National Association of Counties
Washington, D.C.

 Sequester cuts hurt county issuers of Build America Bonds

By Charles Taylor

Clarke County, Va. financed construction of a new high school in 2010 using Build America Bonds, a form of “direct-pay” bonds created in the 2009 federal stimulus. The new bonds were “marginally less costly than competing financing methods” — such as tax-exempt bonds — said Michael Hobert, chairman of the county’s Board of Supervisors.

Now, the sequester’s across-the-board cuts will mean an 8.7 percent cut in tax credits or subsidy payments from the U.S. Treasury Department to issuers of those bonds.

Counties across the United States found Build America Bonds (BAB) and other direct-pay bonds attractive financing options because they effectively lowered interest payments. The bonds allowed state and local governments to issue taxable bonds in 2009 and 2010 for capital projects and receive federal subsidies from the IRS for a portion of their borrowing costs.

Hundreds of counties used them to build new facilities, renovate hospitals, build new schools and roads, according to the U.S. Office of Management and Budget. Now $3.35 billion worth of BAB payments are subject to sequester cuts and about $900 million in payments for other direct-pay bonds.

For Clarke County, the cut will mean a loss of $11,000 for the next fiscal year, an amount that might strike some as “comparatively small,” Hobert said.

“However, unless these payments are shielded from further sequester reductions in October, the annual amount of funding lost to Clarke County for this long-term obligation will continue to increase.”

Bill Daly is director of governmental affairs for the National Association of Bond Lawyers. “Unless Congress goes back in and undoes the sequester process, this is the first year of a total of nine years of sequesters,” he said. In future years, the cuts would be “probably less” than this year’s 8.7 percent.

“There aren’t a lot of choices that the local governments can make to change this,” he said. “They have the bond payments that they’re obligated to make and separately from that, you’ve got the federal subsidy that federal law is cutting.

“Right now, I think we’re just in a position of explaining to people what is going on.”

He said that there may be some situations — depending on the language of each individual bond document and the economics of the deal — where an issuer can do an “extraordinary call.” That is, they can call in the bonds and then re-fund them with tax-exempt bonds.

Wood County, W.Va. used Recovery Zone Bonds, another type of BAB created by the 2009 stimulus, to purchase and renovate a building to house justice and law enforcement offices that had been separately located. As a result of the sequestration, its interest subsidy for this type of bond is being reduced,  county officials said.

 “It has to give you a little bit of concern, but what is, is. That’s the way it worked out,” County Commission President Wayne Dunn said. “That was right around $5,000 that was taken out that we could sure have used. We counted on that money when we started this process,” he continued.

Even with the reduction, “the deal was still the best deal we were ever going to find.” At the time, he said, it did stimulate the local economy while providing a new justice center.

Meanwhile, counties’ bond counsels across the country are getting out the word to county boards and commissions about a sequester-related consequence they might not have been aware of.

Clarke County’s Hobert is sympathetic to the federal budget plight — up to a point. “The County of Clarke fully understands that the federal government must act with greater fiscal responsibility, and that doing so will require spending reductions that will impact this county,” he said. “Indeed, our recently advertised budget makes across-the-board expenditure reductions in anticipation of reduced federal revenue.

“However, reneging on a long-term commitment for financing is qualitatively different from changes in annual appropriations.”

Timber counties question Forest Service’s recall of payments

Alvin Black, a county judge from Montgomery County, Ark., is a bit perplexed.

The U.S. Forest Service wants states that received payments in January under the Secure Rural Schools (SRS) program to return 5.1 percent of the money — $17.9 million — because of the sequester. Some 729 counties with federal forest lands in 41 states received the payments, authorized last year at $323 million.

In letters to 41 governors, USDA wrote that states “will receive a bill for collection to return the sequestered amount to the Treasury.”

The problem is: Though the bulk of the funds were disbursed in 2013, it’s 2012 money, timber county officials say.

“It is beyond me how they can apply the sequester rules to this FY12 money because it was allocated a year ago. Somebody needs to explain that,” said Black, who also serves on NACo’s Public Lands Steering Committee. Arkansas has been asked to refund more than $400,000.

Black isn’t yet sure of the exact monetary impact on his county, where 70 percent of the land is owned by the federal government, including the Ouachita National Forest.

“We’ll still function if we have to turn this back in,” he said, “but in my mind, at least, they’re over-reaching here, and I don’t know how they’re justifying it.”

Neither do 31 bipartisan members of Congress who recently wrote to Agriculture Secretary Tom Vilsack complaining about the retroactive recall of funds. “We respectfully request that you provide our offices with an explanation of the legal rationale to request these refunds from states and counties,” said the letter, also addressed to the acting director of the Office of Management and Budget.

The request is an even bigger issue in Oregon, where Doug Robertson is a Douglas County commissioner and president of the Association of O&C Counties, a coalition of timber counties. The state would have to send $3.6 million back to Washington.

He said governors have been given the option to repay the money from allocated but unexpended funds that typically remain at the state level and don’t flow to counties. “If that’s not the choice, they would come directly to the counties” and take it out of funds counties use for roads, schools, search and rescue on federal lands and firefighting.

“You’re talking about counties, some of whom are on the brink of insolvency as we’re speaking,” Robertson said. “We’re urging the governor to choose to to repay this amount of money through the use of allocated but unspent Title II dollars.” Those funds are used by statewide resource advisory committees to prioritize projects on federal lands such as conservation and watershed improvements, he said.

“It’s just another blow to counties that are trying their best to simply survive to keep their services at acceptable levels,” Robertson added, “and boom, here we come again with another hit, and it’s just very difficult.”