Build America Bonds

State and local governments have started to issue Build America Bonds (BAB), a new form of debt created by the economic stimulus plan for public improvement projects.

As of June, 45 percent of the taxable debt's proceeds have been earmarked for general public improvement projects, 30 percent have gone to transportation and 16 percent to education, according to the Municipal Securities Rulemaking Board.  Approximately 84 issuances have occurred to date totalling almost $12 billion. 

Issuance of the bonds is limited to infrastructure improvements. The bonds offer issuers a direct federal payment equal to 35 percent of interest, which helps keep debt costs low. The IRS issued Notice 2009-26, which provides guidance BABs to enable state and local governments to begin using this program. This notice includes guidance on eligible types of projects and financings, initial implementation of the direct federal subsidy payment procedures, elections to use this program and information reporting for this program.

In addition, the IRS released a new form to claim the federal subsidy payment. Issuers can expect to receive requested payments within 45 days after the IRS receives the new Form 8038-CP, Return for Credit Payments to Issuers of Qualified Bonds. BABs can be issued in 2009 and 2010. There is no volume limitation on the amount of eligible bonds that can be issued during this period.