Bill Would Expand BAB-Style Programs

WASHINGTON — The House last night was expected to approve a jobs bill that would expand two tax-credit bond programs for school projects to allow state and local issuers to receive direct Build America Bond-style payments from the Treasury Department instead of investors receiving tax credits.

While the Senate would not take up the bill until next year, municipal market participants said provisions in the House-approved Jobs for Main Street Act of 2010 — which would apply to qualified school construction bonds and qualified zone academy bonds — may represent a sea change with Congress beginning to revise the fledging tax-credit bond programs to reflect the more popular BABs.

"It's huge. I think this has the potential to be a game-changer," said Sam Gruer, managing director at Cityview Capital Solutions LLC. "I can't see why anyone would borrow on the tax-credit basis if this option is available to them."

"In light of the success of the BAB program, this is a sensible step forward and could jump-start the QSCB and QZAB programs next year," said Jeremy Spector, a partner at Mintz, Levin, Cohn, Ferris, Glovsky and Popeo PC and chair of the American Bar Association's committee on tax-exempt financing.

"If successful, the next step would be to extend the direct subsidy payment to other categories of [tax-credit bonds]."

State and local governments this year have issued more than $63 billion of direct-pay BABs, which provide them with federal payments equaling 35% of their interest expense. That compares to a paltry $2.46 billion of tax-credit bonds that were issued during the same period, according to Thomson Reuters.

And the QSCB program accounted for most of that tax-credit bond issuance — 144 deals totaling $2.4 billion. But the QSCBs issued still fall far short of the $11 billion Congress authorized for the program in 2009. An additional $11 billion of QSCBs have been authorized for next year.

Despite receiving $1.4 billion in authority as part of the American Recovery and Reinvestment Act enacted in February, just 16 issues totaling $43.1 million of QZABs were sold in 2009, according to Thomson Reuters.

The House vote on the jobs bill — which would extend transportation programs through the end of the fiscal year on Sept. 30, 2010 — and keep the highway trust fund from running dry, was expected to come after the House voted 395 to 24 to approve a defense appropriations bill that would extend transportation programs for two months until the Senate could act on the jobs bill.

The House also voted 218 to 214 to approve legislation to raise the debt limit by $290 billion to $12.394 trillion, which would allow the Treasury to continue borrowing until the end of February.

Treasury officials expect to hit the current $12.1 trillion ceiling by the end of the year and if it is not expanded before then, the department would likely have to close the window for state and local government series securities, which muni issuers purchase for refunding escrows to avoid earning arbitrage.

Under the provision of the jobs bill that would extend the direct-pay BAB structure to QZABs and QSCBs, issuers of these bonds would simply sell them at taxable rates, and the Treasury would give them direct payments equal to the lesser of the actual interest rate of the bonds or the daily credit rate for municipal tax-credit bonds.

Sources said they expect most of the subsidies will be paid out based on the tax-credit rate, which was included because otherwise issuers and investors would have no incentive for keeping interest rates down since any rate would be fully subsidized by the federal government.

The Treasury bases the tax-credit rate on taxable bonds with ratings ranging from single-A to triple-B from various market sectors. But market participants have complained in the past that they often have had to offer supplemental interest coupons to investors to market the credits, even though the programs are intended to subsidize 100% of interest costs.

"One of the reason why the tax-credit structure hasn't worked … is because it's very difficult to market tax credits, it's hard to find investors," said Michael Decker, co-head of the municipal securities division at the Securities Industry and Financial Markets Association. He added that with the direct subsidy option, "you won't run into the hurdles that have forced issuers to need to offer the supplemental coupon."

"This is a rare example of something where adding a new code provision and making the code longer actually makes it simpler in practice," said Frederic J. Ballard of Ballard Spahr LP.

The provision would be funded by $4.1 billion redirected from the Troubled Asset Relief Program. Most of the costs to the federal government for QZAB and QSCB programs were already budgeted when they were authorized, and the $4.1 billion would cover the cost of increased issuance, sources said. Representatives from the Joint Committee on Taxation, which is charged with scoring the provisions, could not comment on how the $4.1 billion figure was reached.

The jobs bill would keep transportation grants flowing to states from the federal government through the end of February.

It also would provide money for the highway trust fund, the main source of federal money given to states to help them pay for their transportation projects that has almost become insolvent twice in the past year and a half.

The bill would lift a ban on the trust fund's ability to earn interest on its cash balances and would restore $19.5 billion of interest payments the fund would have earned had the ban not been in effect. The House Transportation and Infrastructure Committee predicts that those changes would increase the trust fund's balance by $500 million to $1 billion per year.

The jobs bill also would provide tens of billions of dollars in grants to states for infrastructure projects. Half of the funding provided in the bill would go to transportation programs, including $27.5 billion for highways and $8.4 billion for transit. Another $1.715 billion would be authorized for clean water state revolving funds.

The jobs bill's infrastructure funding is similar to that of the American Recovery and Reinvestment Act that was enacted in February. As in ARRA, the bill would not require the usual 20% local share for federal transportation grants.

The House approved a smaller increase to the debt limit after Republicans and moderate Democrats opposed earlier plans to raise the limit by $1.8 trillion or $1.9 trillion, which would have been enough to cover government borrowing through the 2010 election year.

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