|January 10, 2014|
Previously published on January 2014
On December 26, 2013, President Obama signed into law the Bipartisan Budget Act of 2013, a “top line” budget package for federal fiscal years 2014 and 2015. While the enactment restores a federal budgeting process that has been on hiatus for a number of years and offers a framework for relief in 2014 and 2015 from the limitations of the sequestration process for a wide variety of federal discretionary spending initiatives, such as outlays for the military and primary school Head Start programs, it does so in part by extending the sequester for “nondiscretionary” expenditures, including interest subsidy payments to issuers of build America bonds and other so-called “direct pay bonds,” for an additional two years—2022 and 2023. The upshot of this change in law is that budgetary sequestration for direct pay bond subsidy payments will cover 12 fiscal years overall, rather than ten. The direct pay bonds affected by this development include build America bonds, recovery zone economic development bonds, qualified zone academy bonds, qualified school construction bonds, qualified energy conservation bonds and clean renewable energy bonds.
According to the office of Tax Exempt Bonds within the Internal Revenue Service (IRS-TEB), direct pay bond subsidy payments processed from and after October 1, 2013 through September 30, 2014 are being reduced by a federal fiscal year 2014 sequestration rate of 7.2 percent. The sequestration rate for federal fiscal years 2015 through 2023 will be set from time to time in the future, unless Congress takes additional action to change or eliminate the sequestration percentage.
IRS-TEB has advised that issuers of direct pay bonds should complete IRS Form 8038-CP as directed in the instructions for the form, claiming the full amount of the direct pay subsidy to which they would be entitled absent sequestration, and has noted that issuers will receive correspondence concerning the subsidy payment reduction after they file the form.
As we have noted in previous client advisories, in light of the implementation of the sequestration, issuers of direct pay bonds may wish to consider whether and to what extent they are currently in a position to exercise a special or extraordinary call right (if any) under the terms governing their direct pay bonds. The answer to this question will turn in part on the specific language creating the call right in the relevant bond document or statutory authorization, and on the economics of refinancing the direct pay bonds from other sources, including the cost of any redemption premium associated with the call of those bonds.