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Reconstructing the Muni Market, Starting at Ground Zero

Build America Bonds Can Support Struggling Infrastructure-Finance Market

SOURCE: AP/Mark Lennihan

Workers smooth wet concrete on the fifteenth floor of 4 World Trade Center.

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See also: Bring Back BABs by Jordan Eizenga and Seth Hanlon

The new World Trade Center is the latest casualty of a municipal bond market in turmoil. The developer of the office-and-memorial project in lower Manhattan this month postponed issuance of $900 million in tax-exempt bonds, because of rising yields.

Liberty Development Corp.’s problems are emblematic of widespread distress in the municipal markets: Default worries, near-elimination of municipal bond insurance, and tight credit conditions have led to higher interest rates and delays of important infrastructure projects that create jobs.

Fortunately, Congress can stabilize this market and lower borrowing costs by bringing back the Build America Bonds program established under the 2009 Recovery Act. BABs, as they are known, are taxable bonds issued by local governments in which Washington covers a percentage of the interest costs.

“Bringing back Build America Bonds would have a positive impact,” said William Daly, senior vice president of government relations at Bond Dealers of America, a trade group. “If for no other reason than you are opening up the market to a broader market.”

The return of BABs would “get you better prices, better yields,” Daly added. And it need not cost the federal government any more money, if set at a revenue-neutral subsidy rate.

A permanent Build America Bonds program would expand the municipal bond market to new investors such as pension funds that do not benefit from the tax exemption on traditional municipal bonds. Tax-free municipal bonds appeal largely to retail investors interested in reducing their federal income tax bill.

Because tax-indifferent institutional investors have longer investment horizons, Build America Bonds should be able to find buyers at longer maturities. The increased demand for longer maturity municipal bonds would lower interest rates and save issuers money. According to estimates by the U.S. Treasury Department, state and local governments saved an estimated $12 billion in net present value from issuing Build America Bonds during the life of the program.

Build America Bonds would also provide issuers with a more stable base of buyers. Despite the trouble in the tax-exempt market, demand for Build America Bonds in the secondary market remains strong. In January, in the middle of record outflows from the tax-exempt market, the spread between Build America Bonds and comparable Treasuries dropped by 20 basis points, according to a Wells Fargo index. This shows Build America Bonds investors have been less troubled by the dire headline predictions.

That’s not to say that Build America Bonds should replace tax-exempt bonds, as some have proposed. In fact, the tax-exempt market that Liberty is trying to attract will benefit from the return of BABs, because there will be less competition for tax-exempt issuers.

As it stands now, too many would-be state and local issuers of tax-free bonds are competing for too-few buyers, making it difficult to finance infrastructure projects and get Americans back to work—at Ground Zero and across the country.

Congress: Let’s get back to the long overdue task of reconstructing the World Trade Center. Let’s bring back Build America Bonds.

Jordan Eizenga is an economic policy analyst at the Center for American Progress.

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