Build America Bonds (BABs) are a form of taxable municipal bonds that were introduced as part of the American Recovery and Reinvestment Act of 2009. The primary aim of BABs was to stimulate economic growth by providing municipalities with an attractive mechanism for raising capital to finance infrastructure projects while creating jobs. Although the program for issuing these bonds ended on December 31, 2009, BABs remain an important concept in the history of municipal finance.
Types of Build America Bonds
Direct Payment BABs
The federal government subsidized a portion of the interest payments for Direct Payment BABs, which helped to lower the cost for issuers.
Tax Credit BABs
Tax Credit BABs provided bondholders with a federal tax credit equal to a percentage of the interest they earned on the bonds, effectively lowering the interest cost for issuers.
Special Considerations for Build America Bonds
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Taxable Nature: Unlike traditional municipal bonds, which are typically tax-exempt, BABs are taxable. This characteristic made them more attractive to a broader range of investors, including those who might not benefit from tax-exempt interest.
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Federal Subsidy: The federal government offered a subsidy for Direct Payment BABs, covering 35% of the interest costs. This subsidy aimed to make municipal bonds more appealing, reducing the effective interest rates that municipalities had to pay.
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Short Duration: The issuance of BABs was a temporary measure, limited to projects financed in 2009, which adds to their unique standing in the history of municipal finance.
Examples and Historical Context
When the American Recovery and Reinvestment Act of 2009 was passed, the U.S. economy was suffering from the Great Recession. The issuance of BABs was a strategic move to inject liquidity into the economy by funding vital infrastructure projects. Municipalities across the country, from small towns to large cities, issued BABs to rebuild roads, schools, and other public facilities.
Applicability and Impact
BABs had several beneficial impacts:
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Job Creation: By funding infrastructure projects, BABs contributed to job creation at a time when the unemployment rate was high.
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Infrastructure Improvement: The bonds helped accelerate the construction and repair of critical infrastructure, thus supporting long-term economic growth.
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Broader Investment Base: The taxable nature of BABs attracted a wider pool of investors, including those outside traditional tax-exempt niches.
Comparisons
BABs vs. Traditional Municipal Bonds
- Tax Treatment: Traditional municipal bonds are generally tax-exempt, whereas BABs are taxable but come with federal subsidies.
- Investor Base: BABs attracted a broader range of investors due to their taxable nature.
BABs vs. Corporate Bonds
- Issuer: BABs are issued by municipalities, while corporate bonds are issued by private companies.
- Purpose: BABs fund public projects; corporate bonds typically fund private enterprise activities.
Related Terms
- Municipal Bonds: Debt securities issued by local governments or their agencies, usually tax-exempt.
- American Recovery and Reinvestment Act (ARRA): Legislation passed in 2009 to stimulate the U.S. economy during the Great Recession.
- Subsidy: Financial aid provided by the government to lower the cost of borrowing or investment.
FAQs
Why were Build America Bonds created?
How were investors compensated for the taxable nature of BABs?
Are Build America Bonds still issued today?
References
- U.S. Department of the Treasury, “Build America Bonds.”
- The American Recovery and Reinvestment Act of 2009.
- Municipal Securities Rulemaking Board (MSRB).
Summary
Build America Bonds (BABs) were an innovative response to the economic challenges of the Great Recession, aimed at revitalizing infrastructure and creating jobs. Taxable but subsidized, they introduced a broader range of investors to municipal funding, leaving a lasting legacy in economic policy and municipal finance.
