The Build America Bonds Program: Savings Opportunities and Efficiency Improvements from Subsidizing Taxable Municipal Debt

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Abstract/Contents

Abstract: As a result of the 2008-2010 financial crisis, municipal borrowers (state and local governments, school districts, transit agencies, water utilities, etc.) faced increased borrowing costs and a risk-averse investor base that made it difficult to finance continued public spending, let alone fiscal stimulus. The Build America Bonds program was touted as a means to ease the credit crunch faced by municipal issuers through Federal interest subsidies on taxable municipal debt, providing an additional borrowing instrument alongside traditional tax-exempt municipal bonds. By allowing municipal borrowers subsidized access to taxable debt markets, the program was designed to lower borrowing costs, and draw new groups of investors (such as pension funds and 401(k) accounts) to municipal bonds that would not be attracted by the tax exemption structures of traditional municipal debt. This paper finds that the program met its objectives of lowering borrowing costs, as seen by an average yield savings of 69 basis points versus issuing in the tax exempt market, and attracting non-traditional investors, as indicated by low marginal tax rates for BAB investors. This paper argues that the Build America Bonds program was a success, and worthy of extension as a long-term alternative to tax exemption, although the subsidy proposed in President Obama’s 2013 Budget is overgenerous.

Type of resource	text
Date created	May 2012

Author	Scott, Mitchel A.
Primary advisor	Shoven, John B.
Degree granting institution	Stanford University, Department of Economics

Subject	Stanford Department of Economics
Subject	American Recovery and Reinvestment Act
Subject	Build America Bonds
Subject	BABs
Subject	Municipal Finance
Subject	Public Finance
Subject	Direct Subsidy
Subject	Stimulus Plan
Genre	Thesis

Location	https://purl.stanford.edu/fp342jv5400

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Preferred Citation: Scott, Mitchel A. (2012). The Build America Bonds Program: Savings Opportunities and Efficiency Improvements from Subsidizing Taxable Municipal Debt. Stanford Digital Repository. Available at: https://purl.stanford.edu/fp342jv5400

Stanford University, Department of Economics, Honors Theses

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