Build America Bonds: Eliminated or in Suspended Animation?

On December 31 state and local governments will no longer be able to issue Build America Bonds (BABs), federally-subsidized, taxable bonds created as part of the American Recovery and Reinvestment Act (ARRA) to fund infrastructure projects. The idea, in addition to creating construction jobs, was BABs would stimulate the municipal debt market which had contracted after the housing bubble/financial market crash in 2008. At that time investors moved away from tax-free municipal bonds since bond insurers stopped insuring debt.

The attraction of BABs is that the program allowed cash-strapped governments to continue issuing debt. The federal government picked up 35 percent of the interest cost. As taxable bonds BABs were marketed largely to overseas investors, who typically don’t buy tax-free municipal debt.

Who’s been issuing the bonds? The most cash-strapped and fiscally profligate states: California, New Jersey, Ohio and New York. Steven Malanga reported in The Wall Street Journal, that in addition to subsidizing big-spending states to take on more debt BABs were used to finance a convention center complex in Dallas, Texas when no private investor was willing. BABs have allowed the most indebted states to effectively ignore market signals concerning risk and increase their debts thanks to the subsidies provided by a very over-extended federal government.

But don’t expect BABs to fade quietly. They have a constituency. Florida Republican, Rep. John Mica, who will chair the House Transportation and Infrastructure Committee aims to find a way to reincarnate the program.