the recovery act at work: build america bonds

United States Department of the Treasury

The Recovery Act at Work: Build America Bonds

Treasurer Rosie Rios

1

United States Department of the TreasuryUnited States Department of the Treasury

• By paying only 35% of the interest on Build America Bonds (BABs), the federal government is helping state and local governments access the capital needed for development projects.

• The bonds must be used for the development of public infrastructure projects.

• Each federal dollar benefits state and local government entities by a dollar.

2

Background on Build America Bonds


Widespread Usage of BABs

3

From when the program was launched on April 3rd, 2009 through January 1, 2010:• $64 billion in BABs have been issued;• BABs are about 22 percent of municipal bonds market; and • 45 states are participating in the program, with a total of 779

separate issues.

BABs provide state and local governments with lower borrowing costs.


• The savings for a 10 year bond are estimated to be 31 bps and the savings for a 30 year bond are estimated to be 112 bps.

BABs Provide Lower Borrowing Costs


BABs Improved the Muni Market

5

• BABs have made municipal debt attractive to new investors. By bringing in new investors, BABs have relieved supply pressure and have helped reduced borrowing costs on all classes of municipal debt.

• “By reducing new-issue supply in the tax-exempt market, they have had the effect of lowering yields there. Estimates of the effect of BABs on tax-exempt yields are in the neighborhood of 20 to 30 basis points or more.” Bond Buyer, November 2, 2009


BABs Improved the Muni Market


Investors, Pension Funds, etc.

BABs

Investment

State & Local Governments

Private Firms

Workers

Federal Government

Contractsfor buildingprojects

Wages

Treasury makes 35 percent subsidy payment to issuer

Savings

BABs Stimulate Private Activity


“The BABs program has produced huge benefits for California. Our state has enormous infrastructure needs. Meeting those needs requires a massive investment. The BABs program has allowed us to increase our capital investment by billions of dollars this year, and in the process provided our workers and businesses a much-needed economic boost. To top it off, BABs have been a bargain for California taxpayers. They will save hundreds of millions of dollars on interest payments.”

- Bill Lockyer California State Treasurer

BABs Have Stimulated Activity


Other Recovery Act Bond Provisions

9


Recovery Zone Economic Development Bonds

Recovery Zone Economic Development Bonds• Type of Build America Bonds • Treasury pays 45% of the coupon • May be issued in 2009 and 2010Program Uses• Broad range of projects to promote economic development or other

economic activity in designated recovery zones• capital expenditures • public infrastructure and construction of public facilities• job training and educational programs

Bond Volume Cap• $10 billion national volume cap• Only $565 million have been issued

10


Recovery Zone Facility Bonds

Recovery Zone Facility Bonds• Similar to traditional tax-exempt private activity bonds• Lower interest rates than conventional debt• May be used by private businesses for private economic development

projects• May be issued in 2009 and 2010Program Uses• Depreciable capital projects (such as buildings or equipment) for original

uses in active businesses in designated recovery zones• Manufacturing, commercial, and retail uses• EXCEPTION: cannot be used for residential rental housingBond Volume Cap: $15 billion

11


Qualified School Construction Bonds

Qualified School Construction Bonds• National volume cap of $11.2 billion for 2009 and $11.2 billion for 2010• Unused volume cap may be “carried over” to the next year• Federal tax credit: 100% of borrowing costs• Projects: public school construction, renovation, and repair• Treasury Guidance: IRS Notice 2009-35 (2009-17 I.R.B. (4-27-09))• Volume Cap Allocations (40% to 100 largest school districts; 60% to

States)• About $2.5 billion of these bonds were issued through December 2009

12


Qualified Zone Academy Bonds

Qualified Zone Academy Bonds• National volume cap of $1.4 billion in 2009 and $1.4 billion in 2010• Unused volume cap may be “carried over” to the next year• Federal tax credit: 100% of borrowing costs• Projects: public school renovation, repair, course materials, and teacher

training• 10% private business contribution• Guidance: IRS Notice 2009-30 (2009-16 I.R.B. (4-20-09))

13


Qualified Energy Conservation Bonds

Qualified Energy Conservation Bonds• National volume cap of $3.2 billion• Federal tax credit: 70% of borrowing costs• Projects: broad range of qualified energy conservation purposes, including

capital projects to reduce energy use, research, mass transit, green community programs, and public education campaigns

• Treasury Guidance: IRS Notice 2009-29 (2009-17 I.R.B. (4-20-09))• Treasury guidance allocates volume cap among states by population• State implementation requires allocating portions of state shares among

large localities (meaning cities and counties greater than 100,000)

14


New Clean Renewable Energy Bonds

New Clean Renewable Energy Bonds• National volume cap of $2.4 billion• Federal tax credit: 70% of borrowing costs• Projects: clean renewable energy capital projects• Guidance: IRS Notice 2009-33 (2009-17 I.R.B. (4-27-09))• IRS allocations were made in October 2009

15

the recovery act at work: build america bonds

Documents