The US Department of the Treasury last week issued a new report indicating that Build America Bonds have saved $12.3 billion dollars in borrowing costs for state and local governments when compared to issuing tax-exempt debt. The analysis also found that over one thousand separate bonds have been issued in 48 states for a total of more than $90 billion during the first year of the program.
Began as part of the American Recovery and Reinvestment Act, Build American Bonds are direct payments from the Treasury to a state or local government issuer in an amount equal to 35 percent of the interest payment on the bonds. The bonds have a standard ten to thirty year maturity, but when compared to traditional tax-exempt bonds, the Treasury analysis identified several reasons for the lower net borrowing costs.
Firstly, the 35 percent subsidy was designed to save issuers more than a traditional tax-exempt bond. And secondly, more types of investors have bought Build America Bonds, bringing down interest rates.
President Obama has indicated his preference to make the program permanent, and Treasury Assistant Secretary for Economic Policy agrees. “Expanding and making this program permanent, as the President proposed in the Budget, will further improve the long-term functioning of the municipal bonds market and create a more efficient and effective municipal finance sector,” he said in a statement accompanying the report.
State and local leaders have echoed calls for the programs permanent extension. In a Letter to the Editor of the New York Times, Pennsylvania Governor Ed Rendell argues the bond program has spurred growth in employment and been a boon to manufacturers at a time that most states are still stymied in recession. “Once we emerge from these difficult times, investments made with Build America Bonds will be one reason that communities that are now suffering will once again be thriving,” Gov. Rendell wrote. “Extending the life of this innovative bonding program will ensure that growth continues and that our country will remain competitive.”