Bond Accountability Commission 2 Recommendations Page 120
Build America Bonds Another new type of bond available to finance municipal school facilities is the
Build America Bond (or “BAB”). BABs (which can only be issued at present through 2010) 126 are bonds that would otherwise qualify as tax-exempt governmental bonds but for the issuer making an election to have them treated as taxable debt. Rather than in the form of tax-exemption, the federal tax is provided in the form of a tax credit to the bondholder in the amount of 35% of the interest rate. More attractively, for certain types of BABs, the issuer may elect to have the federal government pay a direct subsidy to the issuer equal to 35% of the interest payable on the BABs (so-called “Direct Pay BABs”). 127 Very few of the tax credit BABs have been issued; most states and local governments taking advantage of the BAB program have elected to issue Direct Pay BABs.
Various Treasury and legislative staffers have suggested that the BABs program may be extended by future legislation.
One disadvantage of BABs, and presumably QSCBs, under a direct subsidy format, is that the federal government will offset automatically any federal government claims against the issuer regardless of whether the claims are related to the bond issue or subsidy. That has led at least one prominent issuer— the State of Florida—to delay further issuances of BABs until it receives clarification regarding federal policies.
See McGee and Sigo, “Issuer Put Off by BAB Offsets—Treasury ‘Aware’ Continuity Is Key” (Bond Buyer Online March 19, 2010) (“Alan B. Krueger, assistant secretary for economic policy, … [said] ‘My understanding is that IRS and Treasury have relatively little discretion in this area … . But I would assure you that Treasury is acutely aware of the importance of continuity and payments in this area. … Krueger’s remarks came just hours after Ben Watkins, director of Florida’s Division of Bond Finance, said he postponed a new-money competitive deal scheduled for next week—$265 million of new-money turnpike revenue bonds—until there is clarification from the federal government regarding the offsetting of subsidy payments. Watkins said the deal was expected to be a mix of BABs and taxexempts. He also said BABs have been a ‘great tool’ for state financings, but he decided to stop selling them for now because of the risk that the Internal Revenue Service could intercept subsidy payments if issuers have payments due to the federal government under any federal program, including Medicaid and unemployment compensation. ‘From a risk-management standpoint, we’ve made the internal decision to step away from BABs and not use them any longer until we get clarity around this issue and this new risk,’ Watkins said.”)
Published on May 14, 2014