Jackson Jambalaya

The Wall Street Journal had a few things to say yesterday in an editorial about the Build America Bonds program (Hinds County and other Mississippi governments are using the program.):

"Obama Administration and Congress are moving to subsidize even more federal and municipal borrowing through a program called Build America Bonds. These are a new type of state and local municipal bond, authorized by the 2009 fiscal stimulus bill as a temporary way to help open credit markets that were frozen. They no doubt did some good in the crisis, but naturally the politicians can't leave well enough alone and now want to make it permanent.

Unlike traditional munis, these new bonds aren't tax-exempt but rather carry a direct federal subsidy of one-third of their interest payments. Thus on a bond with a 7% interest rate, the issuing city government pays roughly 4.5% of the interest, and the feds pay 2.5%. These bonds also expand the pool of muni bond purchasers to nontaxable entities, such as pension funds, foundations and foreign investors. Conventional munis are mostly purchased by individuals in high-tax brackets. Treasury is proposing to reduce the federal subsidy to 28% of the interest but make it permanent..... (Got that? the federal government is trying to insert itself and take over part of the muni bond market. Wonder how long it will be before the federal government starts placing "conditions" on the subsidy.).

Meanwhile, Wall Street firms have pocketed more than $1 billion in fees in less than a year from selling the bonds. Average underwriting fees are $8.20 per $1,000, according to a March 10 Journal story, compared with traditional tax-exempt fees of between $5 and $6 per $1,000. Goldman Sachs, a major Build America Bonds underwriter with some $10 billion in sales, has taken out advertisements urging Congress to make the program bigger and permanent. This is one banker bonus the politicians don't seem to mind.

We aren't surprised that everyone with government connections is happy when Washington pays cities and states to borrow more money. But no one mentions the downside: Build America Bonds will add hundreds of billions of dollars of new liabilities to the balance sheets of cities, states and Uncle Sam....." Column

Meanwhile, Florida decided to forgo the bonds for now because its not sure if the Feds could take part of the money raised from the bonds for moneys owed it for other programs. Suppose the state had a dispute with the federal government over Medicaid funding and it was argued the state owed $20 million. There is a serious question as to whether the federal government could seize that $20 million from the bond proceeds even though it was for a different program:

"Florida, a frequent issuer of federally subsidized Build America Bonds, is temporarily suspending its use of the highly successful program, state Finance Director Ben Watkins said Thursday.

Mr. Watkins told a Florida municipal bond conference, and then Dow Jones in a telephone interview, that he is "uncomfortable" with an Internal Revenue Service "offset" rule that he believes would let the federal government subtract from the bond subsidy any monies the state may owe it for other programs, such as Medicaid or Medicare.

Mr. Watkins said he has been asking for clarification of the rule for weeks and hasn't received any response other than being "shuffled around."

Given his uncertainty, he said, he decided to cancel a combined sale next week of $265 taxable new-money Build America Bonds and $160 million of tax-exempt refunding bonds..." Article

Hope Hinds County and the rest of Mississippi don't get addicted to this stuff.