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March 6, 2013
Effect of Federal Sequestration on Certain Municipal Bond Issuers

March 6, 2013 - On Friday, March 1, 2013, the sequestration provisions of the Budget Control Act of 2011 (“Sequestration”) went into effect.  As a result, according to the Internal Revenue Service, federal subsidy payments relating to Direct-Pay Tax Credit Bonds will be reduced by 8.7 percent of the amount that would otherwise have been paid to the issuer.

Direct-Pay Tax Credit Bonds are taxable bonds for which the federal government makes a direct payment equal to a percentage of the interest due, and include:

  • Build America Bonds (BABs)
  • New Clean Renewable Energy Bonds (New CREBs)
  • Qualified Energy Conservation Bonds (QECBs)
  • Qualified School Construction Bonds (QSCBs)
  • Qualified Zone Academy Bonds (QZABs)
  • Recovery Zone Bonds (RZBs) 

Issuers of Direct-Pay Tax Credit Bonds may want to review their bond documents with their bond counsel and/or financial advisor to understand the potential effect of Sequestration on their Direct-Pay Tax Credit Bonds, and may wish to consider the following actions:

  • Determine the amount of the shortfall and, if the issuer relies on the federal payment amounts to make timely interest payments, develop alternative plans to meet debt service requirements.

  • Determine whether the subsidy payment is paid directly to the issuer or is sent directly to a debt service fund held by a paying agent, and work with the paying agent and/or filing agent to ensure that Form 8038-CP is filed in a timely manner.

  • For issuers of Direct-Pay Tax Credit Bonds that are payable from utility revenues, determine whether a reduction in the payment materially impacts any bond covenants.,

In addition, issuers who are preparing to sell bonds should consult with bond counsel and/or disclosure counsel about whether Sequestration will have a material effect on the issuer’s financial picture in general, including anticipated receipt of significant federal grant funds, payments-in-lieu-of-taxes, or other potential impacts.

For further information, click on the links above or contact any member of our Municipal Government and Public Finance practice groups.