Congress should permanently reinstate a Build America Bond program with a 28% subsidy rate to encourage state and local governments to invest in infrastructure projects,  Brookings Institution recommended in a report this week.

“While authorized at a lower subsidy rate than the original program, a permanent BAB program would provide flexible low-cost financing for a broad range of infrastructure projects that will create jobs and foster economic growth for years to come,” the paper said.

The BAB program — established under the American Recovery and Reinvestment Act — allowed state and local governments in 2009 and 2010 to issue taxable bonds for capital projects and receive a payment from the Treasury Department equal to 35% of their interests costs, the report said. The program was wildly popular and decreased the average borrowing costs for states and localities when compared to their borrowing costs for tax-exempt bonds. Almost $182 billion of BABs were issued in 2009 and 2010, according to Thomson Reuters.

Although congressionally-mandated budget sequestration cut issuers’ BABs subsidy payments by 8.7%, allowing some issuers to redeem or announce they may redeem their BABs, long maturities, large issuances and contractual provisions against par-value calls will likely limit the number of those redemptions, the authors of the report said.

They suggest that a reinstated BAB program should have a guaranteed subsidy payment “to insulate the bonds from federal budget cuts” in the future.

Brookings proposes a 28% rather than a 35% subsidy rate because the lower rate would be revenue neutral and would match the amount of money the federal government loses from lost taxes due to investments in tax-exempt bonds. Also, state and local governments don’t need the same subsidy that they did after the 2008 financial crisis when borrowing costs rose and bond issuance dropped significantly, according to the paper.

“The market doesn’t particularly need a big kick,” especially compared to the recession, Patrick Sabol, one of the paper’s authors, said in an interview. He noted that municipalities are generally doing fine and that the housing market is recovering.

Reviving the BAB program would expand the market for municipal issuers because it would attract investors that can’t usually take advantage of the tax exemption of most municipal bonds, the report said.

“It’s another tool in the toolkit,” for cities, states and investors, Sabol said.

Reinstating the BAB program would also reduce borrowing costs for some struggling state and local governments that are fast-tracking and supporting investments in infrastructure projects, according to the report. Additionally, a BAB program would increase transparency in infrastructure financing because the subsidy is a direct outlay of the federal government, rather than being buried in tax code, Sabol said.

Brookings released this report because it wanted to insert itself into the policy discussion ahead of debate in Congress over the fiscal year 2014 budget and tax reform, Sabol said.

Many states, localities and potential investors support establishing a permanent BAB program, the report said. President Obama’s fiscal 2014 budget request proposes a direct-pay America Fast Forward Bonds program that is similar to Brookings’ proposal. Under the Obama plan, however, AFF bonds could also be used to finance projects that can currently be funded by tax-exempt private activity bonds.

But opponents of renewing the BABs program think the bonds are the equivalent of a bailout for states and argue that an extension of the program could encourage reckless spending behavior and provide assistance to inefficient local projects, the report said. Additionally, there are concerns by stakeholders that a reinstated BAB program would be paired with a cap on the tax-exempt benefits of municipal bonds. And sequestration has created unease about the federal government’s ability to deliver on direct-subsidy programs.

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