issuers.
Goldman reported in March that it earned $54 million to underwrite $34 billion of BABs and charged slightly higher fees for BABs than for tax-exempt bonds, but said its fees were competitive and that BABs are still a relatively new kind of municipal bond trying to fit into the taxable market.
The three investment banks, including Goldman, that lead the pack in BABs underwriting have dispatched lobbyists to work on legislation that authorizes, extends, or expands the program, according to records. Bank of America NA, Citigroup Management Corp. and Goldman have all reported BABs in lobbying records since last fall.
The major financial industry trade groups — the Securities Industry and Financial Markets Association, the Regional Bond Dealers Association and the American Bankers Association — are among the BAB lobbyists.
“We’ve been supporters of Build America Bonds since their creation in 2009 and believe that they should be made permanent,” said Andrew DeSouza, spokesman for SIFMA, which has seven people working on BABs. “Extending the BABs program remains a top priority for SIFMA, and our advocacy efforts reflect that focus.”
The RBDA has a small in-house lobbying staff and one outside lobbyist who bolsters its federal efforts, according to chief executive officer Mike Nicholas. The group also paid Nixon Peabody LLP “mainly for regulatory guidance” on a number of issues that include muni bonds, hesaid.
There has also been a spike in BAB lobbying in other sectors that created the largest amount of BAB activity.
Disclosures for the past three quarters show BAB lobbying by groups in the education, transportation, utilities and electric power, and health care sectors — which, after general-purpose issuance, led the market for BABs. They include the Northern California Power Agency, Texas Health Resources, the New York MTA, the University of Massachusetts and Arizona State University.
“It’s one of many issues we’re working on,” said Lane Dickson, a lobbyist for the Salt River Project Agricultural Improvement and Power District, a water and electric utility in the Phoenix metro area. The project has two full-time federal lobbyists who took up BABs in the second quarter of this year, mostly to work on extending the current law and monitor potential changes such as ratcheting down the federal subsidy rate.
“While SRP has not issued any BABs to date, we would consider issuing BABs under the current program (and would under any extended program) if it is a lower-cost option to meet our financing needs,” said Aidan McSheffrey, manager of financial services for the Salt River Project.
Other pro-BAB groups have pushed for Congress to extend the direct-pay option to other tax-credit bonds. The American Public Power Association’s lobbyists advocated for allowing clean renewable energy bonds “to be used like Build America Bonds,” according to their disclosures, as well as increasing the volume cap for CREBs. They achieved some success in March, when Congress extended the direct-pay option to CREBs.
Many of the lobbyists who have worked on BABs, including Dickson, already had long-standing relationships with governmental clients and simply added BABs to their to-do list.
Brad Van Dam, who lobbied on BABs for the American Association of Airport Executives, said the financing tool has benefited airports but is not the top priority for the AAAE. Instead, a temporary tax exemption for private-activity bonds has given airports significantly more borrowing power, and extending the exemption is the group’s top bond-related goal, he said.
The same is true for cities — BABs have taken off as a lobbying issue, but they number among dozens, or in some cases hundreds, of topics listed in the reports.
“We’re urban generalists,” said Ralph Garboushian, a lobbyist for CapitalEdge Strategies LLC, which lobbies on BABs for eight cities, including Dallas and Austin, which have issued a total of $265 million of BABs in the past year.
“When it comes to municipal bonds, anything that’s in the direction of more flexibility, generally, cities support,” he said.