The sequestration rate is 6.9% for direct payment bonds starting in October

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WASHINGTON – Federal grants to issuers of Build America bonds and other direct payment bonds will be reduced by 6.9% in fiscal 2017 under receivership, the Internal Revenue Service recently announced.

The 6.9% reduction, which will apply to grant payments processed as of October 1 of this year, is a slight increase from this year’s 6.8% reductions, which will end on September 30.

The sequestration cuts are automatic, annual, and blanket cuts to defense and non-defense programs that stem from Congress’ failure to reach agreement on how to significantly reduce the deficit by March 2013.

Discounts apply to federal grant payments for, in addition to BABs, Qualified School Construction Bonds, Qualified Zone Academy Bonds, New Clean Renewable Energy Bonds, and Energy Conservation Bonds. qualified.

For each of these types of bonds, issuers have had the choice at one time or another to issue them as direct payment rather than as tax credit bonds. In the direct payment mode, the issuer receives grants from the Treasury Department or the Internal Revenue Service which are usually based on a percentage of their interest charges.

The America Recovery and Reinvestment Act created BABs, allowing state and local governments that issued them in 2009 and 2010 to receive grants equal to 35% of their interest charges. Payments must be made over the life of the bonds.

But the cuts under receivership have reduced the amounts of subsidies. Some BABs were redeemed due to sequestration through extraordinary redemption provisions in the bond documents.

The sequestration rate of 6.9% is much lower than in previous years. The rate was 7.3% during fiscal 2015, 7.2% during fiscal 2014 and 8.7% from March 1, 2013 to the end of this fiscal year. Historically, the rate has been dependent on Medicare costs, based on the formula for determining the percentage of reductions for each fiscal year.

The sequestration cuts have soured the interests of many issuers in direct payment bonds, although some lawmakers and the President have proposed expanding the BAB program at a lower subsidy rate.

“I think the sequestration makes [direct-pay bonds] less attractive, said Matthias Edrich, a lawyer at Kutak Rock in Denver.

“It has become an obstacle,” said Vicky Tsilas, lawyer at Ballard Spahr and former head of the Treasury.

But Tsilas points out that the current administration is backing more direct-pay bonds and said Hillary Clinton, the Democratic presidential candidate, could follow suit.

In his FY2017 budget request, President Obama called for the creation of a permanent program for state and local governments to issue U.S. Fast Forward bonds, which would be similar to BABS, but with a rate of 28% subsidy and expanded uses. Obama would prevent subsidy payments for these bonds from being subjected to sequestration.


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