Build America Subsidy Offset Concern `Overblown,' Treasury's Krueger Says

Build America Bond subsidies are rarely withheld and concerns among states about it are “overblown,” a U.S. Treasury Department official said, moving to quell worries about the reliability of the payments.

Money has been held back from only seven of the 278 Build America subsidy payments sought by states, Alan Krueger, Assistant Treasury Secretary for Economic Policy, said in a speech today to the National Association of State Treasurers. “Hardly any payments” have been withheld to satisfy other debts owed to the government, he said, as the Treasury paid 99.95 percent of the $626.45 million requested by states.

“A small number of officials have raised concerns that BABs subsidies would be offset because the government entity owes the federal government tax or other revenue,” Krueger said in the speech at a meeting in Williamsburg, Virginia. He said this criticism “has been overblown.”

Krueger addressed worries about the Build America program, which began last year and has become the fastest-growing part of the $2.8 trillion municipal market. Issuers receive a 35 percent subsidy from the Treasury Department for interest costs on the debt, which is used for construction projects. States and local governments have sold $129 billion of the securities.

Subsidy Withholding

There has been some concern among officials that the Treasury may withhold subsidies in cases where the states owe money. In May, Florida’s debt manager, Ben Watkins, said Florida would stop selling the securities because of those concerns. Krueger said the payment statistics should ease such worries.

“The Build America Bonds program has been a great success,” he said in his speech. “It is hard to look at these statistics and not conclude that the risk of offsets under the BABs program has been very minor.”

The program is set to expire at the end of the year unless Congress passes a proposed extension. Legislation to prolong it has been approved in the House of Representatives, only to run aground in the Senate.

Krueger said he’s “hopeful” that the program will be extended, though he acknowledged it has been difficult for Democrats, who control both chambers, to get the 60 votes needed to overcome stalling tactics in the Senate. Local-government groups have lobbied for keeping the program alive. After returning from an August recess next month, the House may vote on a new bill to prolong the program through 2012. Passage would give Senate supporters another chance to bring it to a vote.

Bipartisan Support, Once

“The BABs program, when it was initially authorized, had bipartisan support,” Krueger said. “The only thing we have learned since then is that it’s been successful.”

“I would think that would bring more support to the program,” he said. “But finding 60 votes has not been so easy in the Senate.”

Krueger also addressed criticism that the program produced high fees for Wall Street investment banks. Initially, Build America debt underwriting expenses were higher because of the start-up costs for using new financial products, he said. More recently, the costs have fallen amid competition from banks seeking to sell the bonds.

“Even taking underwriting fees into account, state and local governments have still saved over $12 billion in present value from issuing BABs,” Krueger said.

To contact the reporter on this story: William Selway in Washington at wselway@bloomberg.net

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