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6/17/2010
Even YOU can say no to stimulus dollars

If you were head honcho for a day, would you scoop up government largesse?

Build America Bonds – one more creation of the Washington Keynesians – are still another giveaway program it’s darned hard to keep all kinds of hands from messing in.

The Build America Bonds – or BABs – are used by municipalities, states and public utilities like traditional tax-exempt bonds, but unlike those tax-exempts, these bond instruments are fully taxable – and as a result, normally more expensive. Lisa Remiker, the City of Appleton’s Director of Finance explains:

… if the interest rate is taxable to investors, issuers must pay those investors a higher rate. But with BABs, the federal government pays the state or local issuer a subsidy equal to 35 percent of the interest rate (which you have to submit a request for each year within a certain time frame or you don't receive). Government issuers must run the numbers to see if, at the time and under the circumstances they are coming to market, BABs are less expensive than selling a traditional muni bond.

Ok, so BABs are less expensive only because the feds (well, that’s you and I and our kids and our grandkids!) are paying a portion of the interest. Kind of like wind turbines, solar turbines, Cars replacing Clunkers and well, you name it.

The financial press – and Congress are getting a whiff of BABs that isn’t all pleasant.

Goldman Sachs, J.P. Morgan Chase and other firms that dominate the U.S. underwriting market stand to earn millions, if not billions, of dollars under a planned expansion of the Build America Bonds program…. Major banks lobbied heavily for the program's expansion under a jobs bill recently passed by the House and under consideration in the Senate.

Investment banks have earned more than $670 million from selling the bonds, with average fees nearly 20 percent higher than traditional tax-exempt bond issues….

That was the Washington Post June 7. The New York Times piled on this week.

Wall Street banks are charging larger commissions for selling Build America Bonds than they do for normal municipal bonds, increasing the costs to the states and cities. [In addition] the new bonds may be priced too cheaply, enabling quick-footed investors to turn a fast profit as the prices climb, but raising interest costs for taxpayers.

…. As if all this were not enough, Wall Street banks — which have pocketed hundreds of millions of dollars in fees from the program — are now releasing research reports warning that states’ financial woes may make the bonds less attractive. Some banks are even telling investors how to bet against Build America Bonds. [Oh my gosh.]

…. The Obama administration wants to make the program permanent, but Senate Republicans last week introduced a bill that would let it expire as scheduled at the end of this year.

Finance Director Remiker looked at BABs for Appleton, but determined they weren’t cost effective and came burdened with excessive administrative costs. She’s concerned about the bad deal federal taxpayers (hmmm – that’s you and I again) are getting.

The U.S. Treasury Department has signed onto $23 billion in future interest subsidy payments resulting from the $90 billion in BABs sold in the first year. In present value terms, this amounts to $19 billion in costs. Treasury officials estimate that Build America Bond participants have toted up reduced-interest costs of $12 billion on the $90 billion of BABs sold so far. By this reckoning, the federal government is paying a $1.90 subsidy for every $1.20 that states and localities are saving.

The City of Wauwatosa is one of many Wisconsin municipalities taking advantage of the federally-subsidized bonds. They calculated the net interest cost of BABs was a better deal than tax-exempts for their local taxpayers, aren’t bothered by the extra administrative work and have seen interest reimbursements from the feds arrive very promptly. When I mentioned to City of Wauwatosa Finance Director Ronald Braier that somebody was paying for that interest cost differential, he said it was his job to make the best decision for Wauwatosa taxpayers.

Mike Kawula, Kaukauna Utilities’ Manager of Finance, has used the subsidized BABs once – because of the interest rate savings when the 35% subsidy was taken into account. The Utility is paying an agent about $1,000 annually to get the interest payments refunded. When I asked about the possible cost of the bonds to future generations, Kawula mentioned that the purpose of the stimulus dollars and most specifically the BABs was to stimulate building – and that’s exactly what Kaukauna Utilities was doing.

You can be the one to say “no thanks” to the feds. It’s a good time for each of us to call our local alderperson, town supervisor, village trustee and/or county board supervisor. Ask them to let you know when bond issues come up for approval and most especially to let you know if Build America Bonds are being considered. Think about it. How important is it for your municipality to “save” interest dollars when those same savings are being passed on to your grandkids?

Jo Egelhoff, FoxPolitics.net

COMMENTS

Good morning Jo,
I am curious, the tenor of your article suggests that BABS are a lot "worse" than tax free bonds.

"Think about it. How important is it for your municipality to “save” interest dollars when those same savings are being passed on to your grandkids?"

But the description said this;
"like traditional tax-exempt bonds, but unlike those tax-exempts, these bond instruments are fully taxable – and as a result, normally more expensive."
So the difference is refunded.

I don't understand why not go for the traditional tax-exempts but aside from that how are the two any different as far as "cost" to us taxpayers?

There is some value to stimulate the economy and create jobs. Should we eschew that just cuz you think austerity is better?

Dean Weichmann (Thu Jun 17 05:38:54 2010)

The whole business is unnecessarily complicated, but as to the question posed in the headline, I have for years been pointing out that "free" money from state or fed governments is not free, that as taxpayers at every level, we pay for these "freebies," and that as these
"gifts" to local levels of government are usually not vital to the core purposes of either state or federal government, it is best to think of them as "gifts" to future tax payers who will have to pay the debts incurred in order to fund this largesse. When someone points out that if we do not take these funds, someone else will, I say, "OK, grab with both hands, but then get on the phone and lobby your state/federal representatives to put an end to these giveaways." While most of our elected officials are proud to follow the first part of that advice, to date, and to my knowledge, no one I addressed has done the latter. Ultimately, if we can not afford to pay for local services locally, we can not afford them

Ken Van Doren (Thu Jun 17 08:33:04 2010)

I could not agree more with Ken's last sentence.

As to his first, I, for one, am struggling to understand how the blasted thing works. If I'm understanding it correctly (and someone please correct me if I'm wrong, because I am trying desperately), a BAB is ultimately a loan that a municipality takes out that is funded by the money people use to buy/invest in the bonds; the interest generated by the loan is the potential profit of the investor (and whatever firm is issuing/selling the bonds). And unique to the BAB, the FED is paying the interest (or a percentage of it) instead of the municipality, as long as the municipality submits their paperwork on time...

If indeed I have that correctly, that is essentially a small group of taxpayers borrowing money from a larger group of taxpayers, none of whom on either side actually have anything to do with the transaction other than to beg and plead the lesser of two evils (the better-than-THAT-guy politician) not to be stupid - the local politician not to borrow the money, and the broader-scoped politician not to keep this silliness on the books. That being the MOST the taxpayer can do, if he/she is even remotely aware of what the hell is going on, let alone understands it.

Andrew Ellis (Thu Jun 17 09:03:53 2010)

"Ultimately, if we can not afford to pay for local services locally, we can not afford them"

OK, so if a municipality can't pay cash it can't afford it?
Are you against borrowing money for anyone or just local government?
What about those capital purchases like roads, schools, jails, courthouses....
you know, things that last a long time?

What is the difference between BABs and regular tax exempt bonds as far as cost to the taxpayer?

Dean Weichmann (Thu Jun 17 12:22:08 2010)

Hi Everyone:

The Problem with BABS as I see is that the total ultimate cost to the Taxpayer is HIGHER than conventional "Munis". The Fed. pays the % of the MUCH higher interest rate (Which is ultimately paid by the Taxpayer. Remember, the Munipality still pays the major % not paid by the Fed. BUT ALSO, the much higheer fee structure to the UNDERWRITERS,and administrative cost.

There is NOTHING wrong with conventional "Munis" to finance long term captial improvements by Local/State Govenment. Provided, however, the total debt load of the Governmental unit does NOT get too high. Such would be the case with a Community like Kaukauna where they are now at 89% of their maximumm permitted bonded indebtedness allowed by the State. Menasha with their "Steam Debacle" is another HORRIBLE example. Wisconsin also has relatively HIGH bonded indebtedness, which has resulted in a downgrading of their credit rating, which, again then "Ups" the interest rate we all have to pay. GLS

GL Schilling (Thu Jun 17 15:29:48 2010)

Dean: BABS are a greater expense to the federal government, an added expenditure, on off-budget expenditure, as it were. they are a greater cost by the amount of the interest subsidy less the federal tax paid on the bond interest. I believe what's best is for a community and a federal government to live within its means. That's not austerity, but it's not Keynesian giveaways either.

Most municipalities have debt guidelines they follow - and if not guidelines, they have the statutory maximum they must comply with. As a separate issue, it's important for community residents to monitor the debt in their community's budget and how it complies with these established standards. Appleton's policy concerning G.O. debt is that it not exceed 40% of the legal maximum. I deem that a wise policy.

Jo (Thu Jun 17 15:32:48 2010)

GLS thanks, that is a better explaination.

Jo, are you forgetting that the the BABs are taxed, therefore return revenue?

Dean Weichmann (Thu Jun 17 15:55:04 2010)

Dean: Yep! You're right! BUT, that is what drives the interest rate much higher in order to make them attractive to Investors, when compared to CONVENTIONAL "Munis". Sophisticated Investors are not fooled by the much higher interest rate. They simply net it down by taking into consideration their personal tax bracket rate. GLS

GL Schilling (Fri Jun 18 09:38:02 2010)

Thanks GL

So why do municipalities bother with BABs at all?

Dean Weichmann (Fri Jun 18 11:23:35 2010)

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