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Rep. Neal, Treasury’s Cross Urge Permanent BAB Extension

WASHINGTON — A lawmaker and a Treasury Department official Thursday pushed for a permanent extension of the Build America Bond program, but acknowledged that the greatest obstacle is finding a way to pay for it.

“I think any remaining concerns about BABs can be solved simply by making it permanent,” said Rep. Richard Neal, D-Mass., a member of the House Ways and Means Committee and chairman of the select revenue measures subcommittee. “That’s my hope and that’s what I’m going to continue to hope to accomplish.”

Neal made his comments during a conference on BABs here that was hosted by the Securities Industry and Financial Markets Association.

Speaking at the same event, John Cross 3d, the Treasury’s associate tax legislative counsel, also called for a permanent or lengthy BAB extension, saying it would help the developing market. He warned that continually extending the program by a year or two could hinder the market.

“The more permanent and the longer-term commitment … the more potential for a more liquid market and more commitment by interested parties in the market,” he said. “I think the greatest fear is that this program, like far too many others, would end up in the cursed swamp of the annual extenders kabuki dance in Congress.”

Market participants echoed the call for permanent BABs, saying there are still a significant number of potential investors who are not investing in the market because they are waiting to see if the program will become permanent.

Patrick Brett, a director of municipal strategy and global distribution at Citi, who said he has traveled to dozens of countries pitching BABs to investors, noted that large BAB deals have featured as many as 150 investors, while large corporate deals may attract 600 to 1,000 investors.

The sooner that there can be some certainty, the better, he said.

Despite the explicit support from lawmakers and the Obama administration, which recommended making the program permanent at a reduced subsidy rate in its fiscal 2011 budget proposal, Congress thus far has only considered extending the program by slightly more than two years. Jobs legislation approved by the House last month that originated in Neal’s tax-writing committee would extend the program until April 1, 2013, and would gradually lower the subsidy rate to 30% from the current rate of 35%.

Since congressional budget rules require every new expenditure to be offset with a revenue-raising provision or proportional cut in spending, lawmakers must find a way to pay for any BAB extension.

The administration estimated in its budget that making the BABs program permanent at a 28% rate would add $24 million to the federal deficit over the next 10 years. However, the Joint Tax Committee, which estimates revenue costs for Congress, projected a permanent BABs program would cost $8.4 billion over 10 years.

The limited BAB extension approved by the House and now pending in the Senate would cost $7.46 billion over 10 years, according to the JTC.

The revenue constraints are a driver in making the provision temporary, Cross said.

Cross also addressed several concerns that have emerged regarding BABs recently, announcing the department plans to release guidance clarifying how to determine issue price for BABs. The guidance would assuage market concern and confusion about how to comply with a special BAB statutory provision limiting premium and how to respond to an Internal Revenue Service compliance check questionnaire that asks issuers if they are monitoring BAB pricing and trading.

“We would like to get ahead of that topic and would hope in the reasonably near future try to provide some further guidance in that whole area just so that people can more clearly go forward with transactions knowing what the rules are,” he said.

He also addressed issuers’ fears that their BAB payments could be reduced to “offset” outstanding liabilities they might owe the federal government.

Florida recently suspended BAB issuance until more is known about the offset process. But Cross said Thursday the attention devoted to offsets is “extremely overblown and exaggerated.”

The only tax-related offsets that BAB issuers need to worry about are overdue payroll taxes and of those only about 1% would be subject to offset, he said.

In addition, he said, federal agencies would only request any outgoing BAB payments be used to offset other outstanding liabilities, if they were “delinquent, enforceable federal debts that have gone through the entire federal process.”

Frank Hoadley, Wisconsin’s capital finance director and chairman of the Government Finance Officers Association’s debt committee who also spoke at the meeting, called offsets a “real stop-and-think-about-it issue.” However, much of the concern could be addressed if the Financial Management Service, the arm of the Treasury that handles outgoing payments for the federal government, would clarify exactly what can cause an offset of a BAB payment.

Market participants also discussed how much the subsidy level for BABs should be reduced as the program is extended. Governmental officials said the current 35% rate was intended to be high to stimulate economic development and would need to be lowered if the program were to become more than temporary, but Hoadley said the administration’s proposed “revenue-neutral” 28% subsidy rate would not fly.

“I can tell you that at 28%, this isn’t going to work,” he said.

Andrew Ackerman contributed to this story.

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