Build America Bond subsidy payments are subject to federal budget sequestration, and public power agencies that floated the bonds are not eligible for refunds, the U.S. Court of Appeals for the Federal Circuit ruled Friday.
The ruling stems from a three-year-old lawsuit brought against the United States by six Midwestern public power agencies, led by the Indiana Municipal Power Agency. The agencies together issued more than $4 billion in direct-pay Build America Bonds before 2011.
Created under the American Recovery and Reinvestment Act, direct-pay BABs were taxable bonds issued in 2009 and 2010 for which the federal government pledged to make payments to issuers equal to 35% of their interest costs. The instrument proved popular, with governments floating more than $180 billion in two years. Obama administration officials at the time assured issuers that the payments would not be subject to retroactive cuts.
From 2010 through the end of 2012, Treasury paid the full 35% subsidy. But since 2013, Treasury reduced the 35% subsidy under the Office of Management and Budget’s sequestration calculations.
The 2013 payments were sliced to 8.7% from 35%, noted the court ruling. The 2019 budget maintained sequestration cuts to direct-pay bond subsidies for 10 more years.
Sequestration was enacted as part of the Budget Control Act of 2011 for spending beginning in March 2013. The cuts are automatic, annual, across-the-board reductions to defense and non-defense discretionary and mandatory spending programs which stem from Congress’ failure to reach an agreement over how to significantly cut the deficit. The sequestration rate cuts are not cumulative and reset at a new percentage annually by the Office of Management and Budget.
The constant subsidy reductions reduce the effectiveness of direct-pay bonds for infrastructure finance, supporters say. And the debate over BABs subsidies remains relevant as muni market participants worry that the subsidies may be denied entirely if Congress does not pass a so-called PAYGO waiver every year.
“We are disappointed with the ruling and frustrated with the Office of Management and Budget, which is largely driving this issue,” said John Godfrey, senior director of government relations for the American Public Power Association.
“It is clear that Congress fully intended refunds to issuers of direct-payment bonds to be exempt from budget sequestration,” said Godfrey, adding that OMB and Treasury have the authority to exempt the refunds from sequestration.
“But the real issue here is the costs imposed on issuers of these bonds,” he added. “Based on OMB reports, we estimate that sequestration has cut $2.4 billion in direct payment bond refunds; $221 million to public power issuers alone,” he said. “This means less money for new investments or higher rates to our customers.”
The public power agencies filed the complaint in December 2020 with the Court of Federal Claims, arguing that the subsidy reductions violated ARRA and that the government was breaching its contract with issuers. The group was seeking the full 35% subsidy on interest payments from 2013 through 2030.
The Court of Federal Claims sided with the U.S. when it ruled that no statutory claim existed because sequestration applied to the payments and that ARRA did not create a contract. The agencies appealed to the U.S. Court of Appeals for the Federal Circuit.
In its Feb. 17 opinion, the judges called the trial court’s decision a “well-reasoned analysis.”
“We agree that sequestration applies to Direct Payment BABs because these payments are issued from the permanent, indefinite appropriation” provided by the statute that oversees direct spending, the ruling said.
“As for appellants’ contractual claim, we agree that appellants did not plead the elements of a contract because they rely solely on a statutory provision that does not create a government contract.”
It was not immediately clear if the power agencies plan to appeal to the U.S. Supreme Court.