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Most BAB Subsidies To States Paid in Full

WASHINGTON — An overwhelming majority of Build America Bond subsidy payments have been paid in full to BAB issuers, suggesting that concerns about offsets are dramatically overblown, according to new data on state issuers compiled by the Internal Revenue Service and prepared remarks expected to be delivered this morning by a top Treasury Department official.

The data, which will be presented in a speech by Alan Krueger, Treasury's assistant secretary for economic policy, indicates that just $300,000 of the $626.45 million in BAB subsidy requests the IRS has received from states as of Aug. 6 has been withheld to offset outstanding tax revenue the issuer owed the federal government. That represents a 99.95% payment rate, according to the IRS figures obtained by The Bond Buyer Friday.

State and local BAB issuers combined experienced an offset rate of 0.85% for tax purposes.

Seen another way, just seven payments of 278 requested by state issuers had to be reduced. In none of those cases did the offset affect more than one of an issuer's subsidy payment, since none of the offsets were larger than a single subsidy payment.

"It is hard to look at these statistics and not conclude that the risk of offsets under the BABs program has been very minor," Krueger is expected to say in a speech to the National Association of State Treasurers' annual meeting in Williamsburg, Va., according to an advance copy of his remarks. "Deciding not to issue BABs because of the risk of offsets is likely to end up costing an issuer money and not be in a state's interest."

Krueger is also expected to say that if issuers avoid BABs solely to escape offsets, some other tax credit or government subsidy would be offset instead, so BABs themselves do not pose an additional inherent risk.

"Because other tax credits or federal payments due to a state would be offset if BABs were not issued and subject to offsets, issuing BABs does not result in any additional burden for the state," Krueger plans to say.

According to the remarks, the most common reason for an offset was an issuer owing payroll taxes to the federal government. More than half of all the offsets were caused by "seriously delinquent" payments owed to the federal government for more than two years.

And he suggested that issuers should be notified well ahead of time if an offset is going to occur. If the IRS detects a seriously delinquent tax liability, it will give four to six weeks advance notice of an offset, he plans to say.

BABs have proven to be a popular financing option nationwide, with $125.7 billion issued as of Thursday, according to Thomson Reuters. However, some states have cast a skeptical eye on the program over the fact that the subsidy payments could be reduced or withheld to offset money the issuer owes the federal government.

Ben Watkins, director of Florida's Division of Bond Finance, has put a halt to the state's BAB sales over offset concerns until there is a guarantee the subsidies will not be offset. And Iowa officials said offsets played a role in their decision to avoid BABs in two recent deals the state did this summer. That state's senior U.S. senator, Republican Charles Grassley, has also raised concerns about fees generated by dealers that underwrite BAB deals.

Offsets that have been made public so far have been relatively small, such as a $28 offset on $307 million of BABs sold by Los Angeles World Airports. But in May, Austin announced that the federal government had withheld roughly $637,000 due to a dispute over unpaid payroll taxes. City Treasurer Art Alfaro said Friday that the issue remains unresolved, but that its subsequent subsidies have been paid in full.

Since Austin is a locality, it was not included in the overall state numbers Krueger is expected to cite. In a brief interview Friday, Krueger said Treasury focused on state figures largely because state issuers have been the most vocal critics of the offsets. Treasury officials have long maintained there is little they can do to change the offset policy and issuers will need to learn to live with it.

The system is broadly applied to all types of tax refunds and the Treasury or IRS has no discretion on what is offset, since the system is entirely automated. Before a BAB subsidy check is cut, the Financial Management Service, a branch of the Treasury charged with distributing payments for federal agencies, automatically checks the issuer's taxpayer information against the records of all other federal agencies for money owed.

In fact, any changes to the system would have to be made by Congress, which would be difficult, Treasury officials have said. In addition, Treasury officials have highlighted that the offset system benefits some BAB issuers, since it is used to collect delinquent state taxes for the states.

The potential for BAB offsets mainly would occur with payroll taxes, but also could happen if an issuer defaults on a federal grant and it must be repaid, or if a state or local government provided group health insurance with Medicare as the secondary provider and Medicare paid when the primary provider should have and the payment must be reimbursed.

Krueger is also expected to address the concerns raised by Grassley, that underwriting firms are making a windfall due to higher fees to sell the bonds.

He is expected to maintain that fees have come down to roughly the same level as fees for selling tax-exempt bonds as BABs have lost their novelty. Even after taking fees into account, the program is estimated to have saved issuers over $12 billion, he plans to say.

Richard Williamson contributed to this story.

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