The Republican landslide in U.S. House elections may derail efforts to extend the Build America Bond program, a part of President Barack Obama’s stimulus that has helped pump $158 billion into local public-works projects.
With the federally subsidized bond program set to expire at year-end, supporters are pressing for an extension in the lame- duck session of the Democratic-controlled Congress, which begins Nov. 15. Prospects will grow dimmer in January, when Republicans, who have called Obama’s $787 billion stimulus too costly, take control of the House and reduce the Democratic majority in the Senate.
“If it doesn’t get through now, it’s not going to happen,” said Jim Currie, the head of federal relations in Washington for the National Association of State Treasurers, which is seeking to keep Build America Bonds in place.
The U.S. pays 35 percent of the interest on taxable Build America Bonds, which have been a boon for local officials seeking to finance construction projects. The securities have also provided fees for Wall Street underwriters and helped hold down borrowing costs in the tax-exempt municipal bond market, where supply has diminished because of the federal subsidies for sellers of the taxable debt.
Republicans say the Nov. 2 election results were a rebuke of Obama’s expansion of the federal government, including the stimulus measure that created Build America Bonds. Senator James DeMint, the South Carolina Republican and Tea Party favorite, said in a Nov. 7 NBC interview that the election showed “people are rejecting, in large numbers, this rampage of government spending.”
“There’s a very good chance they will be done, and it will be hard to bring them back,” he said.
An end to Build Americas would increase tax-exempt bond supply by about 35 percent, just as money is starting to migrate back toward stocks, said Alan Schankel, the director of fixed- income research for Janney Montgomery Scott LLC, the Philadelphia-based brokerage. That may put pressure on muni-bond prices, which move in the opposite direction of yields.
“The forces are conspiring to increase supply and reduce demand, and that’s going to push yields higher,” he said.
Build America Bonds have financed projects such as the new bridge spanning the San Francisco Bay and mass-transit in New Jersey. California, the largest issuer of U.S. municipal debt, is planning to sell $2 billion of the bonds next week.
The securities have also drawn the interest of overseas buyers, whose holdings of municipal bonds jumped to $83 billion by the end of June, up 67 percent from a year earlier, according to the Federal Reserve. Non-U.S. buyers accounted for $123.1 million of New York City’s $775 million Build America Bond sale last month, according to Comptroller John Liu.
Extensions of the program have twice passed the House this year, only to falter in the Senate in part because they were packaged with other provisions that generated opposition. In September, Senator Max Baucus, the Democrat who heads the Finance Committee, introduced a one-year extension with a reduced subsidy of 32 percent.
That bill could pass on its own during the lame-duck session or become coupled with proposed extensions to the 2001 and 2003 income-tax cuts, which are also expiring this year, said Jennifer Hoelzer, a spokeswoman for Oregon Senator Ron Wyden, a Democrat on the Finance Committee. The expiring tax cuts are among the top issues facing Congress before year-end.
“We are cautiously optimistic, but at this point nothing is for sure,” she said.
Not Enough Time
There is as much as a 70 percent chance that Build Americas will be extended for another year, according to a Nov. 5 report by three JPMorgan Chase & Co. bond analysts, Alex Roever, Chris Holmes and Josh Rudolph. Nicholas of the Bond Dealers of America isn’t so optimistic.
“The smart money is that nothing will be done in the lame- duck session because there’s so much division,” he said.
Lars Etzkorn, program director for federal relations at the Washington-based National League of Cities, said he’s concerned that there isn’t enough time in the lame-duck session for Congress to pass the Build America Bonds extension as well as a separate measure making it easier for community banks to purchase municipal bonds.
“We’re very concerned about all the access-to-credit provisions,” he said.
Questioning the Need
The Build America program was expected to cost $36 billion in the 10 years from its 2009 creation, according to the Congressional Budget Office. Republican Representative David Camp of Michigan, in line to head the tax-writing Ways and Means Committee, has questioned the need for the program, saying local governments don’t create the type of jobs needed to foster economic recovery.
Etzkorn said the group would continue to press for Build Americas to be revived if they are allowed to lapse, though he said it may be difficult.
“It is going to be a tough sell,” he said.
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