The BABs problem
I came across something recently that both answered a question I've had for a couple years, and also scared me.
It has to do with the debt ceiling hullabaloo happening right now and a program from the Obama administration's response to the 2008 financial crisis called Build America Bonds. Let's see if I can explain.
Why are you hitting yourself?
The federal government has to 'borrow' money to fund the programs its laws require. Thus we get something called the national debt, infamous for rising really fast on a New York City billboard.
The debt ceiling is the federal government's legal borrowing limit. It turns out that this limit is subject to a vote in congress. Due to inevitable increases in programs and prices and costs, we have to keep increasing this limit, which requires regular votes to lift the ceiling properly.
The modern monetary theorists tell us that this 'borrowing' is actually the government borrowing from itself through the Treasury and the Federal Reserve. To them, the national debt is sort of an empty concept. If you issue your own currency and borrow from yourself, you can do that all you want just so long as you're being productive with the money.
But not everyone sees it that way. Conservatives have profoundly politicized the debt ceiling, pointing to it as an indication of out-of-control government spending that must be reduced, portraying any public provisioning of being profligate waste.
It's like a bully doing a "why are you hitting yourself!" move with the country's public finance apparatus. It's annoying and racist and unjust. And rightwingers have found a way to use the debt ceiling for even worse stuff.
Hostage
You might remember that Republicans barely took over the house of representatives last year and so they have a seat at the table as the federal government's budget comes together.
They only have a four person majority, so things are unstable, but that plays into the hands of the more virulently rightwing elements of their caucus. This includes the Freedom Caucus who, over the last decade, discovered the debt ceiling policy as a way to hold budgets and spending hostage. They say: if you don't make the cuts to programs we want, we won't vote to increase the debt ceiling.
But it's not the first they've done this.
Bolshy
Obama came into his first term controlling both houses of congress. Democrats passed tepid response packages in the wake of the 2008 financial crisis, including the American Recovery and Reinvestment Act (ARRA). In 2010, the Freedom Caucus emulsified out of wild rightwing fantasies and protests, electing a bevy of congresspeople who came to congress froth-mouthed, looking to take no prisoners. They consolidated into the caucus and rode the rabid libertarian wave to power in Congress, financed by people like the Kochs who thought Obama was the second coming of FDR/Lenin and after the crisis it was 1930/1917 again.
The ironic thing is that these libertarians, at least tactically speaking, looked more like Bolsheviks than anyone else in politics. They combined a colonial bloodlust with fiscal and parliamentarian expertise to fight tooth and nail on behalf of the capitalist ruling class instead of the working class. One of their moves was to take the debt ceiling hostage. What was once a procedural vote that no one really cared about became a life or death threat for US and thus the world's economy.
They played this game in the 2010-2011 budget negotiations for the first time, winning a material weakening (through a process called sequestration) of some of the programs in the ARRA, including something called Build America Bonds--which I'll get to in a moment.
Before I do, let's appreciate just how similar our current situation is right now. A Democrat president comes into office with both houses of congress in his party's control, winning a tense election just after a huge crisis has taken hold of the world. That Democrat passes some relief programs in response to the crisis, which couldn't been better but aren't nothing. Two years later, rightwingers come in, riding a wave of discontent with the Democrat's power and platform, looking to eat into his policies.
That's what happened in 2010 but it's more or less what's happening right now with the Biden administration and Kevin McCarthy's Republican congress. At this writing, the Biden administration had said that they wouldn't negotiate with terrorists over the debt ceiling--but Biden just called for a meeting with them.
The BABs problem
As part of my attempts to understand school finance, specifically for facilities, I've had a bunch of off the record conversations with school district finance officials. A couple years ago, while I was trying to see whether the Municipal Liquidity Facility would or could lend to school districts--and whether school districts would or could borrow from the Federal Reserve--a district official said something jarring.
He told me that he prefers the private credit markets for municipal bonds to federal financing programs when it comes to school facilities. He trusted the market more than government because, he said, the government could change its approaches to its programs in volatile ways, making it hard to trust it.
I asked him what he was thinking of specifically and he told me about Build America Bonds. I noted it down, tried to find some histories or analyses of the program, couldn't find much, and lost track of it for awhile.
Then I was researching the story of how the country's only state intercept program got triggered in Penn Hills School District, Pennsylvania in 2015, and lo and behold Build America Bonds (BABs) were a main character.
In 2010, the district needed a new high school and a new elementary school. The buildings were old and they needed better ones. So like any upstanding American school district, they went to the municipal bond market and sold themselves as a commodity investment for ruling class bond investors to borrow $130 million. It was a lot of money.
The lion's share of their $130 million bond--$104 million--was sold as part of the BABs program, a milquetoast tax credit whose provisions reimbursed entities like school districts for 35% of interest payments on bonds issued under the program.
In that earlier piece, I argued that Penn Hills--far from being a corrupt and wasteful school district, as the state government and the Bond Buyer had portrayed them--was relying on the Build America Bonds program for their new elementary and high school construction projects.
When I was writing that, I thought the BABs was an indication that the district was relying on a federal program in good faith, making the situation far from corruption. They were just taking advantage of a public program. But this whole situation was even worse than I thought.
Fear and loathing
You know that I've been researching the Inflation Reduction Act as a potentially transformative way to finance school facilities in the climate crisis. I'm writing a memo on this right now and in the course of my research I came across this passage from the National League of Cities about the direct pay investment tax credit program in the law:
City managers and city finance managers might be familiar with Build America Bonds, or BABs. These bonds were authorized by the American Recovery and Reinvestment Act of 2009 during the Great Recession and were issued in 2009 and 2010. The federal government designed these bonds as a way to subsidize investment in local government borrowing. However, the federal government failed to meet its spending reduction targets under the Budget Control Act of 2011, triggering a sequester that cut the amount of the subsidy that the government paid on the BABs. As a result of the cut in the subsidy, municipalities that issued BABs were forced to make up the difference to investors.
Learning from BABs sequestration issues, drafters of the Inflation Reduction Act took deliberate measures to attempt to protect direct pay credits from sequestration in the future.
My jaw dropped when I read this. I didn't know that BABs funds were sequestered in the debt ceiling hostage crisis that the Freedom Caucus started in 2010-2011! So many things clicked in my head when the information sunk in.
First, I finally understood what the district official I'd talked to meant when he said that the federal government could be more volatile than the municipal bond market. He was talking about the rabid libertarians doing their debt ceiling bullshit!
Second, I had even more sympathy for the Penn Hills School District when they were audited in 2015. Not only were they relying on BABs for their facilities projects--they actually had to eat all the savings they were supposed to have made using that program because of the sequestration. It was the bond buyers' own neoliberal tendency that helped force Penn Hills into that situation.
Third, the fear dawned on me: the NLC was warning that the IRA's direct pay investment tax credit, one of the flagship programs of the law that's supposed to help local and state governments finance green their infrastructure projects, could be decimated by sequestration amidst a debt ceiling fight. It happened before to the BABs program and could happen again. Good grief.
You can't see it, but the authors of this little NLC note put the word "attempt" in italics to emphasize the uncertainty around this. So as Biden tries to negotiate with McCarthy and the new generation of Freedom Caucus demons, the IRA's most promising program hangs in the balance.
Stakes is high
As a coda, I should note that our moment is a bit different than 2010-2011. For example, McCarthy's majority is very small and unstable, and the Republicans don't control the Senate. Also, red states stand to benefit a ton from IRA programs, perhaps making it a less vulnerable target.
But the new crop of rightwingers that can force McCarthy's hand are an even more rabid, more wild, and more untethered formation ideologically and politically. We'll see what happens but I don't like it one bit.
What's at stake here is more than just the direct pay ITC. It's the very small, pitiful, but meaningful step towards the democratization of finance in the US for public education. Just like they dismantled the BABs program and advanced their libertarian project, the same thing is happening again, only now the climate crisis adds a new level of intensity.