Bond financing ain't sexy, but Build America Bonds are creating Oregon jobs today

Kari Chisholm FacebookTwitterWebsite

There's a nice piece over at the American Prospect about the work that Senator Ron Wyden is doing with the Build America Bonds program.

First of all, what are Build America Bonds?

[They] are a new way for cities and states to borrow money to invest in new infrastructure or fill budget gaps. Proponents found it difficult to gather support for the idea until 2009, when local governments were facing grave difficulties borrowing. Markets were frozen, and Wyden, [Treasury economist Alan] Krueger, and others crafting the fiscal stimulus bill saw an opportunity to introduce a more efficient subsidy for state and local borrowing.

Unlike traditional bonds, Build America Bonds don't include big tax deductions for wealthy investors. Instead of providing big subsidies to bond investors, the Build America Bonds provide big subsidies to the cities, counties, and states that need the money.

OK, so that's nice theory. Is it actually working?

The program proved successful: While the architects of the program initially hoped for $3 billion or $4 billion in loans, more than $90 billion in bonds has been issued by local governments, a third of those to fund infrastructure investments. This kind of spending is necessary to encourage economic activity, create jobs, and build national infrastructure for the future, a key progressive priority.

And what about here in Oregon?

Mayors of both parties have praised the program, and in Oregon -- Wyden's home state -- the program facilitated $580 million in transportation projects that state officials say will cost $58 million less thanks to the legislation.

"Put this money into a community and people get paychecks for doing the job, people get paychecks for selling equipment, the restaurant folks make ham sandwiches for people out there getting sweaty, and businesses build up around the finished system," Wyden says. "You couldn't have a sharper contrast between this and where Wall Street is going with our money today."

Politicians like to talk about "creating jobs", but most of that is empty rhetoric -- especially when it's really just camouflage for tax giveaways to wealthy people and multinational corporations. But here's a program that actually works - it produces real work for real people, doing public infrastructure projects that help the private sector, and saves taxpayer money, too. Not sexy, but important.

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    Full disclosure: My firm built Ron Wyden's campaign website. I speak only for myself.

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      Two concerns: (1) Is not the reduction of $58 million in state costs actually just paid for by federal funds, and thus an increase in total costs to taxpayers? (2) My highest priority for the $58 million would not be transportation projects but teachers. We should not be laying off teachers while buiding roads and bridges. Roads and bridges should be funded by gas/carbon taxes.

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        Actually, the $58 million savings isn’t simply a “gift” from the feds; it’s the result of the Oregon State Treasury being able to sell our bonds to a broader market: the taxable bond market.

        Usually, Oregon’s interest rate break comes from the fact that our bonds are tax-exempt (meaning that investors don’t pay taxes on the interest they receive from the bonds), which means the State Treasury is able to command a lower interest rate. For Build America Bonds, the interest on the bonds is taxable, but our rate break comes instead in the form of a federal subsidy equal to 35% of our interest costs. On the flip side, the feds and the state collect taxes on the interest on these taxable bonds, so it generally meshes – notwithstanding market fluctuations. The savings is the result of a larger pool of investors “bidding” for our credit.

        Build America Bonds are a great tool to have, but it’s just one of many in our financing toolbox. There will always be room for tax-exempt bonds, because before the State Treasury sells a bond, we evaluate our options and see which is the cheapest. Sometimes it’s BABs, sometimes it’s tax-exempt. (This, of course, from the state that brought the world the Phillips-head screwdriver.)

        And we should all thank Representative Lew Frederick, who sponsored the legislation that helped facilitate the Treasury’s sale of Build America Bonds.

        Mike Selvaggio, Policy Director Office of State Treasurer Ted Wheeler

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