Congressional inaction rattling muni issuers

Congress hasn’t gotten around to enacting a PAYGO waiver for the American Rescue Plan, which is causing concern from a coalition of issuer groups.

The coalition is worried that if PAYGO isn’t waived before the end of the year, direct subsidy payments owed to them by the U.S. Treasury could be denied. The types of bonds affected include Build America Bonds, Qualified School Construction Bonds, Qualified Zone Academy Bonds, New Clean Renewable Energy Bonds, and Qualified Energy Conservation Bonds.

“A county that has BABs or a transit authority that has BABs, they’re saying, ‘I’ve got to budget for this; if all of a sudden I don’t get subsidies, it’s pandemonium,’ ” said Emily Swenson Brock, who represents the Government Finance Officers Association in Washington.

GFOA's Emily Brock
“In terms of timing, we’d love it to be the first thing for people to look at right now but a lot of people are looking at campaign dates,” said Emily Brock, GFOA’s Washington lobbyist.

The existential threats to the $14 billion in funds come from a combination of politics, the appropriation process, and sequestration. 

PAYGO is a budget rule that requires that new legislation does not increase the federal budget deficit or reduce a surplus. If new legislation increases the deficit or reduces in revenues, the increase must be offset by increased revenue or reduced spending in other areas. 

Build America Bonds were developed to attract investment from outside the usual circles and were authorized to be issued from 2009-2011 when the country was trying to climb out of the global financial crisis. BABs are taxable bonds with higher interest rates than traditional tax-exempt munis. The Treasury is required to reduce this additional expense by providing a payment to the bond issuer equal to 35% of the interest paid to the bondholder. 

The bonds were enormously popular, and financed $180 billion worth of infrastructure projects including school construction, water and sewer improvements, hospital and other health care system upgrades, highway and mass transit investments, along with electric power transmission, generation and distribution systems. 

But the issuer coalition, which includes representatives from fourteen organizations representing finance officers, utilities, engineers, and municipalities, is increasingly concerned that the failure of Congress to waive the PAYGO rule as it has in prior years is putting much-needed subsidy payments at risk.

The coalition sent a strongly worded letter to Congress dated June 21, stating, “To our dismay, the federal government appears on the brink of completely reneging on this deal by eliminating $14 billion in payments to state and local entities.”  

The pandemonium may be premature as Congress has shown a propensity for kicking this budgetary can down the road until careening over a budgetary cliff becomes imminent. 

“My analogy is if you’re driving on mountain roads and pay attention, you don’t have a problem,” said John Godfrey, senior director, government relations, American Public Power. “If you don’t pay attention, there is some real concern. If Congress does not move to waive PAYGO in relation to the American Rescue Plan Act, then sequestration will be triggered and that will be hugely important to our members who issued Build America Bonds and renewable energy bonds.”  

So far, the letter has had no effect other than confirmation of receipt. Concerns are heightened by the calendar and political unknowns. “Nothing has changed just yet,” said Brock. “In terms of timing, we’d love it to be the first thing for people to look at right now, but a lot of people are looking at campaign dates. The question is, can it be done before November or do we have to wait and worry about a lame duck session?” 

Adding to the uncertainty, John Yarmuth, the chairman of the House Budget Committee, is retiring in January. “The timing for getting it done is not right yet,” said Godfrey. “It’s likely to end up being wrapped up in an end-of-the-year package. That’s what happened the last time around — it happened in December.”  


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