United States Department of the Treasury The Recovery Act at Work: Build America Bonds Treasurer Rosie Rios 1

United States Department of the Treasury By paying only 35% of the interest on Build America Bonds (BABs), the federal government is helping state and local governments access the capital needed for development projects. The bonds must be used for the development of public infrastructure projects. Each federal dollar benefits state and local government entities by a dollar. 2 Background on Build America Bonds

United States Department of the Treasury Widespread Usage of BABs 3 From when the program was launched on April 3rd, 2009 through January 1, 2010: $64 billion in BABs have been issued; BABs are about 22 percent of municipal bonds market; and 45 states are participating in the program, with a total of 779 separate issues. BABs provide state and local governments with lower borrowing costs.

United States Department of the Treasury The savings for a 10 year bond are estimated to be 31 bps and the savings for a 30 year bond are estimated to be 112 bps. BABs Provide Lower Borrowing Costs

United States Department of the Treasury BABs Improved the Muni Market 5 BABs have made municipal debt attractive to new investors. By bringing in new investors, BABs have relieved supply pressure and have helped reduced borrowing costs on all classes of municipal debt. “By reducing new-issue supply in the tax-exempt market, they have had the effect of lowering yields there. Estimates of the effect of BABs on tax-exempt yields are in the neighborhood of 20 to 30 basis points or more.” Bond Buyer, November 2, 2009

United States Department of the Treasury BABs Improved the Muni Market

United States Department of the Treasury Investors, Pension Funds, etc. BABs Investment State & Local Governments Private Firms Workers Federal Government Contracts for building projects Wages Treasury makes 35 percent subsidy payment to issuer Savings BABs Stimulate Private Activity

United States Department of the Treasury “The BABs program has produced huge benefits for California. Our state has enormous infrastructure needs. Meeting those needs requires a massive investment. The BABs program has allowed us to increase our capital investment by billions of dollars this year, and in the process provided our workers and businesses a much-needed economic boost. To top it off, BABs have been a bargain for California taxpayers. They will save hundreds of millions of dollars on interest payments.” - Bill Lockyer California State Treasurer BABs Have Stimulated Activity

United States Department of the Treasury Other Recovery Act Bond Provisions 9

United States Department of the Treasury Recovery Zone Economic Development Bonds Type of Build America Bonds Treasury pays 45% of the coupon May be issued in 2009 and 2010 Program Uses Broad range of projects to promote economic development or other economic activity in designated recovery zones capital expenditures public infrastructure and construction of public facilities job training and educational programs Bond Volume Cap $10 billion national volume cap Only $565 million have been issued 10

United States Department of the Treasury Recovery Zone Facility Bonds Similar to traditional tax-exempt private activity bonds Lower interest rates than conventional debt May be used by private businesses for private economic development projects May be issued in 2009 and 2010 Program Uses Depreciable capital projects (such as buildings or equipment) for original uses in active businesses in designated recovery zones Manufacturing, commercial, and retail uses EXCEPTION: cannot be used for residential rental housing Bond Volume Cap: $15 billion 11

United States Department of the Treasury Qualified School Construction Bonds National volume cap of $11.2 billion for 2009 and $11.2 billion for 2010 Unused volume cap may be “carried over” to the next year Federal tax credit: 100% of borrowing costs Projects: public school construction, renovation, and repair Treasury Guidance: IRS Notice ( I.R.B. ( )) Volume Cap Allocations (40% to 100 largest school districts; 60% to States) About $2.5 billion of these bonds were issued through December

United States Department of the Treasury Qualified Zone Academy Bonds National volume cap of $1.4 billion in 2009 and $1.4 billion in 2010 Unused volume cap may be “carried over” to the next year Federal tax credit: 100% of borrowing costs Projects: public school renovation, repair, course materials, and teacher training 10% private business contribution Guidance: IRS Notice ( I.R.B. ( )) 13

United States Department of the Treasury Qualified Energy Conservation Bonds National volume cap of $3.2 billion Federal tax credit: 70% of borrowing costs Projects: broad range of qualified energy conservation purposes, including capital projects to reduce energy use, research, mass transit, green community programs, and public education campaigns Treasury Guidance: IRS Notice ( I.R.B. ( )) Treasury guidance allocates volume cap among states by population State implementation requires allocating portions of state shares among large localities (meaning cities and counties greater than 100,000) 14

United States Department of the Treasury New Clean Renewable Energy Bonds National volume cap of $2.4 billion Federal tax credit: 70% of borrowing costs Projects: clean renewable energy capital projects Guidance: IRS Notice ( I.R.B. ( )) IRS allocations were made in October