Grassley: Congress Should Understand Spending on Build America Bonds, Including Wall Street Fees

Statement

Senator Chuck Grassley today made the following comment about the House "jobs" legislation's expansion of the Build America Bonds provision. The Senate could take up the House bill this week. Grassley also released two responses from Goldman Sachs to his inquiries about the fees Goldman Sachs has received from Build America Bonds.

"Build America Bonds were created in the stimulus last year as a temporary program. A recently-passed House bill included an expansion. The Senate then passed a further expansion and sent the bill back to the House. The House took the Senate's bill and made it richer. Now a temporary program is becoming bigger, and Wall Street is seeking to make it permanent. Wall Street is profiting and cheering the expansion.

"Build America Bonds result in higher underwriting fees for the Wall Street banks that underwrite the bonds than for traditional tax-exempt bonds. According to Bloomberg News, Build America Bonds provide 37 percent higher underwriting fees to the large Wall Street banks when compared with traditional tax-exempt bonds. According to an article in today's Wall Street Journal, Wall Street banks have made more than $1 billion in underwriting fees on Build America Bonds deals in less than a year. The taxpayers pay for those lucrative fees to Wall Street.

"Build America Bonds are portrayed as an easy way to help school kids and green energy. What's left out is that this is a spending program disguised as a tax cut, getting bigger each year, and Wall Street takes a healthy share. In an era of bailouts and disgust with government spending, House members should have to answer for giving yet more taxpayer dollars to Wall Street and foreign investors. Senators should understand the vote they're about to take."

Background on Build America Bonds:

The 2009 stimulus bill created the Build America Bonds program on a temporary basis, and provides a check from the Treasury Department to the state or local government that issues the bonds equal to 35 percent of the interest costs on the bonds. The President has proposed in his fiscal year 2011 budget to make the Build America Bonds program permanent but at a reduced 28 percent subsidy level. The House passed a "jobs" bill that would expand the Build America Bonds program created in the 2009 stimulus bill to two tax-credit bonds -- Qualified School Construction Bonds and Qualified Zone Academy Bonds. The Senate then expanded the House bill to cover two additional tax-credit bonds -- Qualified Energy Conservation Bonds and Clean Renewable Energy Bonds, and set the federal subsidy for interest costs at 45 percent (65 percent for small issuers, defined as those issuing less than $30 million in bonds per year). Just last week, the House increased the subsidies from the Senate bill to 100 percent for Qualified School Construction Bonds and Qualified Zone Academy Bonds, and 70 percent for Qualified Energy Conservation Bonds and Clean Renewable Energy Bonds. The increase in the subsidy percentages made by the House increased the cost of the Build America Bonds provision by more than $2 billion. The subsidy has gone from big, bigger, to biggest. Under the House bill, the outlays, which are scored as spending by the Congressional Budget Office, from these bonds will be $13.2 billion through 2020, which will be paid for by federal taxpayers.

Build America Bonds have been popular with industry and states because they are uncapped and provide higher subsidies to local governments and foreign investors than traditional tax-exempt bonds. The Congressional Budget Office originally underestimated the popularity and had to issue a revised cost estimate of an additional $26 billion. The bonds in the Senate and House "jobs" bills are capped, but the subsidy for the interest expense on school projects in the House bill could cost the federal government more than 100 percent of the financing cost in some cases. This is because unlike with tax credit bonds, where the federal government collects revenue from taxpayers that have to include the tax credits in income, revenue is not collected from investors such as foreigners, pension funds, or other tax-exempt entities that make up the majority of the holders of Build America Bonds.

Attached are Goldman Sach's responses to Senator Grassley's inquiry on Build America Bonds. Following is his initial inquiry.

Source