* Payments suspended as part of IRS plan
* Build America Bonds rebate already cut by sequestration
* Larger issuers likely to weather suspension
By Lisa Lambert and Patrick Temple-West
WASHINGTON, Oct 4 The inability of the U.S.
Treasury to send Build America Bond payments to state and local
governments during the federal government shutdown is the latest
blow to hopes these securities might grow into an alternative to
tax-exempt municipal bonds.
Taxable Build America Bonds, created in the 2009 economic
stimulus plan, pay issuers federal rebates equal to 35 percent
of the bonds' interest costs. The rebates were so attractive
that state and local governments rushed to sell $181 billion
BABs in the 20 months of the program's existence.
When the BABs program expired with the end of the stimulus
plan, issuers pushed to bring it back or create a similar form
of taxable debt with rebates, often also called
Since the government shutdown began on Oct. 1 because of a
budget impasse in Congress, all tax refunds have been halted,
including BABs rebates.
It is the latest complication to make issuers skeptical of
proposals for new direct-subsidy bonds because many say the
bonds entangle state and local governments in federal budget
fights that jeopardize their funds.
The across-the-board spending cuts known as sequestration
that started this spring sliced into all BABs rebates. Issuers
had believed rebate amounts were guaranteed and were dismayed to
find they could shrink. On Monday, the day before the shutdown
began, the Internal Revenue Service said that year-two
sequestration cuts would trim BABs payments by 7.2 percent.
"We've already gone through this drill with sequestration,"
said Chris Mier, managing director of analytical services for
Loop Capital Markets, about the suspension of rebates.
The Government Finance Officers Association, the largest
organization representing issuers, could not say how many
issuers were expecting rebates during the shutdown. There is no
central calendar of BABs interest payments or rebates. Recent
IRS statistics show that in 2010, the last year data is
available, issuers received $1.78 billion total in BAB rebates.
About 90 days before an interest payment is due, an issuer
formally requests the rebate and then receives it typically 30
days before the payment date, according to Utah Treasurer
Like many issuers, Utah does not use the rebates to cover
its interest payments due in January and July. It has set aside
enough funds for interest costs and then treats the rebates as
additional revenues, said Ellis.
Most at risk from the suspension would be to small issuers
such as remote school districts that also apply the rebates to
the interest payments and have payments due soon, Loop Capital's
President Barack Obama has pushed for an alternative to
traditional tax-exempt municipal bonds, arguing they cost the
federal government more than they benefit local governments.
Obama has suggested creating more direct-subsidy debt programs
and also capping the tax exemption on municipal bonds, which
would drive down the demand for them.
Richard Ciccarone, a managing director at McDonnell
Investment Management, said the current payment suspension shows
direct-subsidy bonds make states and cities too dependent on the
Issuers should see "they have a strong interest in
preserving the current tax-exemption structure," he said.
Asked if he would ever push for Utah to issue direct-subsidy
bonds should they reappear, Ellis, the state treasurer, said: "I