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Build America Bonds (BABs)



Definition

Build America Bonds (BABs) are taxable municipal bonds issued by state and local governments, introduced in 2009 as part of the American Recovery and Reinvestment Act. The goal was to support these entities in raising capital for new projects during the economic downturn. Unlike traditional municipal bonds which are tax-exempt, the federal government provides a direct subsidy to BABs issuers or tax credit to bondholders.

Phonetic

The phonetic pronunciation for “Build America Bonds (BABs)” would be:”bild əˈmɛrɪkə bɑːndz (bæbz)”

Key Takeaways

  1. Financing Tool: Build America Bonds (BABs) are a type of municipal bond that were introduced under the American Recovery and Reinvestment Act of 2009. They serve as a financing tool for state and local governments to fund capital projects like infrastructure development at lower borrowing costs.
  2. Tax Credits: Unlike traditional municipal bonds which are tax exempt, BABs are taxable bonds. However, they include a federal subsidy component for the bond issuer, either in the form of tax credits or direct payments. This makes them attractive to a wider array of institutional investors than traditional municipal bonds.
  3. Temporary Program: The Build America Bonds program was a temporary measure and expired at the end of 2010. However, there have been calls by various market participants and lawmakers to reintroduce the program given their perceived effectiveness in reducing the borrowing costs for state and local governments during their period of issuance.

Importance

Build America Bonds (BABs) hold significant importance in the business/finance sector as they are a catalyst for infrastructural development. Instituted as part of the American Recovery and Reinvestment Act of 2009, BABs were intended to stimulate economic recovery following the financial crisis. These are taxable municipal bonds that receive federal subsidies for a significant portion of their interest costs. The unique structure of BABs allows municipalities to access a broader base of potential investors, including those who generally do not invest in the municipal bonds market. Furthermore, these bonds facilitate the financing of public infrastructure projects at a lower borrowing cost, which can consequently stimulate job growth and progress in local economies. Therefore, BABs play a crucial role in bolstering America’s infrastructure and stimulating economic recovery and growth.

Explanation

The primary purpose of Build America Bonds (BABs) is to reduce the cost of borrowing for state and local government entities in order to facilitate the funding of capital projects. This is particularly valuable in times of economic downturn or fiscal stress, as it allows for the continuation of infrastructure and development projects that might otherwise be unfeasible due to lack of funds. The issuance of these bonds stimulates the economy by creating jobs and promoting investments in areas such as transportation, education, housing, and other public-sector needs. This, in turn, lays the foundation for long-term economic growth and development.BABs are used by these government entities to finance a variety of infrastructure projects. Examples include constructing and rehabilitating schools, roads, bridges, and municipal buildings. Additionally, these bonds can be used to fund water and sewage plants as well as energy projects. Overall, the use of Build America Bonds is an integral part of structural investment, allowing local and state governing bodies to improve the quality of life within their jurisdictions, while also potentially enhancing the attractiveness of their area for potential investors and residents.

Examples

1. The Golden Gate Bridge Highway and Transportation District in California: In 2009, they issued more than 70 million dollars in direct subsidy and tax credit Build America Bonds to fund improvements in their infrastructure. The funds obtained from the BABs issuance were used for the renovation and reconstruction of the bridge, along with purchasing new transit vehicles and equipment.2. The Los Angeles Unified School District: In 2010, they issued $795 million in Build America Bonds. The bond proceeds were used to fund the District’s continuing program to address enrollment growth and overcrowding within the district. The funds allowed for new construction, seismic retrofit improvements, and adding core facilities (like libraries, multipurpose rooms, and science labs) to existing schools.3. The Central Texas Regional Mobility Authority: They used $238.6 million Build America Bonds in 2012 as part of a plan to fund the U.S. 290 East (Manor Expressway) Project. In this specific case, the BABs played a crucial role in financing the construction project, helping to develop a regionally significant toll road.

Frequently Asked Questions(FAQ)

What are Build America Bonds (BABs)?

Build America Bonds, also known as BABs, are taxable municipal bonds introduced by the U.S. government in 2009 under the American Recovery and Reinvestment Act (ARRA) to support funding of public infrastructure projects.

Why were Build America Bonds (BABs) created?

BABs were created as a part of the stimulus package to help states and local governments finance capital projects at a lower cost during the financial crisis when the traditional tax-except municipal bond market was disrupted.

What type of projects do BABs fund?

The proceeds from Build America Bonds are used to fund public infrastructure projects such as schools, hospitals, roads, and sewer systems, etc.

Who can issue Build America Bonds?

Build America Bonds can be issued by state and local governments and their agencies.

How do Build America Bonds differ from traditional municipal bonds?

Unlike traditional municipal bonds, which are tax-exempt, the interest earned on BABs is taxable. However, the U.S. Treasury provides a direct subsidy or a tax credit to either the bondholder or issuer respectively to lower the net interest expense.

Are Build America Bonds still being issued?

The authority to issue new Build America Bonds ended on December 31, 2010. However, the bonds that were issued prior to this date continue to be traded on the secondary market.

What risk is associated with Build America Bonds?

Like all bonds, BABs also carry risk. The level of risk depends on the creditworthiness of the issuer. These include default risk, interest rate risk, and inflation risk.

What is the minimum investment for Build America Bonds?

The minimum investment for BABs can vary from issuance to issuance but it’s commonly set at $5,000.

Are Build America Bonds federally backed?

No, the Build America Bonds are not backed by the U.S. government’s full-faith-and-credit pledge, unlike Treasury bonds. They are only backed by the state or local government who issues them.

How does a Build America Bond benefit the general public?

BABs help state and local governments affordably finance public infrastructure projects which lead to job creation and improved services and facilities for the public.

Related Finance Terms

  • Tax Credit Bonds
  • Municipal Bonds
  • US Treasury Department
  • Stimulus Package
  • Interest Rate Risk

Sources for More Information


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