SEATTLE - Members of the Government Finance Officers Association's governmental debt management committee decided unanimously Saturday to draft a document outlining what finance officials should consider when weighing whether or not to issue Build America Bonds.
The committee's decision to put together an advisory for members came at the close of Saturday's meeting just before the official start of GFOA's annual meeting.
The document will detail the potential risks of the new financing tool, as well as things finance officials should consider when deciding how to structure the debt.
The decision to draft an advisory brought to a close a lengthy debate on BABs that continued throughout the day, particularly the direct-pay structure that provides a federal subsidy to issuers.
Ben Watkins, director of Florida's Bond Finance Division, will head up the effort with the goal of getting the document to the executive board for approval in October.
"It's imperative that this be done on a timely basis, because things are happening very, very quickly," he said of BABs, which became an option for municipal debt issuers as part of the American Recovery and Reinvestment Act in February and have already grown to be a more than $12 billion market.
An overarching issue for members was what the new borrowing tool - which allows municipal issuers to sell taxable debt - means for the future of the tax-exempt bond market.
Treasury officials have said that the program could be extended beyond its 2010 sunset date if it is successful, but some of the debt committee members wondered what such an extension would mean for traditional munis, and whether the program could pose a threat to tax-exempt bonds.
The 35% subsidy the federal government pays issuers selling BABs currently presents enticing savings to issuers, but members wondered if Washington might in the future reduce the subsidy or get rid of it altogether.
"The feds can turn the spout on and off," one member said.
Economists have argued that a direct payment or tax-credit bond provides a more efficient subsidy to state and local borrowers than does traditional tax-exempt debt. However, federal officials behind the BAB program have repeatedly maintained that it is meant as a supplement to traditional municipal bonds, not a threat.
Committee members also wondered how much they could count on the federal government to reliably provide the subsidy payments on a timely and consistent basis for the life of the bonds.
From a practical standpoint, they said, the current process of submitting a paper document each time a BAB issuer is requesting a payment, and then having the Internal Revenue Service send a paper check, is too cumbersome and should be modernized and automated.
In the Treasury notice outlining the rules of the program, released in April, federal officials said they were actively looking into a way to make the payment electronically. Members here were in favor of such modernization, with Watkins saying it was time to move away from "the horse-and-buggy days."
There also were questions from committee members about what the higher-than-expected cost of the program might mean for its future prospects. The BAB program has been such a success that federal cost estimates when it was first included in legislation are proving to be low. The program could end up so costly that Congress is not inclined to extend it.
Another area of concern is the fact that since the federal subsidy payments are treated as tax refunds by the IRS and Treasury, there is the potential that they could be retained by the federal government to offset any taxes - such as payroll taxes - that an issuer owes the federal government.
Members on Saturday said they were surprised that the payments would be handled that way, and were hoping to speak with Treasury officials sometime in the near future about it.
But while discussing concerns about BABs, debt committee members did note that the financing tool can present significant savings, and several of the members have already done BAB deals.
Although the GFOA has had a policy in place opposing this type of taxable bond option since 1969, some members wondered if they should consider updating it to present a more nuanced view, given that such a program is now a reality.
"There is no doubt you end up saving a lot of money if you're willing to play in the taxable space," one member said.
"The economics are compelling, but there's a lot of challenges," according to Watkins.
Committee members also noted that while they have significant concerns about what BABs mean for tax-exempt bonds in the long term, thus far the financing tool does not appear to have adversely affected the tax-exempt market, and may have even boosted it somewhat.
With several issuers taking their deals to the taxable market, issuers of tax-exempt bonds have been able to find available investors in the traditional muni market that might not have been available otherwise.
