The $85 billion of sequester cuts slated to take effect beginning March 1 will create uncertainty in the municipal bond market and slam the air transport sector particularly hard, according to market participants and public officials.
The White House is pushing to avoid the cuts and encourage infrastructure investment while federal agencies scramble to prepare.
Bond Dealers of America members are worried that the sequester will create a lot of uncertainty and volatility for Build America Bonds and other direct-pay bonds, Susan Collet, the group's senior vice president of government relations, said Monday.
About $181 billion of BABs were issued in 2009 and 2010. BABs and other direct-pay bonds are taxable but issuers get subsidy payments from Treasury equal to 35% of their interest costs. Some direct-pay bonds are subject to "extraordinary optional redemption provisions" that allow issuers to call them under certain circumstances, possibly if the sequester reduces their subsidy payments.
Dealers and issuers must identify whether their bond documents contain such call provisions. Even if the bonds have extraordinary optional redemption provisions, the question then becomes whether the sequester and a reduction of subsidy payments would trigger a call. If a call is triggered and Congress approves legislation during the next month or two that halts the sequester, does the issuer continue to have the option to go forward with the call?
"That's the kind of uncertainty there is," said Collet. "You could have a brief sequester but you forever damage the perception of these in the marketplace."
The sequester could mean close to $400 million in cuts to the Federal Aviation Administration in fiscal 2013 alone. U.S. Transportation Secretary Ray LaHood sent a letter to aviation groups Friday detailing the government's preparations and some of the possible fallout.
Airport groups like Airports Council International-North America and the American Association of Airport Executives have warned that airport revenues and possibly credits could take a hit if the number of flights gets pared down. LaHood told them to expect fewer flights due to furloughs, air traffic control shift cutbacks, and other cost-saving measures designed to trim the FAA's expenditures by some $600 million.
"We are aware that these service reductions will adversely affect commercial, corporate, and general aviation operators, LaHood wrote. "We also expect that as airlines estimate the potential impacts of these furloughs, they will change their schedules and cancel flights."
The highway trust fund and most other mechanisms for funding highways are mostly shielded from the sequester, but mass transit could still take a hit too. The Washington Metropolitan Area Transit Authority said it could lose millions of dollars due to furloughs of federal employees who make up a huge share of its ridership. The Office of Management and Budget projected federal funds for transit capital programs could be slashed by $156 million in fiscal 2013.
President Obama and Vice President Biden addressed the National Governors Association at a meeting here Monday to outline the impact sequestration would have on states. Obama warned that when the automatic, across-the-board cuts kick in, they will "slow our economy, eliminate good jobs, and leave a lot of folks who are already pretty thinly scrambling to figure out what to do."
He urged the governors to meet with their congressional delegations to remind them of the impacts of and to urge them to find ways to compromise over reducing the nation's $16 trillion deficit. Obama said he wants to be a "partner" with the governors dealing with sequestration and on other key agenda items, such as investing in infrastructure.