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, 3Q ’10

• On September 16, Max Baucus introduced a bill, the Job Creation and Tax Cut Act of 2010, which would extend Build America Bonds program for one year at a reduced subsidy but failed to bring it to the Senate floor.
• The Congressional Budget Office’s (CBO) August 2010 update to the federal budget and economic outlook revised the estimated outlays for the Build America Bonds program upwards to $36 billion for the years 2009-2010 (up $6 billion from the estimated $30 billion in January 2010’s Budget and Economic Outlook: Fiscal Years 2010 to 2020).
• On August 24, the Treasury Inspector General for Tax Administration released an audit report on Build America Bond subsidy payments, stating that all complete requests for BAB subsidies were “processed accurately, timely, and without indications of fraudulent and erroneous disbursement.”

Taxable vs. Tax-Exempt Issuance, 2000 – 3Q ’10

BAB Issuance by Use of Proceeds, 3Q ’10

BAB Issuance as a Percentage of Total Long-Term Municipal Issuance, 3Q ’10

Negotiated vs. Competitive Deals, 3Q ’10

BAB Issuance, Years to Maturity, 3Q ’10

States by Number of Deals and Deal Size, 3Q ’10

15 Largest Deals, 3Q ’10

State Issuance by Month, 3Q ’10

Geographic Distribution, 3Q ’10

Note

• All 3Q data is from July 1, 2010 to September 30, 2010. All YTD data is 2010 data year to date ending September 30, 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, Assistant General Counsel, Co-Head: Leslie Norwood
• Managing Director, Co-Head: Michael Decker
• Policy Analyst (Advocacy): Lynne Funk