For investors worried the U.S. Treasury might revoke its promised subsidies to Build America Bonds, Ann-Ellen Hornidge offers some free legal advice: relax.
The bond lawyer — with the Boston firm Mintz, Levin, Cohn, Ferris, Glovsky and Popeo PC — said the law is pretty ironclad.
“The lawyers who study this believe that there’s minimal risk of this being considered anything but a permanent appropriation,” she said.
Enacted through the American Recovery and Reinvestment Act in February, Build America Bonds allow state and local governments to sell taxable debt and receive a federal subsidy of 35% of the interest cost in lieu of the tax exemption, or issuers can opt to issue bonds that pay investors a federal tax credit.
Hornidge said the risk the Treasury will renege on the subsidy after the bond is issued — saddling the issuer with more cumbersome financing costs and the investor with graver credit risk — is “remote.”
Her comments echo those made in March by John J. Cross 3d, associate legislative tax counsel for the Treasury’s office of tax policy, who 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,” Cross said.
But some people are worried.
Washington State Treasurer James McIntire, addressing the National Federation of Municipal Analysts at the group’s annual conference in Seattle Tuesday, said his state would be “crazy” not to issue BABs, probably in the gas-tax sector. One attendee asked whether McIntire would be concerned about the surety of the subsidy.
McIntire said no.
At the same conference, Morgan Stanley’s Gerry Lian explained that BABs often carry higher yields than bonds issued by corporations or countries with inferior credit quality to the BAB issuers.
One member of the audience asked whether Lian thought the uncertainty of the Treasury’s subsidy accounted for part of this spread.
Lian did not.
Congress could, in theory, amend legislation to revoke the subsidy during the life of the bond, Hornidge explained.
Congress could also, in theory, amend the law to revoke the tax exemption of state and local government debt altogether.
Hornidge said the probabilities are about the same.
For that matter, Congress could write legislation disqualifying taxpayers from receiving tax refunds, she said. Yet nobody worries about that.
Hornidge said one risk is if the issuer fails to comply with the terms of the bond. In that case, the Treasury might withhold the subsidy, she said.
“If the issuer did not comply with all the rules, there’s a really strong likelihood the Treasury has the right to control them by withholding subsidy payments,” she said.
