Congress Passes Another Extension of BABs Sequestration

WASHINGTON — The House and Senate have passed legislation that extends the cuts to subsidy payments for Build America Bonds and other direct-pay bonds by an additional year.

The extension of sequestration for direct-pay bond subsidies and other mandatory programs was included as part of an amendment to S. 25. The bill also repeals reductions in cost of living increases for younger military retirees and directs $2.3 billion to be set aside for reversing cuts to payments for physicians under Medicare.

The Senate passed the legislation Wednesday by a vote 95-3, after the House approved it by a vote of 326-90. President Obama is expected to sign the bill.

The BAB program allowed issuers in 2009 and 2010 to issue taxable bonds and receive payments from the Treasury Department equal to 35% of interest cuts. But these payments have been reduced as a result of sequestration and offsets for other federal funds the issuer owes.

The sequestration cut for direct-pay bond subsidies was initially supposed to last through fiscal 2021. But under the budget agreement passed in December, the sequester for the subsidy payments was extended by two years, through fiscal 2023. This latest bill extends the sequester through fiscal 2024.

The subsidy payments for direct-pay bonds are cut by 7.2% in fiscal 2014. The reduction rate is estimated to be lower in subsequent fiscal years, in part because the amount of money cut from Medicare will increase annually. The reduction rate in fiscal 2022 through 2024 will be the same as the rate in fiscal 2021.

Issuers financed projects with BABs under specific terms, agreeing to issue taxable bonds with higher interest rates because they assumed they would be paid the full subsidy, said John Godfrey, senior government relations representative for the American Public Power Association.

As a result, "it's not good policy" that the terms are being renegotiated years after the BAB program was created, he said, and Congress' actions "once again makes very clear why there's no replacement for tax-exempt municipal bonds."

President Obama had proposed new direct pay bonds called America Fast Forward bonds in his fiscal 2014 budget, and some members of Congress have expressed an interested in reviving the BABs program. However, "as long as they keep on having the sequester and extending the sequester, it's going to be hard to get issuers to accept direct-pay bonds again," said Bill Daly, director of governmental affairs for the National Association of Bond Lawyers.

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