Build America Bond
Build America Bonds (BABs) were taxable municipal bonds introduced under the American Recovery and Reinvestment Act of 2009 that provided federal interest subsidies to state and local government issuers, allowing them to access the broader taxable bond market at competitive rates while supporting infrastructure investment during the post-financial-crisis recovery.
Build America Bonds were a temporary federal program authorized from April 2009 through December 31, 2010. Unlike conventional tax-exempt municipal bonds whose benefit flows to investors in the form of lower pre-tax yields, BABs were taxable instruments for investors. The federal government compensated issuers directly: under the Direct Payment BAB structure (the dominant form), issuers received a refundable federal subsidy equal to 35% of their annual interest cost, reducing the net borrowing cost substantially even on taxable yields that competed with corporate bonds.
The program achieved its intended objective of expanding the pool of buyers for municipal debt. Traditional tax-exempt municipal bonds attract mainly high-income U.S. retail investors and domestic institutions for whom the tax exemption is most valuable. Taxable BABs attracted pension funds, insurance companies, and foreign investors — particularly sovereign wealth funds and central banks — who derive no benefit from the U.S. federal tax exemption. This broader demand base lowered all-in borrowing costs for issuers who chose BABs over conventional tax-exempt bonds.
Approximately $180 billion in Build America Bonds were issued during the two-year program, making it a significant but brief episode in U.S. municipal finance history. States, cities, school districts, and special purpose entities issued BABs to finance highways, bridges, schools, hospitals, water systems, and public transit projects. The program is widely credited with accelerating infrastructure investment at a moment when state and local governments were under severe fiscal stress from declining tax revenues during the Great Recession.
After the program expired, BABs remained outstanding in the secondary market as a distinct asset class. Because they are taxable and carry the general obligation or revenue pledge of state and local governments, they occupy a unique niche: higher-yielding than tax-exempt munis (since no tax advantage), but backed by the same credit base. Institutional investors seeking taxable income with municipal credit quality hold legacy BABs as a permanent component of diversified bond portfolios.
Various proposals to revive Build America Bonds or similar direct-pay taxable municipal bond programs have been introduced in Congress in the years since expiration, reflecting the view that federal subsidy mechanisms can mobilize broader investor capital for infrastructure at potentially lower net cost than conventional tax-exempt financing in low-rate environments.