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Sunday, April 11, 2010

Treasury Assists with $90B in Bonds: Saves States $12B

Last year's stimulus package included a program for states and municipalities entitled "Build America Bonds."

The U.S. Treasury announced that so far it is on target to save those local governments $12.3 billion in borrowing costs with federally subsidized taxable bonds already sold during the first year of the program.

Since the stimulus passed last April, the Treasury has helped state and local governments sell $90 billion of these bonds to assist their jurisdictions with new liquidity to fund their local projects.

While most government agencies traditionally issue tax-exempt bonds, the Build America Bonds are taxable bonds with a 35 percent federal subsidy on interest costs. This means that a jurisdiction ultimately pays much less in interest to provide the same capital improvements or service upgrades to their constituents.

Denver Water which was one of the first agencies to take advantage of the program in order to effect need upgrades to the Denver water system. Chips Barry, manager of Denver Water stated that they were "pleased to be able to sell bonds at a very reasonable rate in the current market environment. For ratepayers, this means we are able to keep costs as low as possible while providing us the funding to improve our system."

California issued seven of the top 10 bond deals according to analysis of Treasury Department data. The state also issued roughly one-quarter of the $90 billion worth of bonds since last April. Most of the bonds issued by the sunshine state are now in the midst of funding transportation and educational improvements.

"People originally said it would eliminate the issuance of municipal bonds," says John Cummings, who is head of muni-bond investments at money-management firm PIMCO. "Instead they have stabilized the market and helped to create jobs."

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