Regional News

California Can Remarket BABs: IRS

SAN FRANCISCO — California has received a favorable private-letter ruling from the Internal Revenue Service that will allow it to remarket Build America Bonds this month while keeping the federal subsidy.

The state will remarket $132 million of taxable BABs, which were up for a mandatory tender in April, as part of a $2 billion general obligation bond sale later this month.

“We are pleased with the IRS ruling. We think the ramifications extend much wider to the variable-rate demand obligation market,” said Tom Dresslar, a spokesman for Treasurer Bill Lockyer. “The best part is that we are going to be able to save taxpayers money.”

BABs, authorized by the federal stimulus program, were issued in 2009 and 2010.

The new securities gave issuers the option of issuing taxable debt and receiving a 35% federal subsidy for interest as an alternative to issuing traditional tax-exempt bonds. The program expired at the end of 2010.

Dresslar said California is the first issuer to remarket BABs. It expects to save around $17.4 million in present value through the remarketing.

The private-letter ruling resolved the question about whether the state could remarket the BABs that had been sold as part of a private placement in 2009 and are facing an upcoming mandatory tender, while still keeping the 35% federal subsidy.

The state plans to reset the interest rate on the bonds to variable rate from fixed, which led to the question of whether that would constitute a reissue under BAB rules, making the bonds no longer eligible for the BAB subsidy.

The IRS in its ruling concluded that the conversion of the bonds to a new rate period and the setting of a new interest rate in connection with the conversion do not result in an unacceptable modification of the bonds.

Dresslar said the state believes the ruling also applies to VRDOs because it resolves related issues.

California has $1.05 billion of put bonds outstanding, according to the treasurer’s office.

The state has another series of $500 million of BABs sold to support stem cell research up for mandatory tender in April 2013, according to Dresslar.

The BAB remarketing will be part of the GO sale for the week of Oct. 19.

The state also has a refunding of up to $600 million of economic recovery bonds scheduled the week of Oct. 27, finalizing its bond sale calendar for rest of the year.

California has $7.9 billion of economic recovery bonds outstanding, according to its most recent annual report.

In November, the treasurer’s office plans to sell $670 million of public works lease revenue bonds in three sales to finish up the year.

The state is slated to issue $10 billion of GO bonds and $5.5 billion of lease revenue bonds over this fiscal year and the next.

So far this year, it has sold $2.39 billion of GOs. Last year, the state sold $10.5 billion of GOs. In 2009 it sold $23 billion.

California’s total outstanding debt was $91 billion as of the end of June, according to the treasurer’s debt affordability report, which was released earlier this month,

Outstanding general fund-backed debt totaled $82.6 billion, while economic recovery bonds, veterans bonds, and other state bonds not tied to the general fund totaled $8.4 billion.



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