This information is a generalized description of characteristics, products or sectors of the municipal securities market. Precise terms of municipal securities may vary considerably. Investors should always consult the disclosure document or other materials for a particular security to understand fully the terms.
The American Recovery and Reinvestment Act of 2009 enacted by Congress in February 2009 directly affected capital raising and the issuance of bonds by states and municipalities, and continues to play a key role in municipal finance. The act contained several economic stimulus programs, including creation of a new type of municipal bond called Build America Bonds, designed to rejuvenate the public sector.
Commonly known as BABs, Build America Bonds allow state and local governments to finance capital projects using a federal subsidy. The lower borrowing costs made possible by the subsidy were intended to ease the financial burden that state and local governments faced in 2009 and to stimulate spending on a variety of public projects.
While tax-exempt securities traditionally have been the most common form of debt issued by state and local governments, the Build America Bond program allows state and local governments to issue an unlimited amount of taxable debt through the end of 2010. Issuers can elect either to receive a direct payment from the U.S. Treasury Department or to provide the bondholders with a tax credit.
Under the direct payment option, the Treasury Department pays the issuer 35 percent of the interest paid on the bonds. In contrast, if the issuer elects the tax credit option, the bondholder will receive a tax credit equal to 35 percent of the stated interest rate on the bond that can be applied against their federal income tax liability.
Read the MSRB's report on Build America Bonds issuance and trade activity in 2009.
Read guidance from the Internal Revenue Service on Build America Bonds.
Read a U.S. Treasury Department report on Build America Bonds and issuer net borrowing costs.
Application of MSRB Rules
Build America Bonds are municipal securities because they are issued by states and their political subdivisions and instrumentalities. Accordingly, all MSRB rules apply to transactions effected by municipal securities dealers in Build America Bonds, including rules regarding uniform and fair practice, political contributions, automated clearance and settlement, the payment of MSRB underwriting and transaction assessment fees, and the professional qualifications of registered representatives and principals.
Underwriters are also required to submit official statements produced in conjunction for most primary offerings of Build America Bonds. These documents, along with transaction data and continuing disclosure documents, are available on the MSRB’s Electronic Municipal Market Access (EMMA) website.
Other Tax Credit Bonds
The following tax credit bonds are also municipal securities subject to MSRB rules:
- Recovery Zone Economic Development Bonds
- Qualified School Construction Bonds
- Clean Renewable Energy Bonds
- New Clean Renewable Energy Bonds
- Midwestern Tax Credit Bonds
- Energy Conservation Bonds
- Qualified Zone Academy Bonds