WASHINGTON — The $3.7 trillion fiscal 2012 budget proposed by President Obama Monday would permanently reinstate an expanded Build America Bond program but at a lower 28% subsidy rate.
It also would simplify arbitrage restrictions, expand the smaller-issuer arbitrage rebate exemption, and provide $30 million over six years for a national infrastructure bank.
The budget also calls for $8 billion for high speed rail and proposes a six-year $556 billion surface transportation reauthorization bill.
The White House budget proposal anticipates $2.6 trillion in revenue, resulting in a $1.1 trillion deficit.
The plan drew some support from municipal market participants, but they were disappointed about what it did not contain, such as eased tax restrictions for bank-qualified bonds.
They also were unhappy with proposed cuts to state revolving funds and community development block grants.
“Pretty much dead on arrival,” is how one market participant described the president’s budget request.
Republicans blasted it.
“The president’s budget will destroy jobs by spending too much, taxing too much, and borrowing too much,” said House Speaker John Boehner. “By continuing the spending binge and imposing massive tax hikes on families and small businesses, it will fuel more economic uncertainty and make it harder to create new jobs.”
The BAB proposal, the same the president made in his fiscal 2011 budget request, is a case in point. Under the wildly popular program that expired Dec. 31, state and local governments issued taxable bonds and received payments from the Treasury equaling 35% of their interest costs.
Obama proposes making the program permanent with a 28% “revenue-neutral” subsidy rate. BABs, which had been limited to governmental issuers and capital expenditures, could be used more broadly for current refundings, short-term working capital, and they also could be sold by 501(c)(3) nonprofit issuers.
Key Republicans oppose BABs. House Ways and Means Committee chairman Rep. Dave Camp, R-Mich., said Monday: “Small governments are not small businesses, and they do not create the kind of private-sector jobs we need.”
Rep. Orrin Hatch, R-Utah, the top Republican on the Senate Finance Committee, was even harsher.
“Build America Bonds are simply a disguised state bailout that have proven to be another flawed provision within the failed stimulus bill, which the Obama administration erroneously promised would keep unemployment below eight percent,” he said.
“Over the past two years, nearly $200 billion worth of Build America Bonds have been issued by state and local governments. These bonds rightly expired at the end of 2010 and the resurrection of them would do nothing more than encourage states to continue on a reckless course of irresponsible spending and further fuel the unfettered spending agenda of the Obama administration.”
Also in the tax area, the president proposed a major easing of arbitrage rebate restrictions. Currently governmental bond issuers and governmentally-owned nonprofit bond issuers are exempt from having to rebate arbitrage to the federal government if they spend most proceeds in two years.
However, Obama is proposing a much broader exemption that would allow all issuers of fixed-rate bonds with weighted average maturities of at least five years to be exempt from arbitrage rebate requirements if they spend most of their bond proceeds within three years.
The administration also proposed exempting from arbitrage-rebate requirements small issuers that issue no more than $10 million of bonds in a year, up from the current $5 million. The exemption would be indexed for inflation and would apply to issuers regardless of whether they have taxing powers.
The administration also would end yield-restriction requirements, under which the investment yield could not exceed the bond yield, in certain cases such as after an issuer held onto proceeds during a three-year temporary period. The requirements, however, would still apply to advance refundings.
Obama also would eliminate the so-called 5% disproportionate and unrelated use test for private-activity bonds, so that the debt would only be PABs if they exceeded both the 10% private use and 10% private payments tests.
A single-family housing bond proposal would eliminate requirements that the mortgagee both be a first time homebuyer and fall within purchase price limits, something housing advocates applauded.
“The changes to the simplify arbitrage investment restrictions are a welcome proposal, and something that the state and local government community have long been calling for,” said Susan Gaffney, director of the Government Finance Officers Association’s federal liaison center. “We are very appreciative of the Treasury’s efforts to improve the arcane arbitrage procedures that have been in place for too many years.
“We note concerns with the cuts proposed to many programs important to state and local governments, including to state revolving funds, and that the success of the increased bank-qualified limit that was in place the past two years was not included in the president’s budget,” she said.
The administration had increased the bank-qualified small-issuer limit to $30 million from $10 million in 2009 and 2010 so that banks could deduct 80% of the cost of buying and carrying the bonds of the issuers, but the provision expired on Dec. 31.
“It was expected but disappointing that the administration chose not to advocate reform of the bank-qualified provision,” said Chuck Samuels, a partner at Mintz Levin Cohn Ferris Glovsky and Popeo PC. “It was a very useful provision for many small governments and charities and cost the government very little. We’ll continue advocate for changes in the provision that will modernize and make it useful.”
The Bond Dealers of America “is pleased to see that the Administration continues to support Build America Bonds at an essentially revenue neutral level. BABs helped the overall municipal market by attracting new investors and improving liquidity,” said Bill Daly, senior vice president of government relations for the BDA. “We are disappointed that the administration did not also propose reinstating the bank-qualified provisions that expired at the end of last year.”
In the transportation arena, Obama is proposing a $556 billion six-year surface reauthorization bill that would expand the current Highway Trust Fund to a Transportation Trust Fund that accounts for newly incorporated activities.
He would provide $30 billion over six years to fund a national infrastructure bank, and $8 billion as part of an overall $53 billion, six-year program to create a high-speed rail and intercity passenger rail network.
However, Obama would reduce funding for wastewater and drinking water state revolving funds as well as for the community block development grant program.
The president would propose about $1.55 billion for wastewaster SRFs, down about $500 million from the amount requested for fiscal 2011, and he proposed $990 million for drinking water SRFs, down $250 million from last year’s request.
“We’re not surprised, but we’re disappointed,” said Rick Farrell, executive director for the Council of Infrastructure Financing Authorities.
Obama also would cut the Community Development Block Grant program — which is used in connection with bonds — by 7.5%, or $300 million from the $3.948 billion that was provided for fiscal 2010.
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