Build America Bonds

Build America Bonds
Name	Build America Bonds
Type	Municipal bond program
Introduced	2009
Creator	American Recovery and Reinvestment Act of 2009
Sponsors	United States Department of the Treasury, Internal Revenue Service, State of New York
Status	Expired (2010 program, subsidized through 2011)

Build America Bonds Build America Bonds were a United States municipal finance instrument created in 2009 under the American Recovery and Reinvestment Act of 2009 to lower borrowing costs for eligible issuers such as State of California, City of Chicago, Commonwealth of Virginia, and State of New York. Designed amid the Great Recession, the program aimed to stimulate infrastructure investment alongside tax incentives for investors including Pension Fund of the City of New York, Vanguard Group, Fidelity Investments, and BlackRock. The initiative involved fiscal coordination among the United States Department of the Treasury, the Internal Revenue Service, and state and local finance authorities.

Background and Purpose

The program emerged during the Financial crisis of 2007–2008 and the Great Recession when municipal issuers faced constrained access to capital markets and rising yields, affecting projects overseen by agencies like the Metropolitan Transportation Authority and the Port Authority of New York and New Jersey. Policymakers in the United States Congress and the Obama administration sought to blend objectives pursued by prior laws such as the Tax Reform Act of 1986 and federal initiatives like the Economic Stimulus Act of 2008. Sponsors argued the instrument would attract institutional investors including California Public Employees' Retirement System, Teachers Insurance and Annuity Association, and New York State Common Retirement Fund by offering taxable bonds with federal subsidies, thereby supporting projects in transportation infrastructure, water resources, and public school construction administered by entities like the State Education Department.

Structure and Types

Issuers could choose between two main subsidy models: the direct-payment subsidy and the tax-credit version. Under the direct-payment model, a taxable municipal bond carried a federal payment equal to 35% of the interest disbursed, administered by the United States Department of the Treasury and coordinated through procedures in the Internal Revenue Code. Under the tax-credit model, investors received a nonrefundable tax credit administered by the Internal Revenue Service comparable in effect to credits used in programs like the Low-Income Housing Tax Credit. Eligible issuers included states, territories, municipalities, and certain authorities such as the New York City Municipal Water Finance Authority and the Illinois Finance Authority. Variants included current interest bonds and capital appreciation bonds similar to structures used by entities like the Municipal Bond Research Association.

Issuance and Market Impact

Between 2009 and 2010, issuers sold approximately $181 billion in these taxable bonds, with large transactions by State of California, Cook County, and City of Los Angeles. The program reshaped demand dynamics by drawing institutional buyers including Pension Benefit Guaranty Corporation, CalPERS, and foreign central banks, competing with taxable corporate issues from issuers such as General Electric and AT&T. Market analysts at Moody's Investors Service, Standard & Poor's, and Fitch Ratings tracked spreads relative to Treasury bond yields and to traditional tax-exempt municipal yields, noting compression in municipal credit spreads and shifts in the municipal yield curve. The secondary market involved dealers like Goldman Sachs, J.P. Morgan Chase, and Citigroup facilitating liquidity.

Tax Treatment and Subsidy Mechanisms

The program departed from long-standing municipal practice established under decisions influenced by the Sixteenth Amendment to the United States Constitution and tax rules codified in the Internal Revenue Code by offering taxable treatment coupled with federal subsidies. Direct-payment bonds provided issuers a refundable payment based on interest paid, while the tax-credit bonds provided investors with credits reducing federal income tax liability administered via Form 1099 processes overseen by the Internal Revenue Service. The mechanics resembled other subsidy frameworks such as those used for New Markets Tax Credit and required compliance with Treasury regulations, reporting, and certification by state finance officers and bond counsel from firms that worked with issuers including California Debt and Investment Advisory Commission.

Economic and Fiscal Effects

Analyses by the Congressional Budget Office, the Government Accountability Office, and academics at Harvard University and University of Chicago examined macroeconomic stimulus, short-term job creation in sectors like construction and long-term fiscal implications for state and local budgets. Proponents argued subsidies lowered borrowing costs, enabling capital projects by authorities such as Metropolitan Council and Massachusetts Bay Transportation Authority, while critics cited the program’s federal cost and distributional effects assessed in studies by the Brookings Institution and the Urban Institute. Empirical work tracked project-level outcomes, interest savings, and the opportunity cost for federal discretionary spending amid competing priorities like the Affordable Care Act.

Controversies and Political Debate

Debate involved partisan actors in the United States Senate and United States House of Representatives, fiscal hawks including the Heritage Foundation and Committee for a Responsible Federal Budget, and municipal finance advocates like the National League of Cities and Government Finance Officers Association. Critics highlighted federal expenditure, alleged windfalls to well-capitalized issuers, and concerns raised by commentators in The Wall Street Journal, The New York Times, and The Washington Post. Proponents countered with endorsements from state treasurers and local officials including chairs of entities like the National Association of State Treasurers. The program’s sunset in 2010 was a focal point in budget negotiations involving chairs of the House Ways and Means Committee and the Senate Finance Committee.

Legacy and Subsequent Policies

Although the program expired, its legacy influenced later discussions about taxable municipal instruments, shaping proposals considered by the Bipartisan Policy Center, Congressional Research Service, and state finance agencies. Elements reappeared in proposals for direct federal support using taxable financing, informing debates about infrastructure bills introduced in sessions of the 117th United States Congress, and influenced market practices among underwriters like Morgan Stanley and Barclays. Academic assessments continue at institutions such as Massachusetts Institute of Technology and Princeton University evaluating welfare effects, capital formation, and the interplay between federal fiscal policy and municipal finance.

Category:United States federal assistance programs Category:Municipal bonds Category:2009 establishments in the United States