Obama Wants BABs Made Permanent

WASHINGTON — The Obama administration will recommend making permanent the Build America Bonds program in its fiscal 2011 budget proposal Monday, a Treasury spokesperson said Friday night.

The plan would reduce the subsidy from 35% to 28% beginning Jan. 1, 2011, but would greatly expand the program’s reach to include refundings, working capital, as well as permitting nonprofit hospitals and universities to issue the debt. The lower subsidy is intended to make the program’s cost equivalent to the cost to the federal government of traditional tax-exempt bonds.

“Build America Bonds were an important new reform in the Recovery Act. They were successful in helping to repair a severely damaged municipal finance market, making much needed credit available at lower borrowing costs for infrastructure projects that create jobs,” said Treasury Secretary Tim Geithner in a statement sent to The Bond Buyer. 

“By making Build America Bonds a permanent and expanded financing tool for state and local governments, we’re investing in our country’s long term economic growth in a cost-effective way.”

Under current law, the program is slated to expire at the end of the year.

Michael Decker, managing director and co-head of the Securities Industry and Financial Markets Associations’ municipal securities division, said: “BABs have become an extremely important tool for state and local governments and we’re happy the administration has proposed making this a permanent part of the municipal market. We look forward to working with the administration and Congress to see the proposal enacted.”

Decker said that there was a widespread view in the market that the 35% subsidy rate was a reaction to very constrained credit market conditions one year ago and that there was an expectation that if the program were extended, it would be at a lower subsidy level.

But Frank Hoadley, Wisconsin’s state capital finance director and chair of the Government Finance Officers Association’s debt committee, said that in today’s marketplace, BAB maturities will “dramatically drop off” with a 28% subsidy.

“It seems to me only the highest interest-rate bonds – or low credit bonds – would have enough benefit,” he said. “High grade bonds like state of Wisconsin general obligation debt, I don’t think they’d work at 28%.”

Hoadley stressed, however, that Treasury is “absolutely correct” that BABs have been a very valuable tool under the existing authorization.

In a statement, Michael Nicholas, chief executive officer of the Regional Bond Dealers Association, said: “We fully support making the Build America Bonds program permanent and expanding this program and are pleased with the administration’s proposals.”

Nicholas noted that the BAB program has been “a great success” equaling roughly 16% of total issuance in 2009 with more expected in 2010.
 
“The RBDA is supportive of a variety of financing alternatives for state and local issuers and also would encourage making permanent the increase in the bank qualified limit, the AMT relief for private activity bonds and the provision allowing banks to hold up to 2% of assets in municipal securities.”

Asked if stimulus provisions encouraging banks to purchase bank-qualified debt would be extended, a Treasury Department spokesperson would not comment.

Total BAB issuance from April 15, 2009, through Jan. 28, is $70.983 billion, across 878 issues, according to data from Thomson Reuters. In January alone, issuers sold $6.862 billion of BABs across 87 issues.

The Joint Tax Committee, in a report on the stimulus law, last year estimated that BABs would result in lost revenue of $4.3 billion through 2019.  On Tuesday, the Congressional Budget Office said that the popularity of the BAB program is expected to cost $26 billion more over the next 10 years than originally predicted.

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