U.S. Treasury Department Releases Guidance on Build America Bonds and School Bonds

The existing tax-exempt bond market has faced significant challenges over the past two years.

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(WASHINGTON D.C.) - The U.S. Treasury Department today released guidance on the Obama Administration’s Build America Bonds and School Bonds programs, which will help states and localities pursue needed capital projects, such as infrastructure development and public school construction.

The guidance Treasury is issuing today provides state and local governments with the answers they need in order to begin issuing these bonds with confidence about how these crucial federal payments will be made.

Build America Bonds

The existing tax-exempt bond market has faced significant challenges over the past two years. The Build America Bonds address that by providing state and local governments with a new, optional, alterative direct federal payment subsidy for a portion of their borrowing costs on taxable bonds.

“Increasing state and local funding for capital projects doesn’t just help rebuild our aging infrastructure. It gets American’s back to work,” said Treasury Secretary Tim Geithner.

“Build America Bonds is an innovative approach to augment the ailing tax-exempt bond market and shows the Administration’s commitment to economic recovery for Main Street.”

Build America Bonds provide a deeper federal subsidy to state and local governments (equal to 35 percent of the taxable borrowing cost) than traditional tax-exempt bonds and because of this federal subsidy payment, state and local governments will have lower net borrowing costs.

Also, this feature should make such Build America Bonds attractive to a broader group of investors than typically invest in more traditional state and local tax-exempt bonds.

A simple example: If a state or local government were to issue a Build America Bond and paid to the bondholder $100 of interest on the bond, the Treasury Department would make a payment directly to the state or local government of $35. Thus, the state or local government’s net interest expense would be only $65 on a bond that actually pays $100 to the bondholder.

The capital projects these bonds would fund include work on public buildings, courthouses, schools, transportation infrastructure, government hospitals, public safety facilities and equipment, water and sewer projects, environmental projects, energy projects, government housing projects and public utilities.

School Bonds

In addition, Treasury also announces guidance on allocations of national bond volume cap authorizations for two innovative tax credit bond programs for schools, known as Qualified School Construction Bonds and Qualified Zone Academy Bonds.

The American Recovery and Reinvestment Act of 2009 provided new or expanded authorizations, respectively, for these two programs. These tax credit bond programs allow state and local governments to finance authorized public school construction projects and other eligible costs for public schools with interest-free borrowings.

These tax credit bond programs provide this federal subsidy to state and local governments for their borrowing costs by giving investors a federal tax credit in an amount designed to replace 100 perc! ent of the interest payments on the bonds. As a result, state and local governments are able to issue these bonds without interest cost.

The guidance that Treasury and the IRS are issuing today allocates the national bond volume authority for these school bond programs among the States and certain large local school districts under statutory formula. These volume cap allocations are important to enable state and local governments to use these low-cost borrowing programs to finance school projects to promote economic recovery and job creation.

For Qualified School Construction Bonds, the guidance provides for division of the $11 billion national bond volume authorization for 2009 among the states and 100 largest school districts based on levels of Federal school funding.

For Qualified Zone Academy Bonds, the guidance provides for division of the $1.4 billion national bond volume authorizations for each of 2008 and 2009 among the states based on poverty levels.