WILLIAMSBURG, Va. — One of the Obama administration’s priorities is to get Congress to extend the Build America Bond program and federal officials are convinced BABs will remain a “vibrant market” even if the federal subsidy rate is reduced from its current 35% level, a Treasury Department official said Monday.
Speaking at the National Association of State Treasurers’ annual conference here, Alan Krueger, assistant Treasury secretary for economic policy, said the administration “is committed to seeking a long-term extension” of the BAB program, which is set to expire at the end of the year.
However, Krueger acknowledged that the program faces Republican opposition and will need 60 votes to clear the Senate.
“I’m hopeful that we will see an extension of the BABs program and it continues to be a priority of the administration,” he said.
Krueger fielded questions from issuers and market participants who raised concerns that the BAB program would languish if the subsidy rate is reduced below 35% of interest costs.
“The subsidy rate is going to come down” if the program is extended, he said.
The Treasury Department has calculated that at a 28% subsidy rate, which is below the 30% rate starting in 2012 that is proposed under legislation pending in the House, “there will still be a vibrant market” for BABs, especially for those with long-term maturities, Krueger said.
“I would even venture a guess that [the BAB program] would expand,” he said, as underwriters invest more resources in BABs and investors become more knowledgeable about the securities.
White House’s fiscal 2011 budget request proposed making the BAB program permanent at a 28% subsidy rate, but thus far lawmakers have been reluctant to follow through on that proposal because of associated costs.
Some state treasurers said they are skeptical that the BAB market would remain strong with a reduced subsidy rate.
The 35% subsidy rate worked for issuers and was attractive to the market, said Nevada Treasurer Kate Marshall, adding that it remains to be seen if the market will adapt to a lower subsidy rate.
A reduced subsidy rate would push the cost effectiveness of BABs out along the yield curve, according to Vermont Treasurer Jeb Spaulding.
This means issuers will find BABs savings only in the long-dated maturities, he said.
“From the issuers’ perspective, at some point on the [subsidy] step-down you are going to lose interest from us,” he added.
With the threat of a reduced subsidy rate looming, state and local governments are likely to “issue more BABs later this year,” Krueger said. Oregon officials have already issued more BABs than they had planned to secure the 35% rate, he said.
Some states are preparing for a BAB extension. Washington residents are expected to vote in November on a change to the state’s constitution to allow for more BAB issuance.
The state currently caps its debt in terms of debt-service payments, excluding the federal subsidy rate. When the state issues BABs, the taxable rate is counted against its debt cap.
Washington Treasurer James McIntire said the constitutional change will allow the state to save about $100 million on BABs issued in the next fiscal year.
“It would be a great savings for Washington taxpayers,” he said.