The encyclopedia · Finance & Accounting · Financial decision · 2009–2010
The US paid cities 35% of bond interest to open the muni market.
Build America Bonds let municipalities sell taxable bonds with a 35% federal interest subsidy; in 2009, 749 issues raised $63.9bn and the market reopened.
U.S. Department of the Treasury · U.S. state and local governments
The solution
After the 2008 crisis, the municipal bond market froze: investors fled, and states and cities could not finance infrastructure. In February 2009 Congress authorized Build America Bonds (BABs) under the Recovery Act.
BABs are taxable bonds on which the Treasury pays the issuer 35% of the interest cost — roughly the value of the traditional tax exemption. First sold on 15 April 2009, they let taxable investors such as pension funds buy into the market.
In 2009 alone, 749 BAB issues raised $63.9 billion from 680 issuers in 43 states and the District of Columbia — about 20% of long-term municipal issuance in the period — pushing the taxable share of the muni market to record levels.
Why it worked
- Taxable bonds open the market to pension funds and foreign investors.
- A direct 35% subsidy keeps the issuer's benefit without the tax break.
- The program scaled to $63.9bn within eight months of launch.
What can be applied
When a tax break limits your market to tax-exempt buyers, swap it for a cash subsidy: the issuer keeps the benefit while every investor can participate.
Aftermath
The program was allowed to expire at the end of 2010 despite repeated proposals to make it permanent; its design influenced later federal credit programs and remains the benchmark for taxable-muni experiments.
Sources
- Build America Bonds: Issuance and Trade Activity, 2009
- Build America Bonds (primer)
- Build America Bonds
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