By Larry Jones
February 1, 2010

Former Conference President Chicago Mayor Richard M. Daley introduced the new United States Treasurer Rosie Rios, speaker for the January 22 morning Plenary session. He told the mayors that Rios is someone who understands local governments, having worked for a number of cities and counties over the years managing and directing economic development. Daley said he met her recently when she visited Chicago to announce the city's issuance of $750 million in Build America Bonds (BAB) supported by the America Recovery and Reinvestment Act. Funds raised from the bonds will be used to help build new schools, extend and renovate existing buildings and reduce the city's debt service.

In her presentation, Rios mentioned the Parkland Hospital, the DART Subway system and the convention center in Dallas as good examples of how the program is benefiting cities. These are just a few of a "whole host of projects and activities that have benefited from the BABs program," she noted.

Rios told mayors that many state and local governments are reaping huge benefits from the BAB program, which was one of several programs approved in last year's stimulus bill to help governments gain better access to credit and create new jobs. Under the program state and local governments are allowed to issue taxable bonds for capital projects and receive a direct federal subsidy payment equal to 35 percent of the interest on the borrowing cost.

Rios explained that during the credit crisis, the municipal market was frozen. In March 2009, cities with high bond ratings seeking financing for capital projects faced either excessively high interest rates or no access to financing at any price. She said the BAB program has significantly lowered the borrowing costs for state and local governments.

Rios said that, "many cities have issued BABs and have enjoyed savings in some cases of over 100 basis points on their borrowing costs. And this has provided them some much needed fiscal relief, while at the same time allowing them to move forward with their essential capital investment." In general, she explained that the savings for a ten-year bond are estimated to be 31 basis points and the savings for a 30-year bond are estimated to be 112 basis points.

Between April 3, 2009 and January 1, 2010, state and local use of the program has grown significantly. During that time, Rios said governments have issued $64 billion in BABs, which now account for about 22 percent of municipal bond market. A total of 45 states are participating in the program with a total 779 separate issues. "This is probably one of the most successful projects at Treasury," she said.

Overall, Rios explained that BABs have made municipal debt attractive to new investors and in so doing, they have relieved supply pressure and helped reduced borrowing costs on all classes of municipal debt. She also cited a November 2, 2009 Bond Buyer article that states, "By reducing new-issue supply in the tax-exempt market, they have had the effect of lowering yields there. Estimates of the effect of BABs on tax-exempt yields are in the neighborhood of 20 to 30 basis points or more."

Rios closed by reminding mayors of other bond provisions in the American Recovery and Reinvestment Act available to cities including: