Whither Go the BABs?

Without an extension by the end of December, the 2 year old Build America Bond (BAB) program will expire. As of this writing, both the Senate and House tax bills failed to include BABs as part of their packages.

The program, which was birthed as part of the stimulus package, authorizes state and local governments to issue these bonds to finance pretty much any kind of infrastructure project. They are different from standard municipal bonds in that the interest earned is taxable as opposed to tax-exempt.

The BABs are a direct response to the needs of state, local, and other public entities to expand their ability to fund projects. To enable these governments to take on more debt, the federal government subsidizes 35 percent of the interest payment on the BABs. As a result of this federal subsidy payment, state and local governments have lower net borrowing costs and are able to reach more sources of borrowing than with more traditional tax-exempt or tax credit bonds.

Questions about the impacts of BABs are ongoing. Did they saddle already-strapped public agencies with too much debt? Did they succeed to unfreeze of the capital markets and reduce the borrowing costs of local and state governments? Were they plagued by fees from Wall Street firms? Or were they or were they not one of the stimulus success stories of the past couple years?

But other important questions have gotten less attention. Critically, what do we know about where and for what purpose have these bonds been issued?

Examining data from the Treasury Department for BABs issued since the beginning of the program in April 2009 until the end of April 2010, we can shed some light.

Our analysis found that nearly half of all the funding (47.6%) for the BAB issuances was for projects in the 100 largest metropolitan areas. Eight percent were in metros outside of the top 100, and 5 percent were outside metropolitan America completely. Another 40 percent were issued on a statewide level.

Not surprisingly, the largest states have the largest dollar amount of issuances. Half of the BABs dollars went for projects in California, Illinois, New York, and Texas. But as a percentage of gross state product, the four largest issuers were South Dakota, Kentucky, Wisconsin, and Kansas.

In terms of purpose, by far, the greatest share of BAB funding (30 percent) went for educational facilities. Water/sewer projects (13.8 percent) and road/bridge projects (13.7 percent) followed behind. See table.

So whether BABs are dead for good or whether they will be resurrected in 2011 is anyone’s guess. But the spatial distribution as well as the purpose of the spending, should be part of any debate going forward.

Build America Bonds, issued between April 2009 and April 2010 (Source: U.S. Treasury Department)