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Senate Clears Bill With BAB Payments

MAR 17, 2010 7:28pm ET
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WASHINGTON — The Senate yesterday voted 68 to 29 to pass a $17.6 billion jobs bill requiring the Treasury Department to provide Build America Bond-style direct payments to municipal issuers of four types of tax-credit bonds, if they want them, instead of offering tax credits to investors.

The bill also would extend authorizations for highway and transit programs through the end of the calendar year and transfer $19.5 billion in interest foregone since 1998 from the general fund to the Highway Trust Fund to keep it solvent into next year.

In addition, the measure would repeal an $8.7 billion rescission of unobligated balances of contract authority in this fiscal year, which began Oct. 1.

The Hiring Incentives to Restore Employment Act, or HIRE, which was approved by the House March 4, will now be sent to President Obama for his signature.

Meanwhile, the House Ways and Means Committee yesterday voted 25 to 15 to approve a second, follow-up jobs bill  that would extend the BAB program through April 1 and reduce the current 35% direct-pay subsidy rate to 33% in 2011, 31% in 2012, and 30% in the first three months of 2013.

Municipal market participants applauded the HIRE Act, saying turning the tax-credit bonds into BAB-like bonds will make them more attractive because issuers have not shown much interest in tax-credit debt.

“We’re pleased that the Senate has taken this action,” said Michael Decker, managing director and co-head of municipal securities at the Securities Industry and Financial Markets Association. “The tax-credit bonds have been under-utilized since their enactment in last year’s stimulus bill, and today’s action opens the door for school districts and other ­issuers to make use of the authority that Congress provided.”

“This is a tremendous victory for our school kids,” said New York City Comptroller John Liu. “In the rising battle for space as more schools close and overcrowded classrooms burst at the seams, this is exactly we what need and asked for. Our representatives in Congress have heard the calls for a 100% subsidy rate and they delivered.”

Under the bill, the Treasury would make direct payments to issuers of qualified school construction bonds, qualified zone academy bonds, new clean renewable energy bonds, and qualified energy conservation bonds in amounts that otherwise would have been provided for tax-credit bonds.

For QSCBs and QZABs, issuers would get payments equal to the lesser of the actual interest rate of the bonds or the tax-credit rate for municipal tax-credit bonds, which the Treasury sets daily. For CREBs and QECBs, issuers would receive payments equal to 70% of interest costs.

The bill approved by the Senate contains higher direct-pay subsidy rates than had been proposed. When the Senate initially considered the bill, it had proposed large issuers receive a subsidy rate of 45% of interest costs and small issuers a 65% rate. The bill had defined small issuers as those that sell less than $30 million of bonds in the calendar year. The House modified the bill to include the higher rates.

Senate Finance Committee chairman Max Baucus, D-Mont., said the proposed BAB provisions with higher direct-pay subsidy rates would cost $4.6 billion over 10 years, $2.1 billion more than with the lower rates.

The higher subsidy rates were approved despite a concerted campaign against BABs by Sen. Charles Grassley, R-Iowa, the committee’s ranking minority member, and other Republicans. During debate on the bill, Grassley said the provisions amounted to “a very rich spending program disguised as a tax cut” that generates huge fees for Wall Street firms. “States and local governments can view this federal money as free money because they don’t even have to collect it from their residents,” he said.

Sen. Jon Kyl, R-Ariz., also complained in a letter to colleagues that because interest rates reflect risk, states with poor credit ratings that pay higher rates get the biggest reward from BABs.

“A state that issues $1 billion worth of debt paying a 5% interest rate would receive a bigger direct payment from the federal government than a state issuing $1 billion ... of debt paying a 4% interest rate,” he said.

Grassley noted that 92% of the BABs from the 10 largest transactions were issued by California and New York.

The second follow-on jobs bill approved by the House Ways and Means Committee contains an amendment offered by chairman Sander Levin, D-Mich., that would shorten the BAB extension to April 1, 2013, instead of the previously proposed Dec. 31, 2013. The bill also would allow tribal governments to issue private-activity bonds for sewage and water supply facilities without being subject to PAB volume caps or the “essential government function” test that normally limits a tribe’s use of tax-exempt financing.

Levin called the roughly 2.5 year extension of BABs “the cornerstone of this package.” The Joint Tax Committee estimated the cost of that provision would be $7.46 billion over 10 years.

The two recovery zone bond programs would double in size under Levin’s bill to $50 billion. The recovery zone economic development and exempt facility bond programs were originally created as part of the American Recovery and Reinvestment act, with bond authority of $10 billion and $15 billion, respectively, allocated to areas facing tough economic conditions.

RZEDBs — a special type of private-activity bond — are effectively “super-BABs,” under which issuers receive direct payments from the federal government equal to 45% of their interest costs.

A handful of lawmakers had complained to the Treasury Department that although their districts had some of the highest jobless rates in the nation, they received no RZ bond allocations because the formula was based on net job losses, not unemployment. For a variety of reasons, those districts — which were in California, Arizona and Nevada — saw statistical spikes in both unemployment and employment, resulting in smaller net-job loss figures, possibly due population increases.

To address this, Levin’s bill would allocate an additional $10 billion and $15 billion to each of the programs, and would ensure each local municipality receives an allocation equal to at least its share of national unemployment as of December 2008. That provision would cost $2.385 billion over 10 years, the JTC said.

The House bill also would extend through 2011 a stimulus provision exempting all new PABs from the alternative minimum tax, including bonds refunding debt sold in and after 2003. The JTC estimated that provision would cost $224 million over 10 years.

Earlier this week, the Airports Council International-North America, Education Finance Council, and American Association of Port Authorities threw their support behind that provision in a letter sent to the committee. They claimed “the success of this provision in stimulating the economy has been widespread, running the gamut from helping students secure low-interest student loans for college to making safety improvements in our national infrastructure that have helped create new jobs.”

State and local governments also would be able to sell PABs for water and sewer facilities without being limited by state volume caps. Issuance of PABs by states and U.S. territories are capped annually based on their population estimates, but some types of PABs are excluded from the caps. The provision would cost $354 million over 10 years, according to the JTC.

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A recent phenomenon is the emergence of bonds with shorter call protection as funding alternatives for municipalities. However, the shorter call protection also dampens the potential upside for investors, which in turn reduces the price they are willing to pay.

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