by Matthew D. Jessup on December 17, 2010
Last night, the House of Representatives followed the earlier action of the Senate and approved significant tax legislation that, among other things, failed to include an extension of the Build America Bond (BAB) Program. The BAB Program automatically expires on December 31, 2010, and tax legislation was the last chance for a stay of execution. The BAB Program allowed governmental issuers to issue taxable bonds to finance tax-exempt capital projects and receive a 35% (or in some cases 45%) interest subsidy from the Federal government.
Based on the very scientific “by show of hands” survey I conducted last month at the League of Municipalities, governmental issuers in New Jersey won’t be mourning the death of BABs for long. Very few municipalities issued BABs, and the few that did are still (a) wondering whether they saved money compared to issuing traditional tax-exempt bonds and (b) holding their breath that the Federal government makes good on its promise to pay the subsidy for the next 20 or 30 years.
What municipalities should mourn is the reversion of the “Bank Qualification” limit from $30 million back to $10 million. Originally created in 1986, the $10 million limitation had never been increased based on inflation or regionalization, until 2009 when it was increased to $30 million pursuant to the legislation creating BABs. Tax legislation was needed to prevent the decrease back to $10 million at the end of the year.
Banks buying “Bank Qualified” debt are allowed to deduct 80% of the cost of borrowing and holding such debt issued by governmental issuers that issue no more than (for now) $30 million of tax-exempt debt each year. When banks have access to less expensive capital, those savings are passed down to the municipal issuers. On any given day, bank qualification can mean as many as 50 basis points or more in savings.
Rather than issue Build America Bonds, a significant number of New Jersey issuers took advantage of the limitation increase to $30 million and issued bank qualified debt in 2009 and 2010. The increase in the limitation was long overdue and provided critical debt service relief to municipalities. It is unfortunate that Congress couldn’t separate its dislike for BABs from the benefits of a higher bank qualification limit, so that the latter could continue. Heading into the worst budget year they have ever seen, local governments needed this valuable benefit.
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