Summary
An Executive Order signed by the President on March 1, 2013 will trigger automatic reductions in subsidy payments for certain Direct Pay Bonds.
Pursuant to the requirements of the Budget Control Act of 2011 and the American Taxpayer Relief Act of 2012, on March 1, 2013, President Obama signed an Executive Order reducing the budgetary authority in accounts subject to "sequester." Sequester is the formal term for mandatory cuts to federal programs. Spending accounts are divided into four categories, and within each category programs must be cut by the same percentage. Direct Pay Bonds are in a category required to be cut by 5.1 percent. Direct Pay Bonds are comprised of the following types of bonds: Build America Bonds, Qualified School Construction Bonds, Qualified Zone Academy Bonds, Qualified Energy Conservation Bonds and Clean Renewable Energy Bonds.
The total budget authority for fiscal year 2013 for the five categories of bonds affected by sequestration is $4.265 billion. As a result of the Executive Order, that budget authority will be reduced by $218 million to $4.047 billion. Subsidy payments due for fiscal year 2013 began on October 1, 2012, and were not reduced, therefore the $218 million of mandatory reductions will have to be recovered out of payments yet to be made in fiscal year 2013. The remaining fiscal year 2013 payments will be cut more than 5.1 percent in order to achieve the total cut of $218 million. The IRS Tax-Exempt Bond Office is expected to announce details on how the sequester order will be implemented.
Issuers of Direct-Pay Bonds that are subject to the mandatory reduction in subsidy payments should review extraordinary redemption provisions of such bonds which may permit the issuer to call the bonds due to the reduction in the federal interest subsidy.
For more information on the impacts of sequestration please contact George T. Magnatta (215.972.7126, gmagnatta@saul.com), Chair of the Public Finance Practice, or any other member of the Saul Ewing Public Finance Practice.
