In just one year, federally subsidized Build America Bonds for public-works projects have become a hot item. Volume soared to $90 billion, and localities saved more than $12 billion, the Treasury Dept. said in an April 2 report. The program, created by 2009’s American Recovery and Reinvestment Act, is set to expire on Dec. 31, but the House voted to extend it and President Obama wants to make it permanent.

Demand is strong. Treasury, citing data from Bloomberg, says that as of March 31, states and localities had gone to market with 1,066 Build America Bond (BAB) issues, totaling more than $90 billion. That amount equals more than 20% of the market for new municipal bonds.

At least 20% of the $90 billion is for highways and transit. Jack Basso, American Association of State Highway and Transportation Officials’ director of program finance and management, says BABs have “helped to advance and move projects out quickly.” He says BABs have been a “crucial” financing source, “given the screws that were put to the credit markets and the difficulty getting money in the municipal market.”

Unlike most municipal bonds, BABs are taxable. Their big draw is a subsidy equaling 35% of the interest rate issuers pay. Treasury says BABs will save issuers $12.3 billion in interest costs’ net present value, compared with tax-exempt bonds.

About half the $1 billion in bonds Utah issued last fall were BABs, says state Treasurer Richard Ellis. BABs didn’t fund added projects. However, Ellis says, “It saved us 32 basis points in overall financing costs, which was about $24 million in present-value savings for our debt service.”

Critics such as Sen. Charles Grassley (R-Iowa) say financial firms charged high fees for underwriting BABs. Treasury says BAB fees’ weighted average is $7.29 per $1,000, compared with $6.19 for tax-exempt bonds, based on Thomson Reuters data. Also, it says January-February 2010 BAB fees fell to $6.64.

The Hiring Incentives to Restore Employment Act, signed on March 18, widens eligible BAB uses. The House passed a bill on March 24 to extend BABs through March 2013 but with the subsidy phased down to 30%. Obama proposed making BABs permanent but cutting the subsidy to 28%. “We’d like to see it made permanent,” says Basso. “It’s another set of tools that are good for moving infrastructure investments forward.”

Billion-dollar ‘BABs’*
Issuer Purpose Amount($ billions)
State of California Highway/recreation/schools/water 5.0
State of California Schools 2.5
State of California Schools 1.75
N.J. Turnpike Highways 1.375
L. A. school district Schools 1.37
Bay-area Toll Authority [Calif.] Highways 1.3
L. A. school district Schools 1.25
Ga. Municipal Electric Auth. Electric power, refunding notes 1.22
State of Texas Highways 1.2
Univ. of California Higher-education 1.02
Ga. Municipal Electric Auth. Electric power,refunding notes 1.01
State of Illinois Transit 1.0
*through 3/31/10; Sources: Bloomberg; Treasury Dept.