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Build America Bonds Would Be Revived Under Obama Plan

The Build America Bonds program, a boon to state and local governments that lapsed last year in the face of Republican opposition in Congress, would be revived under President Barack Obama’s proposed budget.

The administration, in the $3.7 trillion budget unveiled today, said it wants to make Build Americas permanent. It would cut the subsidy the U.S. Treasury pays to states and cities so that the securities cost about the same as the tax break for buyers of traditional tax-exempts. The proposal also recommends expanding their use beyond public works to endeavors that can now be financed in the tax-exempt market.

Republicans last year blocked Democrats’ efforts to extend the program. Now in control of the U.S. House of Representatives, they have criticized Build Americas for encouraging state and local governments to pile on debt while generating fees for Wall Street underwriters.

The taxable bonds were created under Obama’s economic stimulus program in 2009 to drive down borrowing costs for municipalities as banks remained leery of extending credit in the wake of the financial crisis. The Treasury paid 35 percent of the interest on the securities, instead of the income-tax exemption for buyers of traditional municipal bonds. The program expired on Dec. 31.

‘Reckless Course’

Reviving the program would “encourage states to continue on a reckless course of irresponsible spending and further fuel the unfettered spending agenda of the Obama administration,” Senator Orrin Hatch of Utah, the top Republican on the Senate Finance Committee, said in a statement.

State and local governments sold $187 billion of the bonds as the subsidized interest payments allowed them to borrow more cheaply than in the tax-exempt market. Build Americas also diminished the supply of tax-exempt bonds, fueling a rally in the securities that reversed last year when the taxable program’s end approached.

There was little immediate reaction in the municipal bond market, said Tom Kozlik, municipal credit analyst for the brokerage Janney Montgomery Scott in Philadelphia.

“The president’s budget is the first step in a long process that will involve maneuvering, compromise and a dash of theater,” he said in an e-mail. The market is “watching its progress closely but will not likely react forcefully until there is something more substantial to react to,” he said.

Responding to Critics

The president’s proposal seeks to address criticism among Republicans by reducing the direct subsidy on the bonds to a “level designed to be approximately revenue-neutral in comparison to the federal tax losses from traditional tax-exempt bonds.” It pegs the cost at $28 million from 2012 through 2021.

“Their approach in terms of revenue-neutrality is their key argument,” Oregon Senator Ron Wyden, a Democrat who has championed the program, said in an interview.

The lower subsidy would also reduce the incentive for public officials to use the securities, potentially muting their impact on the $2.9 trillion municipal bond market.

Before the program expired, it expanded the market for state and local government bonds to international investors and other non-traditional buyers of municipal debt who had no need for the tax breaks they provide. The failure to extend the program helped send municipal bonds to their worst quarterly drop since 1994.

Pelosi Backing

A separate effort to revive the bonds has run into obstacles. Last week, Democratic Representative Gerald Connolly, with backing from Minority Leader Nancy Pelosi, introduced a bill to revive Build Americas until 2012, with the federal subsidy eventually pared to 31 percent.

Republicans blocked the measure from going straight to the House for a vote, forcing it to go through committees. Republican House Ways and Means Committee Chairman David Camp of Michigan last year criticized Build Americas as a relic of the “failed stimulus bill” that “subsidized state and local governments going deeper into debt.”

Wyden, the Oregon senator, said he plans to work to drum up a bipartisan plan to revive Build America-style bonds. He said any proposal to expand the program beyond construction projects to other uses could run afoul of Republicans who want to block any aid to cash-strapped localities.

“It will obviously be more likely to attract Republicans if they’re dedicated to keeping their focus on transportation and infrastructure,” he said.

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