A Network of the National Association of State Treasurers
101 Brief:

Direct Subsidy Bonds

Street in Midtown Manhattan

Unlike traditional municipal bonds, direct subsidy bonds are generally taxable, but include a federal subsidy to the issuer worth a portion of the interest costs. In theory, the taxable nature of these bonds come with higher interest rates that are attractive to a larger buyer class similar to corporates. The federal subsidy compensates the issuer for the added interest costs. While direct subsidy bonds are an interesting tool in the state finance toolbox, issuers should be aware that previous iterations of bond subsidies have been sequestered by the federal government pushing considerable and unplanned added costs onto issuers.

Background

The American Recovery and Reinvestment Act (ARRA) of 2009 created a temporary bond financing program for issuers known as Build America Bonds (BABs). The program sunset in 2010. These bonds came with a 35 percent subsidy to issuers that helped spur infrastructure investment during the height of the recession. The Budget Control Act of 2011 (BCA) enacted mandatory spending cuts (sequestration) in 2013 that included a drastic reduction to BAB subsidies that continues to challenge certain issuers. Since the Great Recession, there have been considerable efforts to restore a permanent direct subsidy bond program.

Current Efforts

In 2020, the House passed a large infrastructure package, known as the Moving America Forward Act, which included a provision to include a direct subsidy bond program known as Qualified Infrastructure Bonds (QIBs). QIBs came with an initial generous subsidy of 42 percent that gradually ramped down to 37 percent by 2027. The package also included language to protect subsidies from future sequestration. While the bill passed the House, it was not taken up by the Senate.

American Infrastructure Bonds
Senator Wicker (R-MS) and Senator Bennet (D-CO) have lead efforts in the Senate to bring back a new permanent direct subsidy bond program. The American Infrastructure Bonds Act of 2021 would allow for taxable “American Infrastructure Bonds” (AIBs) that come with a set 28 percent subsidy rate. The legislation offers language to guard against future sequestration threats.

No standalone direct subsidy bond bill currently exists in the House, but Congresswoman Sewell (D-AL) has introduced a three-part bill that includes a very similar program. The LIFT Act would restore advance refunding bonds, modernize bank qualified debt and create a version of AIBs with a starting subsidy of 42 percent that winds down to 30 percent by 2027. The legislative language does not include added protections to guard against future sequestration.

NAST Position

NAST generally supports efforts to expand low cost financing options to states, including through the creation of direct subsidy bond programs. We strongly urge that future iteration of such programs come with additional sequestration protections. NAST supports the American Infrastructure Bond Act and applauds its inclusion of sequestration protection language. NAST also endorses the LIFT Act for its inclusion of advance refunding restoration.

Related