New Bond Programs Not a Threat

WASHINGTON - The House Ways and Means Committee's chief tax counsel assured bond lawyers yesterday that although some of the bond programs created by the stimulus law are "unprecedented," particularly the taxable Build America Bonds program, none of them are meant to undercut the traditional tax-exempt bond market.

John Buckley made his remarks in a teleconference during which a Treasury Department official said Treasury hopes to release initial guidance by the end of this month or the beginning of next on how direct payment BABs will work - how issuers should opt into the program as well as how and when the government will make payments to issuers.

The teleconference on the American Recovery and Reinvestment Tax Act of 2009 was sponsored by the National Association of Bond Lawyers.

Buckley, who presided over the drafting of all of the bond provisions in the House version of the stimulus package, told NABL members: "I don't think anybody should see these provisions as a threat to tax exemption. They were not designed for that. They were designed to be a supplement to tax exemption and to provide state and local governments with one more financing mechanism to borrow money to finance their affairs."

Buckley pointed out that his boss, committee chairman Charles Rangel, D-N.Y., has long supported tax-exempt bonds and said, "If I came to him with a design to undercut tax exemption, I would lose my job."

The new stimulus law marks the most significant changes to the municipal bond market since the 1986 Tax Reform Act, Buckley said, adding, "There are far more fundamental changes here than the 1986 Act."

"I have to admit some of the provisions like Build America bonds are without precedent, but it was a response to turmoil in the credit markets that also, I believe, is without precedent," he said.

The BAB program allows muni issuers in 2009 and 2010 to offer an unlimited amount of taxable debt and to elect to either receive a cash subsidy from the federal government or have it provide bondholders with a tax credit. Both the payment and tax credit would be equal to 35% of the interest paid on the bonds. The stimulus law also authorizes over $30 billion of new taxable, tax credit bonds.

Buckley admitted that earlier taxable tax-credit bond programs such as qualified zone academy bonds and clean renewable energy bonds "have faced several handicaps that have prevented them from being broadly available," but said he is optimistic that those issues have been addressed with the latest round of authorizations.

The earlier programs were too small to establish any consistent market, and they had to deal with fluctuating rules from Congress, he said. But Congress has since adopted a universal framework for tax-credit bonds, which should simplify matters, he added.

"The hope is, that format will be the format used by the Congress so that if they authorize new bonds in this area, it would simply be putting new definitions of bonds within that standard framework," Buckley said.

He said that he, along with most members of Congress, see tax-credit bonds as similar to existing tax-credit programs, like the low-income housing credit, which are "intended to provide low- or no-interest financing for a certain type of activity."

"The low-income housing credit had fairly low yields when it first started, but as the program became established, the yields and efficiencies of the program increased," he said.

When asked which of the two-year stimulus provisions may become permanent, Buckley cited as a strong candidate exempting private-activity bonds from the alternative minimum tax. "There is no policy reason for inclusion of tax-exempt private activity bonds in the AMT," he told the lawyers.

However, Buckley tempered his statement by saying it would be "an extraordinary mistake to make predictions about what Congress might do .... If these programs succeed in accomplishing their goals, I think the pressure to extend them will be large, and Congress will respond."

Buckley echoed comments made by John J. Cross 3d, associate legislative tax counsel for the Treasury's office of tax policy, at a separate NABL conference two weeks ago, when he said the BAB program as written is intended for new projects. His comments are likely to dash the hopes of bond lawyers who wanted the government to allow the direct-pay BABs to be used for refundings of auction-rate securities.

But Cross, who also participated in the teleconference, said that it is possible that the tax-credit BABs could be used for ARS refundings because the law says they can be used for the same purposes as tax-exempt bonds.

On the regulatory front, Cross said the forthcoming guidance for the direct-pay BABs "is a high priority in part because it is one of the broadest things effecting this area, and could in theory be a substitute for the entire tax-exempt bond market." Cross said his office is "working night and day with the IRS to develop" the guidance.

He also tried to assuage the concerns of some market participants who worry that Congress could in the future stop providing the direct payment. Cross said the law treats the payments like a tax refund, and that they should be seen as "an ongoing, kind of permanent appropriation."

"That arguably should not be a feature of this that people need to worry about," he said.

Another top priority for the Treasury is releasing guidance within a month on how the tax-credit bonds will be allocated to states. Cross appeared sympathetic to the idea of allowing states to reclaim allocations from localities and redistribute them if they were not used within a certain time frame.

Marvin Markus, managing director of Goldman, Sachs & Co., said there are several obstacles muni issuers will have to clear if they want to enter the taxable market. For example, taxable investors tend to be familiar with those involved in that market, whereas the thousands of muni issuers are relatively unknown to them, he said.

However, Markus said he is confident muni issuers will not have to overhaul their disclosure practices to satisfy taxable investors. "The bulk of the municipal market can approach this market with the existing disclosure framework," he said.

Scott Lilienthal, a partner at Hogan & Hartson LLP here, moderated the panel.

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