Stealth finances: Is the U.S. Government bailing out the states and their public employees by offering China taxpayer-paid discounts on bonds? (updated)
UPDATE(02): 11-18-10 BROKEN STATE OF CALIFORNIA SWITCHES TO BABs ...
"[California] on Wednesday said it would cut the size of a sale of traditional tax-exempt bonds by $750 million to $1 billion, shifting the borrowing to a planned sale of taxable debt, which will price on Friday. Of the $2.75 billion of taxable debt it is now selling, some $2.5 billion will be BABs." <Source>
UPDATE(01): 11-05-10 COINCIDENTLY, THE TREASURY DEPARTMENT UPPED THE ANTE TODAY ...
"The U.S. Department of the Treasury today released its comprehensive monthly update on Build America Bonds issuances, including state-by-state data, showing that more than $150 billion have been issued through October 31, 2010. Build America Bond issuers benefit from substantial savings in borrowing costs when compared to issuing tax-exempt debt." <Source>
Original Blog Entry ...
There is no doubt in my mind that the mainstream media is mainly composed of reporters who are more interested in their audience stats than they are in providing financial news to their respective audiences. Reveling in celebrity, sex and the bizarre to capture the largest possible audience share. Against this background, very few of us has the time and inclination to research arcane and strangely-worded government media releases.
Here is one obscure Treasury Department media release which does not explain the obvious … the government is already assisting in bailing out the states – actually by encouraging even more borrowing -- and may be rewarding China in the process.
From the Treasury Department (June 3, 2010) …
Treasury Releases New Build America Bonds Data
Recovery Act Bonds Program Provides $106 Billion Nationally to Date, Estimated to Save State and Local Governments Billions Compared to Tax Exempt Bonds
WASHINGTON – The U.S. Department of the Treasury today released its monthly comprehensive update on Build America Bonds issuances, including state-by-state data, showing $106 billion has been issued through May 31, 2010. Build America Bond issuers benefit from substantial savings in borrowing costs when compared to issuing tax-exempt debt.
The Build America Bonds program, created by the American Recovery and Reinvestment Act, allows state and local governments to obtain much-needed financing at lower borrowing costs for new capital projects such as construction of schools and hospitals, development of transportation infrastructure, and water and sewer upgrades.
Under the Build America Bonds program, the Treasury Department makes a direct payment to the state or local governmental issuer in an amount equal to 35 percent of the interest payment on the bonds.
How does it really work …
Authorized by the American Recovery and Reinvestment Act Build America of 2009, Build America Bonds, or BABs as they are colloquially called, are municipal bonds whose income is fully taxable to the bondholder but carry special offset tax credits for bondholders and federal subsidies to the bond issuer.
There are two types of BABs:
One, the “Tax Credit” BAB. provides a Federal subsidy to investors equal to 35% of the interest payable by the issuer. And two, the “Direct Payment” BAB, which provides a direct Federal subsidy that will be paid to state and local governments in an amount equal to 35% of the interest.
Both types of BABs must be issued before January 1, 2011 – although the program is likely to be extended by Congress in the upcoming lame duck session.
The Treasury Department explains …
“Build America Bonds are a new financing tool for state and local governments. The bonds, which allow a new direct federal payment subsidy, are taxable bonds issued by state and local governments that will give them access to the conventional corporate debt markets. At the election of the state and local governments, the Treasury Department will make a direct payment to the state or local governmental issuer in an amount equal to 35 percent of the interest payment on the Build America Bonds. As a result of this federal subsidy payment, state and local governments will have lower net borrowing costs and be able to reach more sources of borrowing than with more traditional tax-exempt or tax credit bonds. “
“For example, if a state or local government were to issue Build America Bonds at a 10 percent taxable interest rate, the Treasury Department would make a payment directly to the government of 3.5 percent of that interest, and the government’s net borrowing cost would thus be only 6.5 percent on a bond that actually pays 10 percent interest.”
“This feature will make Build America Bonds attractive to a broader group of investors, and therefore create a larger market than typically invest in more traditional state and local tax-exempt bonds, where interest rates, due to the federal tax exemption, have historically been about 20 percent lower than taxable interest rates. They should be attractive to investors without regard to their tax status or income tax bracket (e.g., pension funds and other tax-exempt investors, investors in low tax brackets, and foreign investors).”
But you would never know it from the legislative language …
SEC. 54AA. BUILD AMERICA BONDS.
(a) IN GENERAL.—If a taxpayer holds a build America bond on one or more interest payment dates of the bond during any taxable year, there shall be allowed as a credit against the tax imposed by this chapter for the taxable year an amount equal
‘(b) AMOUNT OF CREDIT.—The amount of the credit determined under this subsection with respect to any interest payment date for a build America bond is 35 percent of the amount of interest payable by the issuer with respect to such date .
(c) LIMITATION BASED ON AMOUNT OF TAX.—
(1) IN GENERAL.—The credit allowed under subsection (a) for any taxable year shall not exceed the excess of— (A) the sum of the regular tax liability (as defined in section 26(b)) plus the tax imposed by section 55, over ‘(B) the sum of the credits allowable under this part (other than subpart C and this subpart).
(2) CARRYOVER OF UNUSED CREDIT.—If the credit allowable under subsection (a) exceeds the limitation imposed by paragraph (1) for such taxable year, such excess shall be carried to the succeeding taxable year and added to the credit allowable under subsection (a) for such taxable year (determined before the application of paragraph (1) for such succeeding taxable year).
(f) SPECIAL RULES.—
(1) INTEREST ON BUILD AMERICA BONDS INCLUDIBLE IN GROSS INCOME FOR FEDERAL INCOME TAX PURPOSES.—For purposes of this title, interest on any build America bond shall be includible in gross income.
(2) APPLICATION OF CERTAIN RULES.—Rules similar to the rules of subsections (f), (g), (h), and (i) of section 54A shall apply for purposes of the credit allowed under subsection (a).
(g) SPECIAL RULE FOR QUALIFIED BONDS ISSUED BEFORE 2011.—In the case of a qualified bond issued before January 1, 2011—
(1) ISSUER ALLOWED REFUNDABLE CREDIT.—In lieu of any credit allowed under this section with respect to such bond, the issuer of such bond shall be allowed a credit as provided in section 6431.
Bottom line …
More borrowing … While shrouded in governmentalese, it appears that the federal government is encouraging the individual states to encumber themselves with even more debt to both paper over existing budgetary deficits and to keep public employees working on government-controlled projects. All at taxpayer expense and without taxpayer approval.
It also appears that the largest holders of these bonds are not individuals but foreign central banks, foreign commercial banks, insurance companies and mutual funds as they are yielding 2% more than corresponding Treasury Securities – and thus are extremely attractive to the global wealth pool seeking both safety and yield.
In the just-passed election cycle of 2010, I urged voters to elect “honest brokers” to serve “we the people.” I now urge all taxpayers to demand that their legislators support “single-purpose” bills which do not contain loopholes, exceptions, special provisions and are not written in governmentalese.
It is our government, our money and they should be working for us – not the public employees unions and special interests.
Reference Links …
- Table 1: BAB Issuances and Volumes
- Table 2: BAB Issuances and Volumes by State Between Program Inception
- Table 3: State Detail
“Nullius in verba.”-- take nobody's word for it!
“Beware of false knowledge; it is more dangerous than ignorance.”-- George Bernard Shaw
“Progressive, liberal, Socialist, Marxist, Democratic Socialist -- they are all COMMUNISTS.”
“The key to fighting the craziness of the progressives is to hold them responsible for their actions, not their intentions.” – OCS "The object in life is not to be on the side of the majority, but to escape finding oneself in the ranks of the insane." -- Marcus Aurelius “A people that elect corrupt politicians, imposters, thieves, and traitors are not victims... but accomplices” -- George Orwell “Fere libenter homines id quod volunt credunt." (The people gladly believe what they wish to.) ~Julius Caesar “Describing the problem is quite different from knowing the solution. Except in politics." ~ OCS
“The key to fighting the craziness of the progressives is to hold them responsible for their actions, not their intentions.” – OCS
"The object in life is not to be on the side of the majority, but to escape finding oneself in the ranks of the insane." -- Marcus Aurelius
“A people that elect corrupt politicians, imposters, thieves, and traitors are not victims... but accomplices” -- George Orwell
“Fere libenter homines id quod volunt credunt." (The people gladly believe what they wish to.) ~Julius Caesar
“Describing the problem is quite different from knowing the solution. Except in politics." ~ OCS