Taxable Municipal Guide - Piper Jaffray

September 2010
Exhibit 2
250%
30 Yr AAA GO % of Treasury
200%
150%
100%
50%
0%
Jan‐00 Jan‐01 Jan‐02 Jan‐03 Jan‐04 Jan‐05 Jan‐06 Jan‐07 Jan‐08
As part of the American Reinvestment and Recovery Act (ARRA) that was passed in February
2009, four new or expanded categories of municipal securities were authorized.
The most popular of the securities has been the Build America Bonds (BABs). Build America Bonds
can be used to finance capital expenditures, and can be issued by a wide range of governmental
entities, including water and sewer projects, public utility spending, public universities,
governmental housing projects and transportation (private activity bonds are excluded). Interest on
BABs is federally taxable to the investor, and the issuer receives a direct subsidy from the federal
government equal to 35 percent of the interest payment.
The remaining three categories of bonds were authorized as tax credit bonds, where investors
would receive a tax credit that can be used to offset taxable income. These bonds include Qualified
School Construction Bonds (QSCBs), Qualified Zone Academy Bonds (QZABs), and Recovery
Zone Bonds (Recovery Zone Economic Development Bonds-RZEDBs, and Recovery Zone
Facilities Bonds-RZFBs). The tax credit securities attracted a very limited buyer base, which
resulted in higher yields than comparable securities paying cash interest. As part of the Jobs bill of
2010, Congress allowed these three programs to issue BAB-style securities with a direct subsidy
paid to the issuer. The subsidy for recovery zone bonds is 45 percent of the interest payable while
the subsidy for QSCBs and QZABs is 100 percent of the interest, subject to some U.S. Treasury
limits.
The effect of this change from tax credit to direct subsidy taxable municipal securities can be seen
in looking at the brief history of Qualified School Construction Bonds. The ARRA authorized a
Piper Jaffray Taxable Municipal Guide
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