WASHINGTON – Eighteen muni market groups are urging the Obama administration to exempt Build America Bonds and other direct-pay bonds from sequestration so the Treasury Department’s subsidy payments to state and local government issuers are not cut.

The groups, which include the Government Finance Officers Association, the Securities Industry and Financial Markets Association and the National Association of Bond Lawyers, made the request in a two-page letter  sent to officials at the Office of Management and Budget and National Economic Council.

State and local governments issued about $182 billion of BABs in 2009 and 2010 after they were created by the American Recovery and Reinvestment Act. Millions of dollars more of direct pay bonds have been issued under the Hiring Incentives to Restore Employment Act, enacted in 2010. The HIRE act gave issuers of qualified zone academy bonds, qualified school construction bonds, qualified energy conservation bonds, and clean renewable energy bonds the option of issuing  direct-pay rather than tax credit bonds.

BAB issuers get subsidy payments from the Treasury equal to 35% of their interest costs. Most of the other direct-pay bonds have even higher subsidy payments.

But the OMB issued a report in September, showing that BAB payments would be cut an average of about 7.6% under the sequestration process, under which mandated across-the-board budget cuts totaling about $1.2 trillion that would occur beginning Jan. 2 because Congress did not reduce the federal deficit.

That would mean cuts of $255 million for BABs, $62 million for QSCBs, $3 million for QZABs, and $2 million for QECBs. The report did not show any cuts for CREBs, possibly because none were issued as direct-pay bonds.

In their letter to administration officials, the groups said state and local issuers used direct-pay bonds to help finance more than $203 billion of “critical, long-term infrastructure” projects “with the understanding that federal payments related to these bonds would not be subject to the appropriation process” and that they would receive the 35% subsidy payments until the bonds matured.

“These projects were planned, and the bonds sold in the marketplace, with issuers borrowing based on the law’s stated and ongoing direct payment provision,” the groups said. “A bond is a contract. Governments will be able to do little in many instances to unwind their commitment to buyers of their bonds, and in most cases, they will still be obligated to pay investors the full interest rate on the bonds, even if the subsidy payments from the federal government are decreased.”

Making the subsidies of direct-pay bonds subject to sequestration will “increase the costs for individual projects and … permanently dampen future enthusiasm or commitment to similar programs,” the groups warned.

“We urge the administration to provide an exception for direct-subsidy bonds from sequestration similar to what is currently provided for individual refundable tax credits or other permanent appropriations,” the groups said, adding that they do not think Congress intended for the subsidy payments to be subject to sequestration.

The letters were sent to OMB director Jeffrey Zients and NEC director Gene Sperling.

The groups, besides GFOA, SIFMA and NABL, included: the National Association of State Treasurers, The National Conference of State Legislatures; the National League of Cities, the U.S. Conference of Mayors, the National School Boards Association; the National Association of Counties; the National Association of Independent Public Finance Advisors; the National Association of Local Housing Finance Agencies; the National Association of State Auditors, Comptrollers and Treasurers; the American Public Gas Association; the American Public Power Association; the Council of Infrastructure Financing Authorities; the International City/County Management Association; the International Municipal Lawyers Association; and  the Large Public Power Council.

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