Bonds and Financing

Public power utilities urge Congress to end sequestration of direct payments

On July 16, the American Public Power Association transmitted a letter from 114 public power utilities to congressional taxwriters urging the end of federal budget sequestration of direct payments to issuers of bonds.

The letter was sent as Congress is considering whether to allow states and localities to issue direct payment bonds to encourage infrastructure investments, similar to when it authorized Build America Bonds and New Clean Renewable Energy Bonds in the past. However, the letter states that “enthusiasm for direct payment bonds from both issuers and purchasers has been dampened by sequestration of direct payments to issuers of previously issued direct payment bonds.” Approximately $1.8 billion in payments have been sequestered since 2013, and the Association estimates that amount could double through 2027 under the current law.

The letter was addressed to House Ways and Means Committee Chairman Richard Neal (D-MA) and Ranking Member Kevin Brady (R-TX) and Senate Finance Committee Chairman Chuck Grassley (R-IA) and Ranking Member Ron Wyden (D-OR).

Letter signatories include utilities and joint action agencies from 21 states who issued direct payment bonds, including Build America Bonds or New Clean Renewable Energy Bonds, or are involved in direct-payment-bond financed projects.

While proposals for new direct payment bonds generally exempt them from sequestration, the proposals do not address the utilities’ concerns with existing direct payment bonds. The letter explains how failing to address sequestration of existing bonds would still hurt newly issued bonds:

“(T)he continued sequestration of payments to existing direct payment bond issuers still will have a chilling effect on newly authorized direct payment bonds. Issuers rightfully questioning Congress’ commitment to retaining the exemption from sequestration will likely insist upon the right to redeem newly issued bonds.  In turn, investors seeking a long-term reliable investment will demand a higher interest rate by way of compensation for the threat of an early redemption.”

The letter supports the recreation of direct payment bonds as a useful tool for expanding the scope of infrastructure investors, including pension funds. However, the letter warns the legislators that a failure to address the sequestration of payments will hinder newly issued bonds’ success. “(P)revious direct payment bond issuers should never have been subject to sequestration, and those seeking to reinstate direct payment bonds must end current sequestration of these payments to ensure the success of future direct payment bonds,” the letter concludes.

"This issue has been plaguing us for a while, so it’s really gratifying to see so many engaged,” said John Godfrey, senior government relations director at the Association. The Association has been advocating for Congress to end sequestration of these payments since 2013.

The Association will continue to work with affected members on this issue and with other stakeholder groups, including the Large Public Power Council, the Government Finance Officers Association, and the National League of Cities.

Read the full letter