Many good reasons to breathe life into BABs

Republican leaders in Washington should stand down in their efforts to block the revival of the popular Build America Bond program.The resumption of the program would help restore order to the troubled municipal bond market by reducing the supply of newly issued, traditional tax-free bonds — thereby putting upward pressure on the bond prices. Also, it would provide more liquidity to the muni bond market by reopening it to new — and presumably more sophisticated — investors, such as pension funds. Buried deep in the $3.7 trillion fiscal 2012 budget proposed last Monday by President Barack Obama is a measure that, if passed, will reinstate an expanded BAB program permanently — albeit at a lower subsidy rate of 28%. Days earlier, Rep. Gerald Connolly, D-Vt., introduced in the House a bill that would restore the lapsed program for two years at a subsidy of 32% this year and 31% in 2012. In its original incarnation, the BAB program encouraged state and local issuers to issue taxable debt by offering them a 35% federal subsidy intended to offset the higher interest rates that they otherwise would have paid. Already, key Republicans including Sen. Orrin G. Hatch, R-Utah, the ranking Republican on the Senate Finance Committee, and House Ways and Means Committee Chairman Dave Camp, R-Mich., are threatening to thwart any attempt to bring the BAB program back to life. “Build America Bonds are simply disguised state bailouts that have proven to be another flawed provision within the failed stimulus bill, which the Obama administration erroneously promised would keep unemployment below 8%,” Mr. Hatch said. “Over the past two years, nearly $200 billion in Build America Bonds have been issued by state and local governments. These bonds rightly expired at the end of 2010 and the resurrection of them would do nothing more than encourage states to continue on a reckless course of irresponsible spending, and further fuel the unfettered spending agenda of the Obama administration,” Mr. Hatch said. Clearly, his vitriolic statement was intended more to incite partisan rancor than to inspire meaningful, nonpartisan debate about the merits of the BAB program. BABs, which were first issued in April 2009, proved to be an effective financing tool that allowed state and local governments to attract investors — including pension funds and sovereign-wealth investors. In doing so, the bonds helped finance hundreds of roads, hospitals, schools and other critical infrastructure projects that otherwise might not have been built during the Great Recession. In total, more than $181 billion was raised through 2,275 BAB issues in virtually every state between April 2009 and December 2010. One criticism often associated with BABs is that they came with high underwriting fees, which obviously raise borrowing costs. Although that was true when BABs first came out of the gate, those fees declined over time as underwriters became more comfortable and adept at placing them. By the time the BAB program ended at the end of last year, underwriting fees on BABs were approaching the ones on tax-exempt bonds. Even with those higher underwriting fees, however, the BAB program was successful in reducing the cost of municipal borrowing. In fact, a Treasury Department analysis on the $90 billion in of bonds issued during the program's first year found that state and local governments were on track to save $12.3 billion to finance projects, compared with what they would have spent by issuing traditional tax-exempt bonds. Of the two proposals to revive the BAB program on the table, we are more inclined to support the permanent plan put forth by Mr. Obama. In lowering the direct subsidy on BABs to 28%, from 35%, the president is clearly trying to address concerns by Republicans that the higher subsidy rate would add to the federal deficit. At 28%, the BAB program should be no more expensive than the traditional muni bond tax exemption. The lower subsidy also would reduce the municipalities' incentive to use BABs, thereby allaying Republicans' concerns about unbridled spending on the parts of state and local governments. And let's not forget that when municipalities issue debt, they usually have to go to voters first, which is also likely to put the brakes on excessive spending. In summary, Mr. Obama's plan to expand BABs and make the program permanent with a 28% subsidy rate would provide greater certainty in municipal financing that would, in turn, likely lead to lower underwriting fees, enhanced retail ownership of BABs and continued savings on borrowing costs.