Build America Bonds

Recently, I stumbled across an article entitled, "BABs saves issuers $12 billion, Treasury says." According to the Treasury, "state and local governments will save $12.3 billion in borrowing costs by issuing federally subsidized taxable bonds, called Build America Bonds, during the first year of the program." Up until now, I had never heard of BABs, and as it turns out, they were part of the American Recovery and Reinvestment Act of 2009.

But, what exactly is a Build America Bond (BAB)? Build America Bonds are taxable municipal bonds with special tax credits and subsidies. There are two types of BABs: tax credit and direct payment. The former carries a federal subsidy that gives the bondholder a refundable tax credit. The latter carries a federal subsidy of 35% of the interest being paid to the issuer.

In the case of direct payment BABs, according to The Wall Street Journal, "the interest rates paid to investors are higher. But the U.S. government pays 35% of the interest, bringing the amount that" the state or local government pays to less than what "it would have paid with tax-exempt bonds." For example, consider the "$1.3-billion Build America Bond issued in October to rebuild the San Francisco-Oakland Bay Bridge and make it earthquake-resistant ... the amount that the Bay Area Toll Authority [paid] ... [was] 4.07% over 40 years compared with 5.5%."