"This is just another way for states and local governments to avoid making the severe cuts that are necessary to really balance budgets. Taxpayers should not continue to be held responsible for the reckless decisions of politicians."—ALG President Bill Wilson.
November 29th, 2010, Fairfax, VA—Americans for Limited Government (ALG) President Bill Wilson today urged Congress not to reinstate a federally-subsidized bond program for states and local governments, which he said were being used to "bail out bankrupt states like New York and California."
"The so-called 'Build America' bonds purport to ease the borrowing costs of insolvent states via a federal subsidy of interest payments. These are governments that otherwise cannot finance their spending habits," Wilson explained, adding, "It's really a mechanism to nationalize the unsustainable spending of insolvent states and local governments."
Wilson said the federal subsidy would be directed from taxpayers across state lines. "This is making taxpayers in more responsible states like Virginia, Mississippi, and Texas pay for the wasteful union contracts and social policy programs of California, Illinois, and New York. The states bailout program should be ended as once," Wilson declared.
According to the Washington Post, under the program, "Treasury pays a 35 percent subsidy on the interest rate of the bonds directly to the city, state or other government entity that issues them. The arrangement dramatically lowers the borrowing cost for local governments while providing lower costs for investors, including pension funds and other major funds that do not usually dabble in the municipal market."
The Obama Administration wants to make the program permanent. Under the final program, taxpayers would subsidize 28 percent of interest owed on the bonds and certain non-profit universities and hospitals would now be allowed to participate by borrowing money through the program, as reported by Reuters.
Wilson said, "This is a states bailout, because the government agreed to cover 35 percent of the interest costs for the last round of bond purchases. Now, to meet their budget obligations, the states need to borrow yet more money."
Wilson continued, "Why don't these states and local governments try to refinance these debts on their own? Because they can't. The 'expansion' of this program really is so that states and localities can refinance the debt they accrued last year. That means that, minus the federal subsidy, municipal bonds are not really a good investment at this point."
Wilson concluded, "This is just another way for states and local governments to avoid making the severe cuts that are necessary to really balance budgets. Taxpayers should not continue to be held responsible for the reckless decisions of politicians. The states bailout bonds tend to undermine states with balanced budget constitutional provisions by giving a federal mechanism to finance the unsustainable budgets of states that refuse to balance their budgets."