WASHINGTON — Federal subsidy payments to issuers of Build America Bonds and other direct-pay bonds will be cut by 7.2% under Congressionally-mandated sequestration in fiscal year 2014, according to the Internal Revenue Service.

The IRS announced the 7.2% rate in a notice released on Monday

The sequestration reduction rate for the bonds for fiscal 2014, which began on Tuesday, replaces the higher 8.7% reduction rate for subsidy payments from March 1 through the end of fiscal 2013.

The reduction rate for this fiscal year applies to payments processed from Tuesday through Sept. 30, 2014, regardless of when the amounts claimed on issuers’ 8038-CP forms were filed with the IRS. Issuers will receive payments processed under the sequestration rate unless and until a new law ends sequestration or makes changes to it, the IRS said in the notice.

Sequestration consists of across-the-board federal budget cuts that were implemented beginning in March of this year and that are to be phased in through 2021. It was triggered by Congress’ failure to reach agreement over how to significantly cut the deficit.

An analysis from the Center on Budget and Policy Priorities in March estimated that the reduction rate for direct-pay bond subsidies and some other mandatory programs will decrease in each subsequent fiscal year of sequestration, in part because the amount of money cut from Medicare will increase annually.

Bill Daly, director of government affairs for the National Association of Bond Lawyers, said the subsidy payment reduction was expected but is disheartening.

“It’s unfortunate, especially for the issuers of the bonds who expected the federal government to make the subsidy payments in full,” he said.

The BAB program was created under the American Recovery and Reinvestment Act and allowed state and local governments from Feb. 17, 2009 through 2010 to issue taxable bonds for capital projects and receive a payment from the Treasury Department equal to 35% of their interests costs.

The program was very popular, with almost $182 billion of BABs issued during the nearly two-year period, according to Thomson Reuters’ data.

But the sequestration cuts to subsidy payments have triggered extraordinary redemption provisions in bond documents for some BABs and allowed issuers to either redeem them or announce that they can redeem them at any point in the future.

The 7.2% cuts will apply, not only to subsidy payments for BABs, but also to payments for qualified school construction bonds, qualified zone academy bonds, new clean renewable energy bonds and qualified energy conservation bonds.

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