(The Bond Buyer) – A draft bill released by House Ways and Means Committee chairman Sander Levin late Monday would authorize over $5 billion in new bond authority for renewable energy projects and open the door for private-activity bonds to be used by states and localities to finance energy-efficient upgrades to residential homes.

The bill does not include highly sought extensions of several high-profile bond programs that were authorized by the American Recovery and Reinvestment Act — including Build America Bonds.

But that’s no reason to panic, according to sources and market participants, who remain optimistic that lawmakers will take another crack at legislation extending BABs and other expiring tax-law provisions during the coming weeks.

BABs were excluded from the energy bill primarily because they are not energy-related, a congressional source said.

The House had approved a two-year extension for BABs in jobs legislation it passed last month. But the BABs and other bond program and tax law extensions were carved out of the legislation after lawmakers in the Senate failed to garner enough votes to limit debate and avoid a filibuster. President Obama signed the much narrower bill last week.

The draft Domestic Manufacturing and Energy Jobs Act of 2010 unveiled by Levin would authorize an additional $3.5 billion of clean renewable energy bonds, 60% of which would be allocated to public power providers with the remaining 40% going to rural electric cooperatives.

It also would expand the use of CREBs to include energy storage systems and certain biogas equipment. CREBs can be issued as either tax-credit bonds or direct-pay bonds like BABs.

In the direct-pay mode, issuers would receive subsidy payments equal to 70% of interest costs.

The Joint Tax Committee estimated the CREBs provision would cost $1.391 billion over 10 years.

The Levin draft legislation also would authorize $2.4 billion of a new type of tax-credit bond — home energy conservation bonds — that the Treasury Department would allocate to state and local governments.

The bonds could be used to finance residential energy-efficiency assistance programs, provided at least 20% of the proceeds are used to make low-income energy efficiency assistance grants and loans, and at least 10% are used to make “very low-income residential energy efficiency assistance grants,” according to the legislative text.

Like CREBs, issuers would have the option of issuing the bonds as tax-credit or direct-pay bonds.

The provision is estimated to cost $1.252 billion over 10 years.

The legislation also would allow states and localities to issue private-activity bonds to finance homeowner energy-efficiency upgrades and retrofits as part of a property assessed clean-energy program.

The PACE programs have been adopted by 21 states and the District of Columbia. Under the programs, tax-exempt bond proceeds are used to finance the “green” upgrades and are eventually paid back by homeowners via a special assessment on their property taxes.

The provision is estimated to cost $730 million over 10 years by the Joint Tax Ccommittee.

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(FOX Business News) – In case you haven’t noticed, there are BABs in Bondland.

“Build America Bonds” were created by Congress under The American Recovery and Reinvestment Act passed last year.(1) They’re municipals with a twist: unlike traditional bonds issued by state and local governments, the interest on BABs is taxable instead of tax-free. As you might expect, this makes them pretty unattractive to typical muni investors, that is, folks in the top tax brackets looking to avoid losing more than a third of the interest earned to federal income tax.

None-the-less, non-traditional buyers, those who pay no or little federal income tax, are snapping them up.

Craig Brandon, manager of Eaton Vance’s Build America Bonds mutual fund, says BABs have created “a whole new market” of municipal-bond investors, including pension funds, foreign governments and corporations, as well as individual investors in the lower tax brackets.

To make it more affordable for cash-strapped cities and states to take on new debt, the federal government is picking up part of the interest- a total of 35-percentage points.(2) Thus, if the interest on a BAB is 5%, the cost to the issuer is 4.65% (5.00%-.35%). The investor, of course, receives the full 5%.

According to Mallas, approximately $121 billion of BABs have been issued since the first one came out in April 2009. By law, the money raised must be used to fund construction projects; fulfilling the goal of “stimulating” the economy by creating jobs.

So what’s not to love?

For one thing, just because the federal government is subsidizing the interest payments, don’t confuse a BAB with a Treasury bond.

“We’re hearing that retail investors think this is security guaranteed by the U.S. treasury or U.S. government,” says Mallas. “It’s not.” Neither the interest payments nor the return of principal are guaranteed, although he stresses that the municipal bond market has historically had a very low default rate.

Brandon maintains that, despite the fact that state and local governments are grappling with the worst budget shortfalls in history, it’s unlikely we’ll see a surge in defaults.

Take the extreme case: California. “If you’re the state of California, [defaulting] only gets you $5-6 billion… when you have a $20 billion hole,” Mallas says. “If you eliminate 100% of California’s debt, hat only solves 25% of its deficit problem. They have a spending problem, not a debt problem.”

Both managers assert that for investors who don’t need tax-exempt income, BABs offer a way to diversify bond holdings and potentially reduce your overall risk. Although T. Rowe Price doesn’t have a mutual fund specifically devoted to Build America Bonds, Mallas says they are held by some of the firm’s taxable bond funds.

In addition, BABs might pay you higher income than a corporate bond with a similar risk rating. Brandon points to an A1-rated state of Illinois BAB issued last week with a yield of 7.11% and a maturity date of 2035. By comparison, an Abbot Labs corporate bond due in 2039 and trading in the secondary market has the same rating but a yield of just 5.16%.

He adds, “I’m not saying ‘Sell all of your corporate bonds.’ [I’m suggesting you] diversify some risk [by moving into] the muni market and picking up a little more income.”

Next week: BABs are not without controversy. Unless Congress acts, the federal subsidy- and, thus, the issuance of new BABs- expires at the end of this year. Why you might be glad if that happened did.

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(GovMonitor) – Some recent press coverage has provided a misleading picture about a successful Recovery Act program, Build America Bonds (BABs).

BABs have proven to be an effective financing tool that have enabled municipalities fund critical infrastructure projects at a time when they were facing severe financing challenges.

A New York Times piece this week, for example, argued that, “Wall Street banks are charging larger commissions for selling Build America Bonds than they do for normal municipal bonds.” While this was true when the program first started, BABs underwriting fees have declined over time and in the past few months have fallen in line with those for tax-exempt bonds (see chart below).

There are economic reasons why BABs underwriting fees may have started out high and then come down: underwriters took on risk with a new product and had to bear start-up costs and devote resources to educate investors for their initial offerings.

Regardless of the reasons, competition appears to have lowered fees substantially.

More importantly, BABs have saved money for taxpayers in virtually every state, even taking into account underwriting fees. BABs issued to date have saved state and local governments more than $12 billion in borrowing costs, which exceeds the subsidy cost to Treasury.

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(PRNEwswire) – John Hancock Financial Services has further expanded its participation in the Build America Bonds program, completing more than 60 transactions that will help state and local entities across the United States rebuild their infrastructure as well as further strengthening the economic recovery of the nation as a whole.

Since the program’s April 2009 inception as part of The American Recovery And Reinvestment Act, John Hancock has invested more than $2.6 billion in transportation, utility and higher education projects as well as general obligation investments across the United States.

The company said it expects to continue making investments in capital projects through the program through the rest of this year, when the program is currently scheduled to end.

“We remain firm supporters of the Build America Bonds program,” said Scott Hartz, Executive Vice President of John Hancock Bond and Corporate Finance Group. “We are pleased to see the U.S. economy show signs of continued improvement. We regard the program, which opened conventional corporate debt markets to state and local governments, as a win-win for all participants, and we believe it helped the overall recovery.”

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SIFMA announces a one-day conference titled ‘Build America Bonds : Infrastructure Investment & Jobs on April 15th from 2:00 – 5:00 pm at The Newseum, 555 Pennsylvania Avenue NW, Washington D.C. The conference will be followed by a reception.

Build America Bonds—BABs—have become one of the biggest success stories of last year’s American Recovery and Reinvestment Act. Under the BABs program states and localities have financed nearly $80 billion of new investment in schools, roads, water and sewer systems and other key public infrastructure resulting in thousands of new jobs. The cost to the federal government is a fraction of the total amount invested.

Come to this special event to hear from federal, state and local officials and market participants on why BABs have become such a successful example of intergovernmental partnership and how extending the program past its 2010 expiration can promote capital investment and create jobs.

The event is free to SIFMA members and invited guests. For registration questions, call Lisette Rios at 212.313.1210 or email at lrios@sifma.org. For program information, contact Michael Decker at 202-962-7430 or email at mdecker@sifma.org.

Click here to Register.

Program Information & Schedule

(US Treasury) – The U.S. Department of the Treasury today released a new report showing that the Build America Bonds program has resulted in significant savings in borrowing costs for state and local governments. The report finds that Build America Bond issuers will save more than $12 billion in borrowing costs on bonds issued during the first year of the program as compared to issuing tax exempt debt. In addition, the Treasury Department today released its monthly comprehensive update on Build America Bonds issuances, showing more than $90 billion have been issued through March 31, 2010.

“Build America Bonds continue to save money for state and local governments and enjoy broad support in the market,” said Alan B. Krueger, Assistant Secretary for Economic Policy at the Treasury Department. “Expanding and making this program permanent, as the President proposed in the Budget, will further improve the long-term functioning of the municipal bonds market and create a more efficient and effective municipal finance sector.”

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.

Build America Bonds have had a very strong reception from both issuers and investors. From the inception of the program in April 2009 to March 31, 2010, there have been 1,066 separate Build America Bonds issuances in 48 states for a total of more than $90 billion. According to Treasury’s report out today, for the $90 billion of Build America Bonds issued, state and local governments will save $12.3 billion in the net present value of borrowing costs compared with issuing traditional tax-exempt bonds. The report also shows the decline in the underwriting cost of issuing Build America Bonds to a level more closely aligned with traditional tax exempt bonds.

These findings provide evidence that President Obama’s proposal to make the Build America Bonds program permanent would likely lead to continued savings on borrowing costs for state and local governments.

Read the Press Release…

View the Full Report…

(Bond Buyer) WASHINGTON — President Obama Thursday signed a $17.6 billion jobs bill that enables municipal issuers to receive direct, Build America Bond-style payments from four types of tax-credit bonds.

But Obama said the new law is “by no means enough” and “there’s a lot more that we’re going to need to do,” just one day after the House Ways and Means Committee cleared a second jobs bill.

That bill would extend the BAB program through April 1, 2013, at a reduced subsidy rate. It also would exempt all private-activity bonds issued through 2011 from the alternative minimum tax, exempt all PABs sold for water and sewer facilities from state volume caps, allow tribal governments to sell such PABs, and double the size of recovery zone bond programs to $50 billion.

“With this law, we’ll make it easier for [state and local governments] to raise the money they need to do what they want to do by using a model that we’ve called Build America Bonds — one of the most successful programs in the Recovery Act,” Obama said.

The Hiring Incentives to Restore Employment Act allows issuers of qualified school construction bonds, qualified zone academy bonds, new clean renewable energy bonds and qualified energy conservation bonds to opt to receive direct subsidy payments from the federal government instead of offering investors a tax credit.

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(CNNMoney.com) — Now that it’s taken its first baby step towards creating jobs, Congress is looking at more measures to spur employment.

Don’t expect any blockbuster bills with inventive hiring initiatives. With partisan politics dominating Capitol Hill, lawmakers are concentrating on bite-sized bills that are easier to pass. Most of the measures merely extend or expand existing laws.

In the House, members are expected to take up legislation next week that contains a medley of tax benefits for small businesses, including a provision allowing entrepreneurs to deduct up to $20,000 of startup costs, up from $5,000 currently.

The bill also focuses on making infrastructure projects easier and less costly for states and cities to fund. For instance, the legislation would extend through 2013 the Recovery Act’s popular Build America Bonds program, which has financed more than $78 billion in projects as of March 1.

“Small businesses are an important engine of our economy and this bill combines a number of proposals to help them grow and free up resources to hire new workers,” said Rep. Sander Levin, D-Mich., the bill’s sponsor. “This bill also extends effective financing measures like the Build America and Recovery Zone Bonds so that they can continue creating new jobs while making critical improvements to our communities.”

In the Senate, the chamber will take up a small business measure in mid-April. It is still being crafted, a leadership aide said.

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(US Treasury Department) – The U.S. Department of Treasury and the Department of Education today announced $11 billion in allocation authority to issue qualified school construction bonds under the American Recovery and Reinvestment Act of 2009 (Recovery Act). Qualified school construction bonds can be used to finance the construction, rehabilitation or repair of a public school facility or for the acquisition of land where a school will be built.

“Recovery Act school construction bonds provide low-cost borrowing to build and upgrade schools, which is a win-win for communities across the country,” said Deputy Treasury Secretary Neal Wolin. “The projects funded with these bonds create jobs today building modern schools to prepare our kids for the global economy of tomorrow.”

“Preparing students to compete in the global economy requires improvements in all aspects of our nation’s education system, including the environments in which they learn,” added Education Deputy Secretary Tony Miller. “The Recovery Act is keeping teachers in the classroom and, through the construction bond program, making lasting investments in the quality of our schools. Our kids deserve no less.”

Created by the Recovery Act, qualified school construction bonds help state and local governments obtain low-cost financing for much needed public school improvements and construction. Investors who buy these bonds receive Federal income tax credits at prescribed tax credit rates in lieu of interest. These tax credit bonds essentially allow state and local governments to borrow without incurring interest costs.

The Recovery Act provided for the issuance of $11 billion of qualified school construction bonds by states and large local educational agencies in 2009 and $11 billion in 2010. The 2010 allocations include $6.6 billion of bonding authority to the 50 states and the remaining $4.4 billion of volume cap to 103 large local educational agencies under a statutory formula tied to levels of federal education grant funding.

2010 Allocations to States of Volume Cap for Qualified School Construction Bonds

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(Dow Jones)–U.S. House Ways and Means Committee Chairman Sander Levin put forth draft legislation that would provide small businesses with a range of tax incentives, aimed at spurring job growth.

The legislation also includes an extension of the Build America Bonds Program from 2011 through 2013.

“Small businesses are an important engine of our economy and this bill combines a number of proposals to help them grow and free up resources to hire new workers,” the Michigan Democrat said in a statement.

One of the top incentives include a 100% exclusion of small business capital gains tax “for qualifying stock acquired after March 15, 2010 and before January 1, 2012,” according to a summary of the legislation.

The American Reinvestment and Recovery Act had already increased the exclusion percentage threshold for qualified investments from the original 50% to 75% for qualifying stock acquired in 2009 and 2010.

Regarding the bond program, state and local governments issued more than $64 billion in Build America Bonds in 2009, after Congress created the program as part of last year’s economic-stimulus program. Funds raised through the bond issuances have helped fill holes in state and local project financing, as demand for tax-exempt bonds has lagged behind. Levin said the extension would help create “new jobs while making critical improvements to our communities.”

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