From Struggling Infrastructure to Robust Reconstruction: The Lifespan of Build America Bonds

Looking to finance infrastructure projects? Learn all about Build America Bonds, a financial instrument that provides attractive tax incentives for government entities to fund construction, transportation, schools, and more. Explore the benefits, qualifications, and how these bonds can help stimulate economic growth.

Build America Bonds

Introduction

Build America Bonds (BABs) are a type of municipal bond that was introduced as part of the American Recovery and Reinvestment Act of 2009. This program aimed to spur economic growth and increase job opportunities in the aftermath of the financial crisis.

Background

BABs differ from traditional municipal bonds in that they are taxable rather than tax-exempt bonds. This feature was intended to attract a wider range of investors, including those who typically invest in taxable bonds, such as pension funds and insurance companies. By making these bonds taxable, the U.S. government hoped to lower borrowing costs for state and local governments, facilitating their infrastructure and development projects.

Key Features

Here are some key features of Build America Bonds:

• Issued by state and local governments, with the interest payments and principal repaid over a specified period.
• Offered at a fixed interest rate.
• Unlike traditional municipal bonds, the interest income generated by BABs is subject to federal income tax.
• The federal government provides a subsidy payment to the issuer equal to a percentage (usually 35%) of the interest paid on the bond. This subsidy serves to reduce overall borrowing costs.
• BABs are generally used to fund public infrastructure projects, such as building schools, bridges, highways, and airports.
• These bonds can be purchased by individual investors, insurance companies, pension funds, and other institutions.

Benefits

The introduction of Build America Bonds brought several advantages:

• Increased access to capital for state and local governments at lower borrowing costs due to the federal subsidy.
• Broadened investor base, attracting investors who typically focus on taxable bonds, thereby stimulating demand.
• Promoted job creation and economic growth by funding essential infrastructure projects.
• Provided bondholders with a higher yield relative to other similar taxable bonds, making it an appealing investment option.

Conclusion

Build America Bonds played a crucial role in the recovery and stimulus efforts following the financial crisis. By providing a taxable alternative to traditional municipal bonds and offering federal subsidies, these bonds proved to be an effective mechanism for funding infrastructure projects while lowering borrowing costs for state and local governments.

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