WASHINGTON - Three Minnesota cities disclosed this month that they can redeem Build America Bonds because their federal subsidy payments have been reduced due to sequestration.
The cities - Brooklyn Center, North St. Paul, and Maplewood -- made the disclosures in event notices posted on the Municipal Securities Rulemaking Board's EMMA system.
BABs are taxable, direct-pay bonds that state and local governments could issue in 2009 and 2010. They were created by the American Recovery and Reinvestment Act.
BAB issuers expected to receive federal subsidy payments equal to 35% of their interest costs. However, these payments have been cut since 2013 because of federal spending cuts known as sequestration. The payments were reduced by 8.7% for part of fiscal 2013 and 7.2% in fiscal 2014, and they are being reduced by 7.3% in fiscal 2015, which ends Sept. 30.
The reductions have led a number of issuers, particularly in the Midwest, to redeem their BABs or say that their BABs are eligible to be redeemed.
The Minnesota cities that posted event notices this month said reduced subsidy payments triggered the extraordinary redemption provisions in their bonds' official statements. The governing bodies of the cities have started proceedings that may result in the BABs being redeemed, the event notices said.
Springsted Inc. was financial advisor on the cities' BAB deals, and Briggs and Morgan served as bond counsel, according to bond documents.
Brooklyn Center's notice pertained to BABs issued in 2010. The city issued $2.35 million of BABs at the time, some of which have matured, according to the official statement.
City finance director Nathan Reinhardt said Brooklyn Center is planning to sell bonds on June 8 whose proceeds would be used to refund the BABs as well as for other purposes. "We would pull the sale if interest rates were not favorable at that time of the anticipated bond sale date," he said.
The BABs, which are taxable general obligation utility revenue bonds, were issued to finance the replacement of residential and commercial water meters, according to the official statement.
North St. Paul disclosed that extraordinary redemption provisions have been triggered for two of their BAB issues: series 2009A taxable general obligation utility revenue bonds originally issued in the amount of $2.12 million and series 2009C taxable electric utility revenue bonds originally issued in the amount of $1.94 million.
The city is currently looking to refund the series 2009A BABs, as well as bonds issued in 2005 and 2006. Refunding bonds are scheduled to be sold on May 28. The city considered refunding the series 2009C BABs, but is "not moving forward with this as the savings have reduced," said city finance director Jeanne Day.
The series 2009A bonds were issued to finance a portion of the construction of a new city public works facility. The series 2009C bonds were issued to finance improvements to an electric utility facility, according to offering documents.
Maplewood said in its event notice that taxable general obligation bonds it issued as BABs in 2010 could be redeemed. In a meeting earlier this month that was recorded on video, the Maplewood City Council preliminarily approved a June 8 sale of taxable bonds that would be used to refund BABs.
The BABs were originally issued in the amount of $11.79 million to finance infrastructure improvements.