States, local governments press to extend BABs

WASHINGTON (Reuters) - As the future of the taxable Build America Bonds program hangs in limbo, states and local governments are pressing the U.S. Congress to extend it beyond the end of the stimulus plan in December.

The debt, which was created in the American Recovery and Reinvestment Act passed last year, pays issuers a federal rebate equal to 35 percent of interest costs.

"We believe most strongly that such an extension is both prudent and necessary, and we urge you to identify another legislative vehicle to which to attach the BABs provisions," said a coalition of state, county and city groups in a letter sent to the leading members of the Senate Finance Committee on Friday.

"BABs have given a much-needed boost to state and local governments at a time when their budgets are under nearly-unprecedented strain," said the groups, which include the National Association of State Treasurers and the U.S. Conference of Mayors.

Legislation containing a provision that would have extended the program for two years and gradually reduced the subsidy to 30 percent stumbled last month in the Senate. An extension has already been approved in the House of Representatives, and President Barack Obama is pressing to make the debt permanent, albeit at a lower subsidy of 28 percent, which the U.S. Treasury considers revenue neutral.

The Senate BABs measure was attached to a jobs and tax bill that fiscal conservatives blocked from reaching the floor for a vote over concerns that some of the legislation's spending parts would contribute to the U.S. deficit.

Those objections "have nothing to do with the BABs themselves," the groups said.

Currently, Congress is on a recess after the Independence Day holiday. The Senate could take up the BABs provision when it returns, attaching it to another piece of legislation.

In the first half of 2010 states, cities and other authorities sold $51.8 billion of BABs. Since BABs debuted in April 2009, sales have reached nearly $115 billion, according to the Thomson Reuters.

The debt has been lauded by some for easing the credit crisis that gripped states and local governments at the end of 2008. As investors shied away from buying traditional tax-exempt debt, interest costs became prohibitively expensive and many issuers were unable to borrow.

Because they are taxable, the bonds brought in new buyers who did not need the tax exemptions provided by most municipal debt.

(Reporting by Lisa Lambert; Editing by Leslie Adler)