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Possible New Life for Build America Bonds

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FOCUS: Bond Counsel Corner
John M. Kamins
Foster Swift Municipal Law News
February 2011

There are two noteworthy developments in February 2011 regarding a possible revival of the federal Build America Bonds (BABs) program, as anticipated in our January 2011 Bond Counsel Corner article, "Updates on Federal Tax Laws Affecting Municipal Bonds." We reported there that efforts failed last year to extend the BABs program beyond the December 31, 2010 sunset date in the authorizing law (the American Recovery and Reinvestment Act of 2009). We further said: "There may be efforts in the new U.S. Congress to resurrect the BABs program in a revised format, but prospects are speculative."

Under the ARRA, state and local governments could issue taxable (not tax-exempt) BABs in 2009 and 2010 and receive federal subsidy payments from the U.S. government equal to 35% of their interest costs on those bonds. New issuances of BABs currently are not allowed in 2011.

What are this month’s new developments? First, a bill has been introduced in the U. S. House of Representatives to reinstate the BABs program for just two years, reducing the federal subsidy payment rate from 35% to 32% for BABs issued in 2011 and 31% for BABs issued in 2012.

Second, President Obama’s proposed fiscal 2012 federal budget, issued February 14, 2011, contemplates making permanent (with no sunset date) a revised BABs program at a 28% federal subsidy payment rate. The President’s budget proposal also would enlarge the BABs program to allow BABs to be issued for all purposes for which tax-exempt bonds currently may be issued. Before the Dec. 31, 2010 sunset, BABs could only be issued to finance capital expenditures.

Just as we stated in last month’s Bond Counsel Corner, "prospects are speculative" for the revival of BABs - whether pursuant to the new pending House bill (introduced by Gerald Connolly, D-Va.) or as proposed in the President’s fiscal 2012 federal budget request. BABs have been opposed by several Republican members of Congress, including the House Ways and Means Committee chairman Dave Camp, of Michigan’s 4th Congressional District (including 14 counties - Leelanau, Grand Traverse, Kalkaska, Missaukee, Roscommon, Clare, Osceola, Mecosta, Isabella, Midland, Saginaw, Gratiot, Montcalm and Shiawassee). We will provide you further updates on the prospects for a BABs revival in future Bond Counsel Corners.