Bonds and Financing

Groups Urge Congress to Take Action to Prevent Elimination of $14 Billion in Subsidy Payments

The American Public Power Association (APPA) and other trade groups are urging congressional leaders to waive the statutory Pay-as-You-Go-Act of 2010 (PAYGO) before the close of the 117th Congress.

“Failure to do so will result in the elimination of $14 billion in subsidy payments to public entities across the country,” the groups said in their Dec. 15 letter. “Subsidy payments from our federal partners are currently included in the budgets of thousands of jurisdictions. Without certainty of receipt, essential public services may become acutely impacted.”

APPA and the other groups are members of the Public Finance Network, representing nearly fifty thousand public organizations and issuers of municipal securities.

APPA is also urging its members to reach out to their congressional delegation to ask for relief from Statutory Pay-As-You-Go Act of 2010 sequestration.

“As we collectively worked to emerge from the Great Recession over a decade ago, state and local governments and public entities across the country utilized options made available to stimulate the economy and undertook several hundred billion dollars in critical, long-term infrastructure obligations through the issuance of direct subsidy bonds,” the groups said.

At the time, the understanding was that federal payments related to these bonds would not be subject to the appropriation process and would not be subject to sequestration, APPA and the others said.

“To our dismay, the federal government appears on the brink of completely reneging on this deal by eliminating $14 billion in payments to state and local entities. Specifically, unless new legislation is enacted that will waive the PAYGO as relates to the budgetary effects of the American Rescue Plan, thousands of state and local entities will not receive any Build America Bond (BAB), Qualified School Construction Bonds (QSCB), Qualified Zone Academy Bonds (QZAB), New Clean Renewable Energy Bonds (New CREB), or Qualified Energy Conservation Bonds (QECB) payments otherwise guaranteed to them under the law.”

Entities that issued these bonds generally in 2009, 2010, and 2011 did so in partnership with the federal government. For example, a BAB is a type of municipal bond designed to expand the pool of investors for municipal debt at a time when investment in traditional tax-exempt municipal bonds was in decline.

Additionally, projects financed with these bonds helped provide jobs and needed infrastructure investments when the economy needed it most. Unlike a traditional municipal bond, interest on a BAB is taxable to the bondholder and the interest rate paid is higher than for a traditional tax-exempt bond. However, Treasury is required to reduce this additional expense by providing a payment to the bond issuer equal to 35 percent of the interest paid to the bondholder, the groups noted.

In all, nearly 2,400 communities issued BABs to finance $180 billion in infrastructure projects, including school construction, water and sewer improvements, hospital and other health care system upgrades, highway and public transit investments, and electric power utility transmission, generation and distribution.

“Insofar as Congress fails to prevent these credit payments from being eliminated under PAYGO sequestration, it will be our residents who ultimately pay for the increased project costs.”

The groups also noted that Congress sought to make energy investment incentives available to not just investor-owned utilities and merchant generators through the creation of new CREBs to be issued by public power utilities and rural electric cooperatives. This change was made to ease the concentration of tax creditable energy project ownership by merchant power generators.

More than 800 public power utilities, school districts, city governments, and rural electric cooperatives were allocated more than $2.2 billion in new CREB bonding authority to finance, wind, solar, hydropower, and biomass projects. If Congress allows new CREB payments to be eliminated, it will result in their customers either seeing an increase on their monthly bill or in reduced resources available for investments in grid security and reliability, the groups warned.

“Payments to issuers of these special purpose bonds are already laboring under a steady stream of cuts triggered by the Budget Control Act of 2011 due to the failure of the Joint Select Committee on Deficit Reduction. These ‘Joint Committee Reductions’ began in 2013 and are now expected to continue through 2031. Joint Select Committee reductions will have cut payments by nearly $3 billion by the end of Fiscal Year 2022 and will cut payments by another $1.6 billion by the end of Fiscal Year 2031,” the letter said.

Allowing joint committee reductions to continue “is a travesty because so many public entities depend on this federal-state-local partnership. However, allowing PAYGO to eliminate these payments entirely would be catastrophic to communities that stepped up during the Great Recession to try to create jobs when job creation was desperately needed, to students in schools that are already underserved and to renters and homeowners that are already struggling to pay utilities, taxes, and other bills,” the groups said. 

“As a result, we hope Congress will overcome its differences and fix this problem for all Americans. Thank you for your time and consideration.”

The letter was sent to House Speaker Nancy Pelosi, D-Calif., Rep. Kevin McCarthy, R-Calif., House Minority Leader, Sen. Charles Schumer, D-N.Y., Senate Majority Leader, and Sen. Mitch McConnell, R-Kentucky, Senate Minority Leader.