For easy printing, download the Sequestration of Build America Bonds Issue Brief.
Spending cuts (“sequestration”) triggered by the Budget Control Act of 2011 have reduced payments to state and local Build America Bond (BAB) issuers by $2 billion. The American Public Power Association (APPA) estimates that an additional $1.7 billion in BAB payments will be cut under sequestration through 2030. 79 public power utilities issued more than $16 billion in BABs and have seen payment cuts totaling an estimated $182 million thus far, with another $151 million in cuts projected through 2030.1 Sequestration ignores Congress’s intent for BABs and New Clean Renewable Energy Bonds (New CREBs) and reneges on what the federal government promised in partnership with state and local governments. APPA believes Congress should act to prevent further cuts to BAB and New CREB credit payments. At the very least, Congress should stop extending the duration of sequestration as it did yet again in the Bipartisan Budget Act of 2019.
Creation of Build America Bonds
In the last decade, public power utilities financed roughly $7 billion annually in electric system investments with tax-exempt municipal bonds. (See APPA issue brief, “Municipal Bonds and Public Power,” for more information.) During the 2008 credit crisis, traditional municipal bond investors pulled out of the market and interest rates soared. To provide liquidity to these markets—and in turn encourage the sorts of infrastructure investments municipal bonds finance—the American Recovery and Reinvestment Act (ARRA) of 2009 created the BAB.2
A BAB meets the same requirements as any other government-purpose municipal bond, but instead of the interest being tax-exempt, the bond issuer receives a credit payment from the Treasury Department equal to 35% of the interest paid. These new direct payment bonds were intended to expand the pool of investors for municipal bonds to include investors willing to invest in taxable assets. The credit payment to issuers was intended to avoid any material increase in the cost of financing for the issuer.
In drafting ARRA, Congress sought to ensure that BAB credit payments were not vulnerable to year-to-year budget legislation enacted by Congress. First, ARRA clarified that a credit payment to a bond issuer is a refundable credit.3 Second, ARRA specifically added BAB credit payments to the list of tax credit payments for which funds are permanently appropriated.4 In the 21-month period (April 2009 through December 31, 2010) in which BABs could be issued, 2,275 BABs were issued worth $181 billion.5 Of those issuances, 108 BABs worth $16 billion financed power-related projects.
Sequestration of BAB Credit Payments
A failure to meet deficit reduction targets under the Budget Control Act of 2011 (BCA) triggered mandatory spending cuts (sequestration) beginning March 1, 2013. These cuts were to continue through the end of fiscal year (FY) 2021. Tax credit payments to individuals are exempt from sequestration, but the White House Office of Management and Budget decided in 2012 that credit payments to other entities—including BAB credit payments to BAB issuers—were not.6 This interpretation contradicted earlier statements by the Treasury Department7 and congressional intent.8 As a result, through 2020, BAB credit payments will have been cut by $2 billion. Additionally, Congress has repeatedly extended the period for sequestration beyond its originally intended FY 2021, most recently in the Coronavirus Aid, Relief, and Economic Security Act of 2020 (CARES Act). As a result, APPA now estimates that BABs payments will be cut by another roughly $1.7 billion before sequestration ends in 2030.9
In addition, BAB credit payments could face still deeper cuts under the Statutory Pay-As-You-Go Act of 2010 (PAYGO). Under PAYGO, any increase in the deficit triggered by a new tax or entitlement spending law triggers across-the-board spending cuts to eliminate the deficit increase. These cuts are automatic unless PAYGO is waived in the new tax or entitlement spending law or waived in a subsequent law. For example, enactment of the Tax Cuts and Jobs Act of 2017 (TCJA) will increase the federal deficit by an estimated $1.5 trillion through 2027 and would have triggered PAYGO sequestration cuts of $1.5 trillion over the same period. Congress acted later to prevent sequestration from being triggered by TCJA, but there is no guarantee Congress will do so under similar circumstances in the future.
On July 1, 2020, the House passed H.R. 2, the Moving Forward Act, which included a provision to reinstate the ability to issue taxable direct payment bonds. The direct payment for these “qualified infrastructure bonds” would have equaled 40 percent for bonds issued in 2020 through 2024, but gradually phased down to 30% for bonds issued in 2027 and thereafter. Credit payments to qualified infrastructure bond issuers would have been protected from budget sequestration. This language reflected the recognition by House members that direct payment bonds should not be subject to sequestration. However, the legislation would not have protected issuers of current direct payment bonds from sequestration. While members of the House Ways & Means Committee had sought to provide such protection, others argued that if any programs get relief from the current sequestration, all programs should get that relief.
Further action on H.R. 2 was not taken in the 116th Congress, but it could be reintroduced in the 117th Congress.
Congress clearly did not intend for BAB credit payments to be subject to sequestration. Likewise, it is tantamount to a breach of contract for bond issuers to have negotiated financial deals based on the promise of a payment on which the federal government is now reneging. BAB-financed investments in power generation, distribution, and system improvements shored up critical infrastructure at a time when traditional tax-exempt bond investors were in short supply and state and local government access to municipal bond markets was impaired. It is wrong for the federal government to decide by fiat to renegotiate the terms of those deals. Every dollar cut means one dollar less that is available to build power plants, power lines, and systems needed to continue to deliver electric power to public power’s customers. Every dollar cut also represents a dollar more that public power utilities’ customers must pay to receive such power.
Reinstating the ability to issue taxable direct payment bonds would attract new investors, including pension plans and offshore investors, that do not benefit from the tax-exemption of a traditional tax-exempt municipal bond. And exempting payments for these payments from sequestration will allow states, localities, and public power utilities to issue these new infrastructure bonds with confidence. Congress should also act to prevent further BAB credit payment cuts. That includes both continued cuts due to Congress’s inability to reach a budget deal in 2012 and potential cuts whenever Congress fails to meet “Pay-As-You-Go” obligations when enacting future legislation. At the very least, Congress should stop extending the duration of sequestration as it did yet again in the CARES Act.
1. Payments to issuers of New Clean Renewable Energy Bonds (New CREBs) are also being cut as a result of sequestration. However, the cuts to public power utility issuers are relatively modest compared – totaling roughly $8 million since 2013. As a result, this issue brief largely focuses on BAB issuers, but APPA’s concerns for issuers of New CREBs are the same.
2. American Recovery and Reinvestment Act of 2009, Pub.L. No. 111-5 (123 Stat. 115) § 1531 (codified as 26 U.S.C. 54AA).
3. Refundable credits generally are exempt from sequestration (2 USC § 905(d)), although as discussed further in this report, the Office of Management and Budget (OMB) has interpreted this exemption narrowly and, as a result, OMB has not applied this exemption to BABs credit payments.
4. 31 USC § 1324(b).
5. U.S. Department of Treasury, Treasury Analysis of Build America Bond Issuances and Savings, at 2 (May 16, 2011).
6. 6 Office of Mgmt. & Budget, Exec. Office of the President, OMB Report Pursuant to the Sequestration Transparency Act of 2012 (P.L. 112-155), at 157 (Sept. 24, 2012).
7. Tax Exempt and Taxable Government Bonds: Hearing before the H. Sub-comm. on Select Revenues of the H. Comm. on Ways & Means, 111th Cong. 12 (2009) (Serial No. 111-22) (Statement of Alan B. Krueger, Assistant Sec’y. of Treasury of the United States).
8. John Buckley, Remarks at the Urban-Brookings Tax Policy Center and George Mason Center for State and Local Government Leadership panel discussion Fall- out from Federal Tax Reform: Implications for State and Local Revenues (Sept. 21, 2012) (http://www.taxpolicycenter.org/events/federal-tax-reform-and-the- states.cfm) (Buckley, who as chief tax counsel for the House Ways and Means Committee helped write the BAB provision in ARRA, called OMB’s decision “extraordinary and strange”).
9. APPA estimates based on prior year sequestration and estimates provided in Cong. Budget Office, Estimated Impact of Automatic Budget Enforcement Procedures Specified in the Budget Control Act, at 8 (Sept. 12, 2011). Statutory Pay-as-You-Go Act of 2010, Pub. L. No. 111-139 (124 Stat. 8) (codified as 2 U.S.C. 931).