Build America Bonds

Obama's stimulus package includes subsidies for these new municipal bonds, which are helping revive local economies

Last year, Joseph G. Zegers, the finance director of De Pere, Wis., learned the true cost of the credit crisis. To raise money, the suburban community of 22,000 sold municipal bonds with an interest rate of 5.6%, up from 4.15% in 2006. Facing a higher debt bill, Zegers figured he would have to postpone plans to upgrade roads, sewers, and buildings, hurting local construction. Now, thanks to a new federal program, De Pere is selling munis at 3.3%, saving the city around $200,000. "Without the bonds some projects might not be done," says Zegers. "There would be less employment."

Cash-strapped states and municipalities may have a fix for some of their financial problems: Build America Bonds, a new type of municipal debt that's the financial crisis equivalent of war bonds. Interest rates on the taxable debt, created as part of the $787 billion stimulus package, are higher than typical munis. But Washington foots part of the bill, which in the end makes them cheaper for municipalities.

By some estimates this market could swell by $50 billion this year and another $100 billion in 2010. The funds are good news for states and local governments, whose economies account for 13% of the gross domestic product. Local officials can use the proceeds to build bridges, fix roads, and spruce up schools—the sort of infrastructure projects the Obama Administration is counting on to rev up the U.S. economy and job growth.

Pension funds, university endowments, insurers, and other big investors can't get enough of the debt, which hit the market in late April. The New Jersey Turnpike Authority, the agency that oversees the 148-mile highway, planned to offer roughly $250 million of Build America Bonds. But investor appetite was so great that the agency actually sold $1.4 billion, and it plans to plow that money into road work. The New York Metropolitan Transit Authority, which runs the city's subway system, issued $250 million more in bonds than expected.

California officials, who have just sold $5 billion of the new debt, estimate that the bond deal will translate into 90,000 jobs. Says Tom Dresslar, a spokesman for the California State Treasurer's Office: "The sale of these bonds creates or preserves jobs, pumps millions in revenues into companies that depend on the projects, and bolsters the state coffers."

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