Rep. Paul Ryan, R-Wis.

WASHINGTON — The Senate passed a budget agreement Wednesday, which will help avoid another federal government shutdown but also extend by two years the cuts to the federal subsidy payments that municipal issuers receive for Build America Bonds and other direct-pay bonds.

The Senate passed the Bipartisan Budget Act of 2013 by a vote of 64 to 36. The vote comes after the House voted 332 to 94 in favor of the bill last week. The measure now heads to President Obama for his signature.

The budget act — an agreement reached by House and Senate Budget Committee chairs Rep. Paul Ryan, R-Wis., and Sen. Patty Murray, D-Wash. — is a step toward avoiding another federal government shutdown because it would allow the House and Senate Appropriations Committees to work on spending bills at agreed-upon levels before the current continuing resolution expires on Jan. 15.

The bill does not include tax reform. It would set overall discretionary spending for fiscal year 2014 at $1.012 trillion, about halfway between the levels in the House and Senate budgets. It sets an overall discretionary spending level for fiscal 2015 that is slightly higher than the one it sets for fiscal 2014.

The bill provides $63 billion in sequester relief for discretionary programs in fiscal 2014 and 2015, divided evenly between defense discretionary and non-defense discretionary programs.

But the sequester for mandatory programs, which include the subsidy payments for BABs and other direct-pay bonds, is still continuing for fiscal 2014 through 2021 as if the budget agreement had not been reached. And the agreement extends sequestration for mandatory programs by two years, requiring President Obama to sequester the same percentage of mandatory budgetary resources in 2022 and 2023 as will be sequestered in 2021. Doing so would reduce spending by $28 billion and helps to offset the increases in the caps on discretionary spending. The BAB program allowed state and local governments in 2009 and 2010 to issue taxable bonds and receive subsidies from the Treasury equal to 35% of interest costs. The program was very popular, with almost $182 billion of BABs issued, according to Thomson Reuters' data.

State and local governments issued BABs with the assurance that the federal government would give them the full subsidy. But BABs have already taken a hit from sequestration and the budget agreement would cause subsidy payments to be less than the statutory 35% of interest costs for a longer period of time.

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.

In total, the budget agreement provides mandatory savings and non-tax revenue of about $85 billion. The deal would reduce the deficit by between $20 billion and $23 billion, Ryan and Murray said when they announced the agreement.

Ryan, who has indicated he wants to chair the House Ways and Means Committee next year, said in a statement that the Senate vote "shows both parties—in both chambers—can find common ground. We can work together. This bill is only a small step. We need to do a lot more. But it's a small step in the right direction."

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