Barclay Damon
Barclay Damon

Legal Alert

The Impending Sequester And Direct-Pay Bonds

As part of the American Taxpayer Relief Act of 2012 enacted last month, a 2013 sequester order for $85 billion in spending cuts is set to be issued on March 1 and implemented on March 27.

Sequester is the formal term for mandatory cuts to federal programs. Essentially, Congress had authorized certain money to be spent but is now prohibiting such money from being spent. Sometimes called “across the board” cuts, spending accounts are divided into four categories, and within each category programs must be cut by the same percentage.

Direct-pay bonds are in a category currently estimated to be cut by 5.3 percent. Direct-pay bonds include the Build America Bonds (which were issued under the American Recovery and Reinvestment Act), qualified school construction bonds, qualified zone academy bonds, qualified energy conservation bonds and new clean renewable energy bonds.

In practice, the cuts would not be “across the board.” Payments that have already been made cannot be cut, so those payments not yet made would then have to be cut by a greater amount so that the set percentage cut for that category is met. As a result, the amount by which an issuer’s payment would be cut depends on when that issuer and all other issuers receive their payments and further depends on when the Office of Management and Budget issues the sequester order and the Treasury Department’s guidance on how the order will be implemented. Those issuers who would receive payments between March 1 and September 30 can expect payment cuts above 5.3 percent.

On February 6, President Obama called on Congress to pass a budget by March 1 that would permanently replace the sequester or to take action to put together a smaller package of spending cuts and tax reforms to delay the sequester until a permanent solution can be found.

The expiration date for the continuing resolution that funds the operation of the government is also set for March 27, so it is also possible that the cuts in the sequester order will be renegotiated during March.

If you would like further information or have any questions with respect to the impact of a sequester on direct-pay bonds, please feel free to contact Connie Cahill at (518) 429-4296 or mcahill@hblaw.com, Garrett DeGraff at (518) 429-4235 or gdegraff@hblaw.com, Jean Everett at (202) 582-0601 or jeverett@hblaw.com, or Susan Katzoff at (315) 425-2880 or skatzoff@hblaw.com.