In Government, News & Updates

In the first significant impact of the federal sequestration on municipal bond issuers, the IRS announced on Monday that payments to issuers that elected to receive a direct credit subsidy under the Build America Bonds, Qualified School Construction Bonds, Qualified Zone Academy Bonds, New Clean Renewable Energy Bonds, and Qualified Energy Conservation Bonds programs, will be reduced 8.7% effective March 1, 2013. The sequestration reduction rate will be applied until the end of the fiscal year (September 30, 2013) or intervening Congressional action, at which time the sequestration rate is subject to change.

The popular programs were in effect during 2009 and 2010 as part of the federal stimulus packages enacted to deal with the financial crisis. Under the programs, bond issuers elected to forego tax-exempt interest rates on their bonds in exchange for the federal government providing annual subsidy payments to them which were to be used to pay a portion of the debt service on the bonds. The subsidy payments made it more financially attractive for issuers to forego tax-exemption on their bonds.

Of course, that analysis was based on the federal government actually paying the assumed amount of the subsidy. Few at the time thought the federal government would ever fail to pay the full subsidy amount, just as few ever thought sequestration would actually happen, and just as few ever thought the entire global financial system would have to be bailed out.

The financial crisis and partisan politics have demonstrated that what was once unthinkable is now reality and that worst case financial assumptions should henceforth become major considerations for municipal bond issuers in structuring their financings.

Our Public Finance Practice Group, chaired by Partner Jeffrey DeCarlo, provides preeminent legal service to players in the public finance arena, from governmental and quasi-governmental entities to underwriters and issuers. In a career that has spanned more than 30 years, Jeff has served as counsel on more than 1,200 bond financings totaling more than $12 billion. The Group handles financing for numerous types of bonds issue ranging from under $1 million to over $500 million. The Group works extensively with our Local Government Law Division in the representation of municipalities, counties, districts and community redevelopment agencies in a variety of public finance capacities.

Author(s): Jeffrey DeCarlo

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