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Rolling Blue State Bailout Ended in Tax Agreement

One of the best things to come out of the White House and Capitol Hill tax deal is that the liberals are apoplectic that there is no extension of the so called ”Build America Bonds.”  These bonds are a rolling-state-government bailout mechanism that subsidizes the interest rate of state issued bonds.  Essentially, these bonds put off the day of reckoning for the blue states that are in a terminal budget flat-spin.

This is a rolling bailout and you, the taxpayer, are on the hook and pay part of the interest to keep afloat states that have made terrible budgeting decisions.  This decision by the federal government would force irresponsible states to resort to conventional bonding, without the federal government giving them preferential treatment.  This only seems fair and conservatives need to make sure that Speaker of the House Nancy Pelosi (D-CA) and Senate Majority Leader Harry Reid (D-NV) don’t sneak a provision reinstatement these bonds when the House and Senate consider the White House-Capitol Hill tax compromise.

The Los Angeles Times reports today that these tax-free municipal bonds are taking a hit on the market, because it looks like the federal government is going to end this program.

Market prices of tax-free municipal bonds took a hit on Tuesday, hurt by uncertainty over the fate of a federal subsidy program for muni issuers and by another general rise in interest rates.  The Build America Bond program, which for the last two years has allowed state and local governments to issue taxable muni bonds with interest partly paid by Uncle Sam, may not be extended beyond Dec. 31. The program wasn’t included in the compromise tax-cut agreement reached between President Obama and Republican leaders.  If the BAB program is terminated, it could mean that muni issuers that would otherwise have borrowed via the bonds in 2011 would be forced to issue conventional tax-free bonds instead — boosting the supply of those securities.  Reacting to that possibility, some investors dumped longer-term tax-free muni issues on Tuesday, driving prices down and yields up. That showed in prices of popular muni bond mutual funds.

CNBC reports that these bonds have exploded since being included in the President’s Stimulus plan and account for over one quarter of the whole municipal bond market.

Since its introduction last year, the Build America program has come to account for about 26 percent of the muni-bond market, and October was its biggest month yet.  One reason: Issuers were scrambling to take advantage of the program’s benefits—which include the federal government footing the bill for 35 percent of the bonds’ interest costs. Of course, demand for the bonds, now a significant cornerstone of the $2.8 trillion muni market, has also been strong.

These states are facing a crisis, so why should taxpayers subsidize these bonds?  Why should somebody in a fiscally responsible state be paying for the big government policies in Illinois and California?  The New York Times has a Sunday headline that reads: “Mounting Debts by States Stoke Fears of Crisis.”

Some of the same people who warned of the looming subprime crisis two years ago are ringing alarm bells again. Their message: Not just small towns or dying Rust Belt cities, but also large states like Illinois and California are increasingly at risk.  Municipal bankruptcies or defaults have been extremely rare — no state has defaulted since the Great Depression, and only a handful of cities have declared bankruptcy or are considering doing so.   But the finances of some state and local governments are so distressed that some analysts say they are reminded of the run-up to the subprime mortgage meltdown or of the debt crisis hitting nations in Europe.

Build America Bonds were not extended in the tax deal, despite pleas by the liberals to extend them.  With the end of the Build America bond program, which the GOP has held firm to date, means that blue states that are spending beyond their means must face the music that much sooner.

The unions really want this and are expected to come to Capitol Hill begging to get this put back into the deal.  They want to make sure that irresponsible states with huge liabilities to public union members, including over funded pension programs and higher than average salaries, don’t get renegotiated by financially distressed states.

Conservatives need to make sure that this bailout program is not extended.  Red state taxpayers are paying the tab for irresponsible blue states.  The BuildBailout America Bonds experiment was a failure and it is time to end this fiscally irresponsible program.

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