WASHINGTON — State and local governments will save $12.3 billion on the $90 billion of Build America Bonds issued so far compared with traditional tax-exempt debt, the Treasury Department said in a recent report touting the success of the program.
The 11-page report, released Friday, also pushed back against some lawmakers who have complained that Wall Street banks are recouping high underwriters’ fees for selling BABs, saying that while BAB underwriting fees were originally higher, they have “declined significantly” over time and are nearing fee rates for tax-exempt debt.
But the loudest BAB critic, Senate Finance Committee ranking minority member Charles Grassley, R-Iowa, responded yesterday that states and localities, especially cash-strapped California, are “saving” on the backs of American taxpayers.
“Of course state and local governments are going to 'save’ money under the [BAB] program — they’re being sent checks from the American taxpayers that they don’t need to pay back,” Grassley said in a release.
California and New York have done 16 of the 17 largest BAB deals, and as a result receive “state aid in the form of fat checks from the Treasury Department,” Grassley added.
The Treasury said its findings support President Obama’s call to make BABs permanent and expand their use to other facets of the muni market, because the program’s continued existence “would likely lead to continued savings on borrowing costs.”
Obama’s fiscal 2011 budget proposal called for making the BAB program permanent but reducing the subsidy rate to 28%, which it claimed would make the program revenue-neutral compared to tax-exempt bonds. It also urged that Congress permit BABs to be used for refundings and working capital and that nonprofit hospitals and universities be allowed to issue BABs.
Congress so far has not followed up on those proposals, instead enacting a jobs law permitting some tax-credit bonds to be issued with BAB-style direct-subsidy payments. In addition, the House approved legislation last month that would temporarily extend the BAB program until April 1, 2013, and lower the subsidy rate gradually to 33% in 2011, 31% in 2012, and 30% in the first three months of 2013.
Obama’s proposal would “provide greater certainty in municipal financing, likely leading to lower underwriting fees, enhanced retail ownership of BABs, and continued savings on borrowing costs for state and local governments,” the Treasury said in its report.
But Grassley argued that Obama’s proposed 28% subsidy rate for BABs would not be revenue neutral because the Congressional Budget Office found that BABs with that subsidy level would cost American taxpayers an additional $8 billion over 10 years.
The Treasury report found that issuers realized savings with BABs over tax-exempt bonds in all maturities on the yield curve by comparing 92 cases in which a single issuer sold both BABs and tax-exempts on the same day. From those 1,815 deals, issuers realized average savings of 31 basis points on 10-year bonds and 112 basis points on 30-year bonds.
The report added that those savings can be directly attributed to BABs because “statistical tests indicate that these differences are very unlikely to have occurred by chance.”
On underwriting fees, the report echoes comments made by Alan B. Krueger, the Treasury’s assistant secretary for economic policy, last month at the National Municipal Bond Summit sponsored jointly by The Bond Buyer and Regional Bond Dealers Association.
The report again cited data from Thomson Reuters showing that underwriting fees for BABs over the last year averaged $7.29 per $1,000 of bonds. In contrast, underwriting fees for tax-exempt bonds issued during the same time averaged $6.19 per $1,000 of bonds.
The Treasury report added that, though there has been a discrepancy between how much issuers were paying underwriters for BABs versus tax-exempt debt, that gap has narrowed significantly in recent months. In the first two months of 2010, it said, BAB underwriting fees averaged $6.64 per $1,000.
To explain the narrowing gap, the report makes several arguments, including that BABs were originally a novel tool and required some start-up costs from underwriters. The report asserted that even more downward pressure could be put on underwriter fees if the program is made permanent, due to the increased certainty of the existence of BABs and the resultant increase in competition between underwriters for BAB business.
