Policy Documents

Research & Commentary: The Build America Bonds Program

Matthew Glans –
February 21, 2011

The federal government’s Build America Bonds program is controversial. Created as part of the American Recovery and Reinvestment Act, Build America Bonds are taxable municipal bonds that carry special tax credits designed to lower the cost of borrowing for state and local governments and government agencies. The program expired at the beginning of 2011.

Traditional municipal bonds receive a subsidy through the income tax deduction for interest received by bond holders. Build America Bonds, by contrast, are subsidized directly by the federal government, which pays a portion of their interest.

The effect of these subsidized bonds on the overall bond market was profound. Many of the program’s supporters credit the subsidized bonds with saving the bond market during the recession by making it cheaper to issue long-term debt when traditional tax-exempt municipal bonds were too expensive or unavailable. As of December 2010, according to Thomson Reuters, nearly $180 billion in debt had been issued under the program. Build America Bonds accounted for more than a quarter of last year’s total municipal bond issuance.

Critics of the program say the subsidized bonds distorted the municipal bond market, forcing prices down and encouraging new debt that many communities and states will be unable to afford in the long term. Steve Malanga of the Manhattan Institute calls the potential defaults facing many state and local governments a “debt bomb.”

The following articles analyze Build America Bonds and other bonds from a variety of perspectives.

Despite Deficits, No Crisis Yet Regarding Municipal Debts
http://www.firepolicy-news.org/article/28254
This article from The Heartland Institute’s Budget & Tax News concludes the bond market is not yet in crisis but has the potential for large-scale defaults.

Build America Bonds Cut Into Muni Bonds, Raise Debt Concerns
http://www.firepolicy-news.org/article/28197
This article from The Heartland Institute’s FIRE Policy News examines the Build America Bonds program and identifies problems that could be created by the increase in municipal debt the program encouraged.

Build America Bonds
http://www.cdfa.net/cdfa/cdfaweb.nsf/fbaad5956b2928b086256efa005c5f78/eba3283f20ee9da486257791007179d8/$FILE/BAB%20Report.pdf
This paper by Andrew Ang, Vineer Bhansali, and Yuhang Xing observes that on average the federal government subsidy in the Build America Bonds program disadvantages individual U.S. taxpayers, who are the main holders of municipal bonds, and benefits new entrants in the municipal bond market.

Evaluating States’ Credit with Bond Yields
http://www.manhattan-institute.org/html/ib_06.htm
This article examines how Build America Bonds were used in each state and the possible effects on taxpayers.

Myth vs. Fact: The Build America Bond
http://www.americanprogress.org/issues/2010/11/bab_myth_fact.html
This article from the Center for American Progress tackles several claims of critics of the Build America Bonds program in a myth vs. fact format.

The Sky Isn’t Falling on the Muni Market
http://online.barrons.com/article/SB50001424052970203367204576066923229282938.html
In this article from Barron’s, Randall Forsyth examines the current municipal bond market and tackles claims the market is failing.

The ‘Build America’ Debt Bomb
http://online.wsj.com/article/SB10001424052748704648604575621062239887650.html?mod=googlenews_wsj
In this article from The Wall Street Journal, Steve Malanga of the Manhattan Institute contends many signals in the municipal bond market point to a potential “debt bomb” from the debt issued under the Build America Bonds program.