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Bonds will reduce costs, Treasury says

Associated Press / April 3, 2010

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WASHINGTON — A bond program funded by the Obama administration’s stimulus bill will save state and local governments billions in borrowing costs, the Treasury Department said.

A Treasury analysis of the “Build America Bonds’’ program found that it will reduce borrowing costs by $12.3 billion for governments building capital projects such as schools, hospitals, and transportation.

Governments use the stimulus bonds, which pay taxable interest to investors, instead of the tax-free bonds that state and local governments normally issue. Investors demand higher interest rates on the stimulus bonds because of the taxes, but the Treasury covers 35 percent of the governments’ interest payments. That lowers the governments’ net borrowing costs to below what they would pay on tax-exempt bonds.

The federal government gets back most of the 35 percent subsidy — about 28 percent — by taxing the investors, the administration said in its annual budget request.

The Treasury would not provide an estimated cost to the government of the remaining 7 percent subsidy. The Treasury does not have access to the necessary data on investors’ taxes, an official said.

The program is a net transfer of money from the federal government to state and local governments. Some industry officials dispute that, saying the federal government is getting back a lower percentage of the subsidy in taxes, and that the program costs more than the government is acknowledging.

President Obama has proposed making it permanent in a modified form.

The Treasury says the bonds open municipal finance to new classes of retail and institutional investors, including life insurance companies.