President Barack Obama will propose making a popular stimulus bond program permanent and expanding its use in the budget plan he presents on Monday, a U.S. Treasury Department official said on Saturday.

He will also seek to lower the level of the rebate the U.S. government pays to issuers on taxable Build America Bonds to 28 percent, the official said. The bonds, created by economic stimulus legislation last year, currently give issuers a subsidy equal to 35 percent of their interest costs.

The bonds were successful in helping to repair a severely damaged municipal finance market, making much needed credit available at lower borrowing costs for infrastructure projects that create jobs, Treasury Secretary Timothy Geithner said in a statement provided by the official.

By making Build America Bonds a permanent and expanded financing tool for state and local governments, we're investing in our country's long term economic growth in a cost-effective way, Geithner said.

At the end of 2009, the $2.7 trillion municipal bond market was at a standstill, a victim of the credit crunch. State and local governments rushed to issue the bonds, which were designated for infrastructure, mere months after the American Recovery and Reinvestment Act was signed into law.

By the end of 2009, issuers had sold more than $60 billion and analysts estimate more than $100 billion BABs could be sold this year.

In Obama's proposal, the bonds will be expanded to refinance some debt, to cover short-term governmental operating costs and to finance non-profit hospitals and universities.

The expanded permanent program would begin January 1, 2011, the official said, coming on-line just when the stimulus expires. The stimulus did not cap the amount of BABs that could be sold, but set an end date for issuing the debt.

Issuers have been asking for the program to be made permanent, and the administration has been signaling for the last few months that the steep subsidy would be cut in any future program.

What was there clearly was intended as stimulus and it was higher than what would be revenue neutral, Aaron Klein, deputy assistant secretary in the Treasury's Office of Economic Policy, said last week.

A lower rebate will be more efficient and revenue neutral, he said.

(Reporting by Lisa Lambert; Editing by James Dalgleish)

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