Build America Bonds

Build America Bonds (BABs) are taxable municipal bonds that were authorized under the American Recovery and Reinvestment Act of 2009 (ARRA) that President Obama signed into law on February 17, 2009. BABs are an alternative to tax-exempt bonds for state and local governments that may be issued in 2009 and 2010. The interest on BABs is taxable to investors. As a result, the nominal interest rate on BABs is about the same as interest paid by non-state and local government borrowers, such as corporations. To make up for the benefit associated with the tax-exemption, the federal government provides two options to BAB issuers to lower their net interest costs.

With direct-pay BABs the Treasury Department provides borrowers with cash subsidy payments equal to 35 percent of their interest costs.

With tax-credit BABs, investors receive the right to a federal income tax credit equal to 35 percent of their BAB interest income. However, all BAB issuance to date has been direct pay.

BABs cannot be used for refundings, working capital, private activities or 501(c)(3) organizations.

Build America Bonds in the News, 1Q ’10

• President Obama’s $3.8 trillion fiscal 2011 budget1, released February 1, 2010, proposed to permanently extend the BABs program at a reduced subsidy rate of 28 percent. It also would expand the use of BABs to include refunding and working capital, as well as allow 501(c)(3) organizations to issue taxable bonds.
• The Small Business and Infrastructure Jobs Act of 2010 (H.R. 4849) passed the House of Representatives on March 24, 2010, and proposes to extend the BABs program through March 31, 2013.2 The proposed subsidy in the bill would decline annually from an initial rebate of 35 percent for 2009-2010, to 33, 31, and 30 percent in 2011, 2012, and 2013, respectively.
• The U.S. Treasury released an analysis stating that the interest cost savings for state and local governments using BABs was $12 billion in 2009 when compared to the cost if they had issued bonds in the tax-exempt market.
• On March 23, 2010, the Internal Revenue Service (IRS) and the Treasury Department released interim guidance on stripping tax credits from qualified tax-credit bonds under Section 54A of the Internal Revenue Code and for accounting issues associated with holding and stripping the bonds.

Taxable vs. Tax-Exempt Issuance, 2000 – 1Q ’10

BAB Issuance by Use of Proceeds, 1Q ’10

BAB Issuance as a Percentage of Total Long-Term Municipal Issuance, 1Q ’10

Negotiated vs. Competitive Deals, 1Q ’10

BAB Issuance, Years to Maturity, 1Q ’10

States by Number of Deals and Deal Size, 1Q ’10

15 Largest Deals, 1Q ’10

State Issuance by Month, 1Q ’10

Geographic Distribution, 1Q ’10

Note

• All 1Q data is from January 1, 2010 to March 31, 2010. All YTD data is 2010 data year to date ending March 31, 2010.
• Data Sources: Bloomberg, MSRB EMMA, Thomson Reuters, SIFMA

Credits

SIFMA Research

• Managing Director, Director of Research: Kyle Brandon
• Research Analyst: Sharon Sung

SIFMA Municipal Division

• Managing Director, Associate General Counsel, Co-Head: Leslie Norwood
• Managing Director, Co-Head: Michael Decker
• Policy Analyst (Advocacy): Lynne Funk