The Lame Duck Congress is likely to vote to extend the Build America Bonds program at the Obama Administration’s request.
“The state and city fiscal mess is getting worse, yet the Obama administration wants Congress to make new taxpayer-subsidized bonds permanent.” Here.
Build America Bonds is the Federal Stimulus Program that subsidizes the debt service or interest payments on State and Municipal bonds. It currently pays 35% of the interest on State and Local Bonds issued under the program, effectively lowering the rate of interest paid by the issuing governmental entity. The program was also designed to encourage both foreign and domestic investors, who otherwise wouldn’t buy such bonds because they couldn’t take advantage of the tax exempt status.
This program subsidizes State and Municipal fiscal mismanagement by local politicians, providing them a vehicle to borrow at lower rates of interest than they would normally be capable of doing. According to the Wall Street Journal over $160 Billion of these bonds have been issued in the last 19 months and not surprisingly California accounts for over $21 Billion of that amount. Illinois another big user has abused the program and CMA Datavision, a major bond insurer, has recently suggested that Illinois was at greater risk of default than Iraq. Yet, despite that, Illinois was still able to borrow millions of dollars at a relatively low interest rates.
“The governments that have made the most use of BABs have been those with the greatest fiscal problems. The biggest issuer of BABs, California, has relied on an unprecedented number of gimmicks to balance its books in the last two years—such as temporarily increasing tax withholding rates and issuing IOUs to vendors.New Jersey used a big chunk of its BAB funding to relieve the burden from past budget tricks. Over the years its legislature has diverted gas-tax money from its transportation trust fund, which is supposedly dedicated to public works, to paper over previous general account budget deficits. Now the state is borrowing with BABs to restock the trust fund, though servicing the interest on those bonds will haunt future budgets.” Here.
State and local governments strapped for cash have hired lobbyists to push Congress to extend the Build America Bonds legislation. And not surprisingly, the Obama Administration in its 2011 budget has proposed to make Build America Bonds program permanent, with “an interest-rate subsidy of 28%.” Here.
While States and Local governments are under mandate to maintain balanced budgets, this Administration and Congress have repeatedly encouraged State and Local politicians to not only violate their responsibility to the voters, but also have encouraged them to jeopardize the fiscal viability and solvency of their jurisdictions. The Administration’s push to extend this program is simply another example of making State and Local Government more dependent upon Washington, DC and less accountable to their own citizenry!
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