Treasury makes fresh case for Build America Bonds

By Peter Schroeder - 05/18/11 01:20 PM ET

The Treasury Department is mounting a fresh case for the return of Build America Bonds (BABs) — a special financing tool for state and local governments included in the stimulus package that expired at the end of 2010.

As state and local governments grapple with hefty budget gaps, John Bellows, the Treasury's acting assistant secretary for economic policy, argued on the department's blog that BABs could be just the thing to give them a boost.

He contended that BABs saved state and local governments money when they issued debt to finance large projects, while encouraging them to make much-needed investments in infrastructure. And while BABs might have gone by the wayside at the end of the 2010, those needs are still prevalent.

"As we’re all looking for ways to save money and be more efficient with taxpayer dollars, the case for bringing back BABs couldn’t be stronger," he wrote.

Typically, a state or local government issues debt in the form of tax-exempt bonds. Investors do not have to pay tax on the returns on the bonds, which in turns allows the governments to offer lower interest rates. However, BABs were taxable bonds, and state and local issuers received a subsidy payment equal to 35 percent of interest costs.

From April 2009 until the program expired in December 2010, governments issued more than $181 billion of BABs to finance new infrastructure projects. New data from the Treasury indicate that those governments saved 0.84 percent on interest costs on 30-year bonds when issuing BABs as opposed to traditional tax-exempt debt.

Several state and local government groups lobbied hard to get the program extended, and the Obama administration has proposed making the program permanent at a lower subsidy rate.

However, lawmakers allowed the program to expire at the end of 2010, as it became subject to some criticism, primarily from Republicans. Sen. Charles Grassley (R-Iowa) was a leading critic of the program, arguing that Wall Street banks used the program to line their pockets with hefty underwriting fees. He also contended that the government ended up handing more taxpayer dollars to states that did not manage their books well, because they would issue debt at a higher interest rate than a state with a healthier fiscal outlook.