By SEWELL CHAN
Published: April 1, 2010
WASHINGTON — State and local governments will eventually save $12.3 billion from bonds issued in the first year of the Build America Bonds program, a Treasury Department analysis has found, compared with what they would have spent by issuing traditional tax-exempt bonds to finance projects.
The analysis, a copy of which was provided to The New York Times on Thursday, represents a defense of the Treasury-supported Build America Bonds, a program that began last April as part of the stimulus package and is intended to spur spending on infrastructure.
Unlike traditional tax-exempt bonds that states and municipalities use to raise money, the Build America Bonds are taxable. The Treasury provides a 35 percent direct subsidy to the bonds’ issuers to offset borrowing costs. So far, $90 billion has been raised through 1,066 bond issues in 48 states under the program, which is to expire at the end of this year. The bonds have a typical maturity of 10 to 30 years.
President Obama has proposed making the program permanent, with a 28 percent subsidy rate.
The analysis examined 92 cases from April to September in which governments issued both Build America Bonds and tax-exempt municipal bonds on the same day. On average, bonds issued under the new program saved money for their issuers, although the savings were greater for bonds at longer maturities.
The analysis identified several reasons for the lower net borrowing costs associated with the Buy America Bonds. The subsidy, as a response to the recession, was designed to save issuers more than the implicit subsidy associated with traditional tax-exempt bonds.
Second, the bonds have appealed to a broader set of investors, including pension funds and sovereign wealth funds controlled by foreign governments, and the wider demand has probably helped drive down interest rates for the bonds, the analysis found. The bond program began when the municipal bond market was still reeling from the aftershocks of the credit crisis, and it gave states and municipalities another avenue for borrowing.
“Build America Bonds have expanded the investor base for municipal debt, and state and local governments are saving money as a result,” Alan B. Krueger, the assistant Treasury secretary for economic policy, said in an interview.
The total cost of the program is difficult to estimate, though a Congressional body, the Joint Committee on Taxation, initially projected that the almost two-year program would cost the federal government $4.3 billion over 10 years.
Mr. Krueger recently visited the West 96th Street subway station in Manhattan, which is being revamped through a Build America Bond issue by the Metropolitan Transportation Authority.
“People are working there because of the Build America Bonds program,” he said. “It’s going to mass transit, schools, sewer systems, parks, municipal buildings, town halls, universities and hospitals.”
The Treasury secretary, Timothy F. Geithner, was to travel to the Bronx on Friday to tour the Mott Haven campus, a four-school construction project for 2,300 students and 200 employees, financed in part through Build America Bonds, but officials canceled the visit on Thursday, citing a scheduling conflict.
The analysis also addressed criticisms that have been raised about underwriting fees associated with the Build America Bonds.
So far, issuers have spent nearly $700 million on underwriting fees. The fees have gone down from about $8 per $1,000 of bonds issued to about $6.69, approaching the average of $6.19 for tax-exempt municipal bonds.
While the underwriting fees did start out higher, “the difference hardly eats into the savings” the issuers have reaped, Mr. Krueger said
from - http://www.nytimes.com/2010/04/02/business/02treasury.html
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