Major cuts in federal payments to issuers of Build America Bonds and other direct-pay bonds will have to be made if Congress is forced to make $1.2 trillion of across-the-board cuts  to the fiscal 2013 budget under the congressionally-mandated sequestration process, according to a report the Office of Management and Budget sent the lawmakers on Friday.

The cuts come after Obama administration officials assured muni market participants when the BAB program was created in February 2009, that the federal government would never make retroactive cuts to BAB payments, which muni issuers count on after they issue BABs.

But the OMB report shows that payments authorized for direct-pay bonds would be cut 7.6% -  totaling $255 million for BABS, $62 million for qualified school construction bonds, $3 million for qualified zone academy bonds and $2 million for qualified energy conservation bonds.  Cuts also could be made to New Clean Renewable Energy Bonds, but it does not appear that any of those have been issued as direct-pay bonds because the OMB shows no cuts for them.

Created under the American Recovery and Reinvestment Act, BABs are taxable bonds for which the federal government makes payments to issuers equal to 35% of their interest costs.   The Hiring Incentives to Restore Employment Act, enacted in March 2010, allowed QSCBs, QZABs, QECBs and CREBs to also be issued as direct-pay bonds, rather than as tax-credit bonds, at higher subsidy rates.

Sequestration would take effect for fiscal 2013 under the Budget Control Act of 2011 because the congressional Joint Select Committee on Deficit Reduction, or so-called Super Committee, failed to reduce the deficit by $1.2 trillion.

Tom Dresslar, a spokesman for California Treasurer Bill Lockyer, said California is slated to receive a total of $213.4 million of BAB payments in fiscal 2013. If the federal government cut those payments by 7.6%, that would equal $16.2 million.

“It certainly wouldn’t help our budget situation, but we could survive a $16.2 million cut if they cut it by 7.6%,” he said.

To achieve the cuts for direct-pay bonds, OMB reduced by 7.6% the fiscal 2013 authorized payments of: $3.351 billion for BABs; $820 million for QCSBs; $38 million for QZABs; and $32 million for QECBs.

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