Quantcast
Taxation

OMB, IRS Details Sequester Impact; BAB Payments Cut By $171M - UPDATED

MAR 4, 2013 1:29pm ET
Print
Email
Reprints
Comment (1)
Twitter
LinkedIn
Facebook
Google+

Build America Bond payments will be cut by $171 million due to the automatic spending cuts that went into effect on Friday, according to the Office of Management and Budget.

The OMB published a 83-page report detailing dollar amounts for exactly how much will be cut from programs at each federal agency as a result of the so-called “sequester” spending cuts.

“Because these cuts must be achieved over only seven months instead of 12, the effective percentage reductions will be approximately 13% for non-exempt defense programs and 9% for non-exempt nondefense programs,” Jeffrey Zients, deputy director for management at OMB wrote in a letter to House Speaker John Boehner, R-Ohio, on Friday. “The cuts required by sequestration will be deeply destructive to national security, domestic investments and core government functions.”

However, the Internal Revenue Service said in guidance issued late Monday that the exact percentage of cuts for BABs and other direct-pay bonds will be 8.7%.

There are $3.351 billion worth of sequestrable BAB payments and $914 million of sequestrable payments for other direct-pay bonds, according to the OMB report.

The BAB program was created in 2009 as part of the American Recovery and Reinvestment Act and expired at the end of 2010. Issuers were given the option to issue BABs as tax-credit bonds, where investors receive tax credits, or direct-pay bonds, where issuers receive subsidy payments from the Treasury equal to 35% of their interest costs.

But only direct-pay BABs were issued, about $181.96 billion of them during that period.

The Hiring Incentives to Restore Employment Act (HIRE), enacted in March 2010, gave issuers of qualified zone academy bonds, qualified school construction bonds, qualified energy conservation bonds, and clean renewable energy bonds the option of issuing these tax-credit bonds as direct-pay bonds.

For these direct-pay bonds, QSCBs were the most issued and will receive the biggest cut in subsidy payments under the sequester. QSCBs, which can be issued by states and large, local educational agencies to finance school construction, have $820 million of sequestrable payments that will be cut $42 million, according to OMB.

A total of about $38 million sequestrable payments for QZABs will be cut about $2 million, OMB said. QZABs can be issued by states and school districts to finance renovation or rehabilitation, as well as equipment purchases, for public schools within empowerment zones or enterprise communities.

Subsidy payments for QSCBs and QZABs equal the actual interest rate on the bonds or the tax credit rate.

QECBs have $32 million worth of sequestrable payments, which will be cut $2 million, according to the report. QECBs can be used by states, local governments and Indian tribal governments to finance energy efficiency and renewable energy projects within their jurisdictions.

CREBs have $24 million of sequestrable payments that will be cut by $1 million, OMB said. CREBs are used by state and local governments, as well as public power providers and electric cooperative companies to finance renewable energy projects.

For both QECBs and CREBs the subsidy payments are equal to 70% of interest costs.

OMB also released more details of cuts to federal transportation spending, totaling nearly $2 billion for fiscal 2013. Besides the more than $600 million in cuts to the Federal Aviation Administration from a sequestrable amount of just under $13 billion, transit spending supplied for Hurricane Sandy Relief takes a $545 million cut from $10.9 billion and $101 million of the $2 billion in emergency highway funds was also trimmed. Aside from emergency spending, the Federal Highway Administration also gets pared back $354 million from $7 billion of sequestrable funds.

OMB said the sequester will slash 5%, or $66 million, in appropriations for the Securities and Exchange Commission’s $1.32 billion general salaries and expenses fund, which pays for the agency’s day-to-day operations.

An SEC spokesperson said Friday that those cuts would affect hiring of new staff and technology investment. The SEC’s 2013 budget request said the agency planned to hire 676 staffers in 2013 and invest in technology.

In addition, the sequester will cut 5.1%, or $3 million in appropriations from the SEC’s $50 million reserve fund, which was created by the Dodd-Frank Act and can also be used to fund daily operations. The agency can annually deposit up to $50 million of filing fees into the fund.

The sequester also will cut 5.1% or $5 million from $90 million in appropriations to the SEC’s investor protection fund, which pays for the SEC’s whistleblower award program and the Office of Inspector General’s suggestion program for SEC employees, both created by the Dodd-Frank Act.

The whistleblower program rewards tipsters who provide information leading to an SEC enforcement action. The employee suggestion program honors SEC staffers who suggest ways to improve the SEC’s efficiency or effectiveness or who report waste, abuse, misconduct or mismanagement at the SEC.

Though the SEC is funded though congressional appropriations, it reimburses the U.S. Treasury Department at the end of the fiscal year with money collected from fees charged to market participants.

JOIN THE DISCUSSION

(1) Comment

SEE MORE IN

RELATED TAGS

Comments (1)
How can the public's faith in the muni market not be adversely affected by the sequestration when it comes to BABs? Some taxable BABs will be callable at par, others will only be callable subject to a make whole provision and yet others (revenue bond issues) may be threatened with a payment default.

Posted by ifinkel | Monday, March 04 2013 at 2:54PM ET
Add Your Comments:
Not Registered?
You must be registered to post a comment. Click here to register.
Already registered? Log in here
Please note you must now log in with your email address and password.

markets
markets
markets
markets

Social

facebook
linkedin

A recent phenomenon is the emergence of bonds with shorter call protection as funding alternatives for municipalities. However, the shorter call protection also dampens the potential upside for investors, which in turn reduces the price they are willing to pay.

Upcoming Events

the bond buyer conferences
Already a subscriber? Log in here
Please note you must now log in with your email address and password.