The Feds giveth and the Feds taketh away: The budget sequester means Illinois governments could lose hundreds of millions in federal bond subsidies

The federal government created the Build America Bond (BAB) program in 2009 as a way to improve access to capital financing for state and local governments during the 2007-2008 financial crisis. In contrast to earlier programs that exempted the interest on municipal bonds from taxation, the BAB program provided direct subsidies to governments to offset interest costs. State and local governments sold more than $151 billion in BABs between 2009 and 2010 when the BAB program ended. Governments in Illinois sold more than $11 billion in BABs during this period. But since instituting the budget sequester in 2013, the federal government has reduced bond subsidies on BABs by between 6.8 and 8.7 percent per year. This reduced bond subsidies to Illinois governments by approximately $70 million between 2013 and 2016. And if the federal budget sequester remains in place, bond subsidies in Illinois will be reduced by hundreds of millions of dollars over the next two decades. This will significantly exacerbate existing state and local infrastructure challenges. This situation is illustrative of a broad class of situations in which Illinois’ fiscal health is inter-connected with federal policies that are largely beyond its control.