Thursday, November 5, 2009

A Subsidy To Nowhere

The Obama administration's support for local government debt was launched in the thick of the credit crunch, as an effort to keep debt markets open to municipalities. In that, it succeeded: states and cities have relied on the Build America Bond program to sell more than $47 billion in bonds since March. But it's an expensive and questionable subsidy, said Philip Condon, head of municipal bond management at DWS Investments, the asset management arm of Deutsche Bank. He expects the support to get trimmed.

Unlike other municipal debt, Build America Bonds are taxable. They pay a higher interest rate than tax-free municipal bonds but are a cheaper form of borrowing for cities and states, because the federal government picks up 35% of the interest payments. The support has come in especially handy for cash-strapped California, which has sold more than $7 billion. The state is currently marketing $908 million of the bonds in a sale managed by Citigroup

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