Supporters expect more of the same if the BABs program finds new life – providing a sustainable funding tool to cover some costs of President Joe Biden’s $ 2 trillion infrastructure plan.
“Market forces and the economy have not changed,” said Aaron Klein, senior researcher in economic studies at the Brookings Institution. “If the BABs were brought back, they would work fine.”
Finding buyers for the program, designed to leverage increasing amounts of private financing for public works through taxable municipal debt, is unlikely to be difficult.
Investor draw: Unlike more traditional state and municipal bonds, which provide non-taxable interest to investors, BABs are said to be part of the increasingly popular taxable municipal debt market. Due to their taxable nature, this type of debt, known as tax credit bonds, offers higher interest rates, a factor that attracts a wide range of investors for whom free municipal issues. tax are much less attractive.
The popularity is evident in data from Charles Schwab Corporation last year, which showed that about 30% of all new municipal bonds issued were taxable, compared to nearly 10% of all issues historically.
“There is an incredible demand for yield in this market and, depending on potential structural changes, BABs could prove to be incredibly attractive to investors,” said Isaac Boltansky of Compass Point Research & Trading LLC, a company of investment.
When initially available, BABs tapped into pension funds – which pay no tax anyway – hence their general disinterest in tax-free municipal bonds. Taxable municipal debt also makes sense for insurance companies; some foreign investors for whom traditional municipal debt is not such a good investment; non-profit organizations; people with moderate income; and other individuals and institutions that do not benefit from tax-exempt interest income.
Call for policy: Attracting a whole new category of investors greatly benefits the public and local debt market by increasing investor competition, allowing issuers to reduce the interest rates they offer on all their debt at all levels, while remaining at levels attractive enough to attract buyers, Klein said.
A 2010 Treasury study shows that BABs saved issuers about $ 20 billion compared to traditional tax-exempt municipal debt, and reduced costs even for state and local governments which stuck only to traditional financing through tax-exempt bonds.
The federal grant rate of 35% in 2009 and 2010 also reduced the costs of government entities that funded projects under the program. Overall, BABs have been positive for issuer results, said Mark Ritacco, director of government affairs for the National Association of Counties.
He said members of the group had started pressuring lawmakers and the Biden administration to bring back BABs as one of multiple avenues for funding infrastructure. The United States Conference of Mayors staked out a similar position in favor of BABs or similar bonds as a complement to tax-exempt bonds, but not as a substitute.
“Tax Credit Bonds and Direct Grant Bonds are a great complement to traditional tax-exempt municipal bonds,” Columbia, SC Mayor Steve Benjamin recently testified before the Revenue Measures Subcommittee. of the Ways and Means Chamber.
New opportunity: The program was established on a temporary basis under former President Barack Obama’s US Takeover and Reinvestment Act in 2009 and lasted until 2010. It aimed to help state and local governments to borrow more easily during the recession that followed the financial crisis, and more than $ 181 billion was issued in all 50 states, the District of Columbia and two territories, far exceeding internal projections.
But after Republicans regained control of the House in 2011, they let the BAB program expire.
Donors like Klein, a Treasury official when the BAB program existed, have argued for their renewal ever since, and an opportunity presents itself as Biden pushes massive infrastructure legislation. BABs would provide a direct interest subsidy to support infrastructure projects financed by public or local loans, potentially at no net cost to the federal government, depending on the subsidy rate.
Biden did not include the BABs in the initial outline of his proposal, but members of Congress key to advancing Biden’s agenda are certainly interested. President of the Chamber of Ways and Means Richard neal (D-Mass.) Listed BAB as one of his own priorities for the infrastructure plan earlier this month, and his counterpart, the Chairman of the Senate Finance Committee Ron Wyden (D-Ore.) Has consistently praised BABs for over a decade.
“Build America Bonds was a huge success in the Recovery Act,” Wyden said. “I’m incredibly proud of this program, and a similar funding structure will be part of the conversation as we move forward.
Neither he nor Neal disclosed the details of their ideas to revive the BABs, but the parameters of the previous program could be adapted depending on the desired results. For example, a federal subsidy rate of 28% would make them revenue neutral for the federal government, Klein said.
Neal said talks are still underway to sort out some details such as the subsidy rate and whether to increase or decrease it. But past experience indicates that a winning formula is achievable, he said.
“Investment in Build America Bond has performed well during the recession,” said Neal.
However, critics have pointed out that the revenue neutral projection assumes that no subsidized bond would have occurred otherwise. Others said BABs were a solution to a problem in 2009 and 2010 that does not currently exist, given the greater degree of stability in municipal revenues during the pandemic compared to the Great Recession, as well as billions dollars in state and local transportation funding. in pandemic relief packages in the past year.
“This is a different time than when Build America Bonds were created to finance infrastructure when the financial crisis limited investment,” said Rep. Kevin brady (R-Texas), the best member of the GOP Ways and Means.
Brady also criticized their original version as “too rich grants”. He said today’s conversation on infrastructure should focus on “better approaches to attracting private investment, rather than relying exclusively on state and local funding, or tax increases that trickle down your back. American workers.
A Treasury spokesperson declined a request for comment, but investors are predicting something will come from the talks.
“I think we’ll see some debates about the grant amount and other programmatic details, but the structure of the BAB is something that should be welcomed by investors, municipalities and a lot of people on Capitol Hill,” he said. said Boltansky.