The ‘Build America’ Debt Bomb: "
The state and city fiscal mess is getting worse, yet the Obama administration wants Congress to make new taxpayer-subsidized bonds permanent.
By STEVEN MALANGA at Wall Street Journal
EXCERPTS:
Facing declining tax revenue and growing deficits, some local governments suddenly couldn’t borrow. The Obama administration responded with a new kind of taxable bond that offered a 35% federal subsidy on the interest rate. Washington designed the subsidy to appeal to investors such as pension funds and overseas buyers who don’t buy traditional municipal bonds because they can’t take advantage of their tax-free status.
States and cities jumped deeply into this new market. California alone has issued some $21 billion in BABs, mostly as a substitute for its general obligation debt to support everything from school construction to sewer projects.
Illinois was at greater risk of default than Iraq. Yet thanks to the BAB subsidy, Illinois was still able to borrow some $300 million in bonds by offering a 7.1% interest rate.
Joshua Rauh of Northwestern University and Robert Novy-Marx of the University of Rochester assess the 50 states’ unfunded pension bill at $3 trillion, and they say that the municipal tab for pensions could reach $500 billion. That is on top of some $2.8 trillion in outstanding state and local borrowing, according to the Federal Reserve.
FULL ARTICLE
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