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AMERICAN PUBLiC pots- TM ASSOCIATION Powering Strong Communities ISSUE BRIEF January 2017 Sequestration of Build America Bond Credit Payments Summary In drafting ARRA,Congress sought to ensure that BAB Failure of the Joint Select Committee on Deficit Reduction to credit payments were not vulnerable to year-to-year budget leg deliver a federal deficit reduction package in 2012 has triggered illation enacted by Congress. First,ARRA clarified that a credit more than$1 billion in payment cuts to state and local issuers payment to a bond issuer is a"refundable credit."2 Second, of Build America Bonds (BABs).Those cuts are scheduled to ARRA specifically added BAB credit payments to the list of tax credit payments for which funds are permanently appropriated.' continue through 2025.Public power utilities issued more than$16 billion in BABs for power-related projects.These In the 21 month period(April 2009 through December 31, cuts ignore Congress's intent for BABs and renege on what the 2010) in which BABs could be issued,2,275 BABs were issued federal government promised in partnership with state and local worth$181 billion.'Of those issuances, 108 BABs worth$16 governments.The Administration should review the decision billion financed power related projects. to cut BAB credit payments and Congress should act to prevent further cuts. Sequestration of BAB Credit Payments On January 15,2012,$984 billion in automatic spending cuts known as"sequestration"were triggered by the failure of the Background Joint Select Committee on Deficit Reduction to meet deficit reduction targets required under the Budget Control Act of Creation of Build America Bonds 2011 (BCA).These cuts,totaling roughly$110 billion annual- Public power utilities annually finance roughly$11 billion in ly,began to take effect on March 1,2013,and had been set to expire after fiscal year 2021,i.e.,after September 30,2021. electric system investments with tax-exempt municipal bonds. (see"APPA1s Municipal Bonds and Public Power"issue brief for In September 2012,the Office of Management and Budget more information).During the 2008 credit crisis,traditional (OMB)provided to Congress a program-level list of cuts that municipal bond investors pulled out of the market and interest would be required under sequestration.'In that report,OMB rates soared.To provide liquidity to these markets—and in turn wrote that,while tax credit payments to individuals are exempt from sequestration,credit payments to other entities—including encourage the sorts of infrastructure investments municipal BAB credit payments to BAB issuers—are not.While perhaps bonds finance—the American Recovery and Reinvestment Act (ARRA)of 2009 created the BAB.' aligning with a strict reading of the law,this interpretation contradicts the Treasury Department's belief that BAB credit A BAB meets the same requirements of any other govern- ment-purpose municipal bond,but instead of the interest paid Z Refundable credits generally are exempt from sequestration(2 USC§905(d)), to the bondholder being tax-exempt,the bond issuer receives although as discussed further in this report the Office of Management and a credit payment from the Treasury Department equal to 35 Budget(OMB)has interpreted this exemption narrowly and,as a result,OMB percent of the interest paid.These new"direct payment"bonds has not applied this exemption to BABs credit payments. were intended to expand the pool of investors for municipal bonds to include investors willing to invest in taxable assets 31 USC§1324(b). without materially increasing the cost of financing for the mu- 4 U.S.DEPT OF TREASURY,TREASURY ANALYSIS OF BUILD AMERI- nicipal issuer. CA BOND ISSUANCES AND SAVINGS,at 2(May 16,2011). 'American Recovery and Reinvestment Act of 2009,Pub.L.No.111-5(123 5 OFFICE OF MGMT.&BUDGET,EXEC.OFFICE OF THE PRESIDENT, Stat.115)§1531 (codified as 26 U.S.C.54AA). OMB REPORT PURSUANT TO THE SEQUESTRATION TRANSPAREN- CY ACT OF 2012(EL. 112-155),at 157(Sept.24,2012). PubLicPower.org 63 245