Refunding Direct Payment Bonds

With the passage of the American Recovery and Reinvestment Act of 2009, Congress authorized several different types of taxable municipal bonds, including Build America Bonds and Qualified School Construction Bonds, where the federal government provides subsidies (the “Direct Payment Subsidies”) in the form of direct payments to bond issuers (“Direct Payment Bonds”).  For the most part, such Direct Payment Bonds were issued in 2009 and 2010, and thereafter to a limited extent with respect to certain Direct Payment Bonds.  In recent years, the actual amounts paid by the federal government with respect to the Direct Payment Subsidies have been reduced due to cutbacks intended to reduce the federal budget deficit, known as sequestration.

In general, the Direct Payment Bonds may not be refinanced with new Direct Payment Bonds issued today.  With optional call dates for Direct Payment Bonds now approaching, issuers of Direct Payment Bonds may encounter opportunities to refund these bonds with traditional tax-exempt bonds and thereby realize savings.  When an issue of Direct Payment Bonds is refunded, the issuer loses the Direct Payment Subsidies.  This would mean that in a calculation generated to determine if savings are present to refund such bonds, the economics of eliminating the receipt of the Direct Payment Subsidy would need to be considered.

For further discussion on refunding your Direct Payment Bonds, or if you have any questions, please contact our tax-team: Bill Henn (410-843-3520), Solomon Cadle (410-843-3509) or Taylor Klavan (410-843-3528).