The National Association of Bond Lawyers is urging Congress to fix a number of glitches and provisions with unintended consequences that it has identified in the American Recovery and Reinvestment Act enacted last February.
The group made the request in a 16-page letter sent Friday to staff on House and Senate tax-writing committees.
“In general, NABL is pleased with the municipal bond provisions contained in ARRA and feels these provisions have assisted borrowers considerably,” said Michael Larsen, a partner at Parker Poe Adams & Bernstein LLP and the primary author of the document.
“There are, however, a few technical issues that may have been overlooked, and instances where the statutory language doesn’t appear to square with the legislative aim, that, if addressed, would assist borrowers in meeting the goals of ARRA.”
For example, NABL discovered that the law’s language contains an error that would allow issuers of recovery zone economic development bonds to “double-dip” on subsidies, getting both a subsidy check equal to 45% of interest costs from the federal government and offering investors a tax credit equal to 35% of interest costs.
The language outlining the RZEDB program refers to a separate ARRA section on Build America Bonds, which can be issued either under the direct-pay mode or the far less popular tax-credit mode. As a result, RZEDBs, which are only supposed to provide issuers with direct-subsidy payments from the federal government, are not prohibited from providing investors with tax credits.
A number of the suggestions center around BABs, a growing sector of the muni market. Lawmakers have proposed several extensions of the program, including a provision in a bill passed by the House that would extend it until April 1, 2013.
NABL asked Congress to legislatively direct the Treasury Department to write regulations that would allow issuers to be able to take remedial actions to correct minor violations of tax rules so that their subsidy payments are not halted. In addition, the regulations should allow BAB issuers who discover an error disqualifying some of their bonds to be able to reduce their subsidy payments proportionally, rather than losing the payments altogether, the group said.
NABL recommends tweaking he existing statutory requirement that 100% of BAB proceeds minus issuance costs and a reasonably required reserve fund be used for capital expenditure. Specifically, the group wants the term “capital expenditures” to be replaced with “capital projects,” which would grant issuers more flexibility in terms of allocating proceeds.
That change would allow BABs to be used for more items customarily financed with tax-exempt bond proceeds, such as payments for a qualified hedge.
Along similar lines, the letter also asked lawmakers to clarify that earnings on a debt-service reserve fund do not have to be used for capital expenditures.
As written, the ARRA presents “significant logistical problems for issuers,” forcing them to spend such earnings on project costs potentially years after the project is completed and put to work, NABL told the lawmakers.
Congress also should clarify that tax-exempt bonds that are issued alongside BABs in parity financing structures are not considered federally guaranteed.
The law explicitly states that the direct payments the Treasury Department sends BAB issuers do not constitute federal guarantees, but the law is silent about tax-exempt bonds issued alongside BABs in such a financing structure.
Turning to refunding bonds, NABL recommends that bonds sold to refund debt that was issued with special temporary ARRA features be able to maintain those features, even after the provisions expire. For example, the act increased to $30 million from $10 million the small-issuer limit for bank-qualified bonds for bonds sold in 2009 and 2010.
Refunding bonds sold after 2010 to refund those bonds should also have the greater limit, the group said.
It contended the same principle should be applied to refunding bonds sold after 2010 to refund bonds sold in 2009 and 2010 that, under ARRA, are exempt from the alternative minimum tax.
Also, if special bonds authorized by the law — such as tribal economic development bonds and recovery zone facility bonds — are limited by a statutory volume cap, refundings of those bonds should not count against that limit since they are not new money bonds, NABL said.