The Sequestration Effects Build America Bonds

Due to the recent sequester, subsidy payments to issuers of Build America Bonds (BABs) are set to be reduced. While Congress was able to delay the implementation of sequestration at the beginning of the year, there was no official agreement reached by March 1st. Federal agencies, including Treasury, are in the process of implementing the sequestration cuts. Communities that issued taxable BABs in prior years should expect a reduction in their interest subsidies.

The most recent report issued March 1st by the Office of Management and Budget includes a 5.1% cut to the federal budget for Build America Bond payments. This same report notes that because there are only seven months remaining in the federal fiscal year (ending September 30, 2013), the effective impact of these cuts will be closer to 8.7%. The exact impact on each community will vary based on the amount of the total annual subsidy anticipated to be collected between now and September 30.

Key questions to consider:

  • A projected reduction of 8.7% would reduce the subsidy on $100,000 of BABs interest from $35,000 to $31,955. This equates to an increase in net interest expense of $3,045 per $100,000 of scheduled interest payments. What impact does this have on the overall future budgets, fund balances/net assets, and cash flows?
  • If there is a delay in receiving the interest subsidy during this implementation period how will that impact cash flows?
  • If the BABs are revenue bonds, will the decreased subsidy result in the enterprise fund being unable to meet the debt coverage requirement?
  • Is there language in the bond resolution which would allow the BABs to be called or refinanced if certain extraordinary events take place? If so, would there be a premium required? Would the costs associated with a refinancing outweigh the additional interest costs from the reduced subsidy?

Communities should continue to monitor changes that occur and consider the impact this reduction could have and the available options. Contact a Baker Tilly team member with questions about your specific situation.