Authored by Belvia Gray and Brock Bowsher

IRS announces FY 2020 effect of federal sequestration on school bonds issued with federally subsidized bonds

The IRS recently announced that the federal sequestration rate for fiscal year 2020 (FY 2020) (Oct. 1, 2019 – Sept. 30, 2020) will be reduced to 5.9%. The reduction to 5.9% will result in an increase in interest subsidy that state and local governmental entities receive for payments made from Oct. 1, 2019 to Sept. 30, 2020, compared to Oct. 1, 2018 to Sept. 30, 2019.

The federal sequestration is the automatic spending reductions that began in 2013 as a result of the Budget Control Act of 2011. Since 2013, the federal sequestration reduces the federal interest subsidy state and local governmental units receive as interest credit toward projects that were originally issued with Build America Bonds, Qualified School Construction Bonds, Qualified Zone Academy Bonds, New Clean Renewable Energy Bonds and Qualified Energy Conservation Bonds. 

If your school district has these types of bonds and you would like Baker Tilly to calculate the updated federal sequestration impact or if you have any questions please contact us

This chart represents the annual sequestration rate reduction by U.S. government fiscal year (Oct. 1 – Sept. 30).

Yearly sequestration rate reduction

Sequestration formula

Debt interest – ((Federal interest subsidy * (1 – Sequestration rate)) = Net interest requirement

Sequestration rate theoretical Qualified School Construction Bonds example

For more information on this topic, or to learn how Baker Tilly specialists can help, contact our team.

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