* New bonds to be modeled after BABs
* Lack of details on new bonds
* Sequestration to affect BABs subsidies
WASHINGTON, Feb 22 President Barack Obama's plan
to launch a new bond program to fund infrastructure such as
bridges and roads may threaten the tax-exempt status of the U.S.
municipal bond market, issuers and analysts said on Friday.
The new bonds would be called America Fast Forward and be
modeled after a popular state and local financing program from
the 2009 economic stimulus plan, the taxable Build America Bonds
(BABs), according to the White House.
For nearly two years, Build America Bonds caught on like
wildfire. Issuers eager to take advantage of the federal rebates
that were equal to 35 percent of the interest paid on the bonds
sold $181 billion BABs over the 20 months of the program's
"To the extent that his proposal...gives us another tool in
our tool box, we are for it. We would welcome it," said Virginia
Treasurer Manju Ganeriwala, who is also president of the
National Association of State Treasurers.
But she added, "I'm cautious. It does worry me. I'm hopeful
this is another tool, in addition to what we have."
For most of his time in office, Obama has suggested a
reduction of the tax breaks on the municipal bond market. In
particular he suggested capping the value of the tax exemptions
for interest paid by municipal bonds. As the country reached the
"fiscal cliff" at the end of 2012, the idea of capping the
exemption gained in popularity among lawmakers seeking to raise
The $3.7 trillion municipal bond market provides a vital
source of funding to local governments. Cities, states and local
governments who sell tax-exempt bonds have stood shoulder to
shoulder with investors in a fight to maintain the exemption.
They say limits to the exemption drive up borrowing costs
for places already financially struggling and break promises to
As the federal government is seeking ways to cut its
spending, issuers are skeptical about Obama's intent in the Fast
Forward bonds. According to some estimates, the tax-exemption
cost the Treasury around $140 billion a year.
The BABs program "made up only a small portion of the total
number of municipal bonds that were issued to support
infrastructure development and repair. Build America Bonds was,
and remains, no substitute for municipal bonds," said Clarence
Anthony, executive director of the National League of Cities, in
a statement issued hours after Obama released his proposal.
The broad intent of the new plan is murky and so are many of
the details. The plan by Obama did not give a rebate amount for
the bonds and did not say if the rebates would be sheltered in
federal budget cutting.
Last year, issuers were shocked to learn their federal BABs
payments are subject to sequestration, the automatic spending
cuts slated to begin on March 1. If sequestration takes effect
there will be a 7.6 percent reduction in the subsidies paid to
issuers of the bonds.
Since the BABs program ended in December 2010, Obama has
suggested bringing it back in his annual budget proposals and
members of Congress have drafted legislation reviving it. All
proposals have included lowering the rebates issuers receive.
William Daly, head of governmental affairs for the National
Association of Bond Lawyers, pointed out the
Republican-dominated House of Representatives could like Obama's
suggestion to include private-activity bonds in the Fast Forward
program. Those bonds are issued for projects outside of typical
civic works, such as building a stadium, and the inclusion would
be considered "business friendly."
The Democratic-led Senate will take up Obama's proposal when
it will consider a global tax reform, according to a staff
Municipal analysts at Morgan Stanley Smith Barney said in a
note on Friday "the newly proposed legislation will encounter
resistance in the House."
Meanwhile, Barclays municipal analysts said in a research
note that "the probability of achieving large-scale tax reform
has diminished greatly."
That would mean that the threat to the interest exemption is
weaker, but "along the same vein, we believe the likelihood of a
new BAB program is very low, given Republican opposition."