When the Feds Hand You a “Light Envelope”: Exploring the Impact of the Federal Budget Sequester on the Build America Bond Program

ABSTRACT In 2009, the US federal government created the Build America Bond (BAB) program to improve access to the capital markets for state and local governments. While the federal government typically subsidizes subnational capital financing indirectly through tax exemption, the BAB program provided direct cash subsidies to governments. The Budget Control Act of 2011 implemented a sequester that reduced BAB subsidies by 5.7 to 8.7% each year since 2013. This paper estimates previous and potential future sequestration losses on all outstanding BABs as of the end of 2022. It delves into BAB use and sequestration by two issuers (governments in the state of Texas and City of Chicago). The paper concludes with a discussion of the current state of BABs as it relates to recent litigation and refinancing attempts. The loss estimates provide lessons for the provision and management of federal direct subsidies available to state and local governments.