Future of Popular Build America Bonds Program in Doubt

The fate of a popular federal stimulus borrowing program that state officials say created thousands of jobs and launched hundreds of transportation, public safety and water and sewer projects may hinge on whether Congress extends several unrelated tax breaks before the end of the year.

Build America Bonds , under which state and local governments have sold more than $150 billion in taxable bond offerings since April 2009, is set to expire at the end of the year. The Obama administration, which established the program as part of the $787 billion economic stimulus plan, favors extending it permanently. Leaders of the current Democratic-controlled Congress generally back an extension, but when the GOP takes control of the House in January, the future of the program will be in doubt because many key Republicans oppose it.

Though the final outcome is difficult to predict, Democrats believe they have a strategy to save the bonds, which make up about a quarter of the municipal bond market. They are planning to include the extension of Build America Bonds in legislation favored by Republicans that would continue a series of Bush-era individual and business tax breaks. The bonds legislation currently is separate from the hotly debated tax cuts on income, dividends and capital gains.

Senator Charles Grassley of Iowa, the senior Republican on the Senate Finance Committee, recently questioned the transparency of Build America Bonds, asking for an inquiry into how much Wall Street banks receive in fees for the bond sales. “I would prefer to see Build America Bonds expire,” Grassley told Stateline in an e-mail. But Grassley predicts the extension will pass provided Democrats can agree with Republicans on the tax breaks.

Build America Bonds are a form of taxable debt intended to expand state and local government access to credit markets. In the months after the Wall Street financial collapse, issuing bonds became increasingly expensive for state and local governments.  The stimulus package included the bond program with the promise that the federal government would pay 35 percent of the interest costs. For example , if a state sold bonds at a 10 percent interest rate, the state would pay only 6.5 percent of the interest cost while the investor would still receive the full 10 percent. In the proposals to extend the program the federal subsidy would drop; the administration proposes 28 percent but some lawmakers want it lower.

“Build America Bonds have proven to be an effective financing tool that have enabled [governments] to fund critical infrastructure projects at a time when they were facing severe financing challenges,” says Alan Kreuger, the chief economist at the Department of the Treasury.

The program, which covers public buildings, schools, government hospitals, housing projects, roads and transportation, public safety facilities and equipment, water and sewer projects, environmental and energy projects and public utilities, has started enterprises large and small. Utah, a state not generally known for issuing large amounts of debt, sold million in Build America Bonds to pay for a trolley system to the Salt Lake City International Airport and an extension of a commuter rail line. The school district in Lexington, Kentucky,  issued   million in bonds to renovate five public schools. Washington State Governor Christine Gregoire loves to talk about how the state bought a new ferry just from the interest savings realized through the sale of $500 million in Build America Bonds for transportation projects.

Financially troubled California has sold about $30 billion in Build America Bonds, more than any other state. California used the program to help rebuild the Bay Bridge linking San Francisco and the East Bay, renovate and erect new buildings at  University of California medical centers , and construct prisons and schools. New York, Texas and Illinois all have made heavy use of the program. Dozens of state and local governments have hired lobbying firms to advocate extending the program.

Earlier this year, the program extension appeared headed for easy approval after the House passed legislation authorizing it. But the effort bogged down in the Senate over the concerns of several key Republicans who said the program was wasteful and rewarded profligate states. Though Iowa has sold more than $200 million in Build America Bonds, Grassley says bigger states are taking disproportionate advantage of the program. “The program might better be named the Build California and New York Bonds Program,” he says. Michigan Representative David Camp, a Republican who is slated to chairthe House Ways and Means Committee in the new Congress, has suggested that the program did not create the number or type of private sector  jobs  advertised by the Obama administration and is therefore “no longer relevant.”

Until the extension goes through, state and local governments are doing everything they can to take advantage of the remaining opportunity. They sold $14.2 billion worth of Build America Bonds in November, the largest monthly total since the program began, according to the Bond Buyer .

Staff writer Stephen C. Fehr contributed to this report.