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Issue Brief

Sequestration of Bond and Tax Credit Payments

Sequestration of Bond and Tax Credit Payments Issue Brief

Summary

The American Public Power Association (APPA) strongly supports legislation to end the threat of sequestration of federal payments related to Build America Bonds (BABs) and elective payment energy tax credits.
APPA believes that sequestration of payments to BAB issuers and other direct payments bonds is tantamount to a breach of contract for financial deals negotiated more than a decade ago.
APPA believes that the threat of sequestration of elective payment tax credits needlessly clouds investment decisions for public power utilities and rural electric cooperatives, which collectively serve nearly 30 percent of the nation’s retail customers.

Background

During the 2008 credit crisis, traditional municipal bond investors pulled out of the market and interest rates soared. To provide liquidity to these markets—and in turn encourage the sorts of infrastructure investments that municipal bonds finance—the American Recovery and Reinvestment Act (ARRA) of 2009 created the BAB. A BAB meets the same requirements as any other government-purpose municipal bond, but instead of the interest being tax-exempt, the bond issuer receives a credit payment from the Treasury Department equal to 35 percent of the interest paid. Of the $181 billion in BABs issued, 108 BABs worth $16 billion financed power-related projects.1 Of those, power-related BABs issuances, roughly $13 billion remain outstanding.2 New Clean Renewable Energy Bonds (New CREBs) are another form of “direct payment” bonds intended as an alternative to energy tax credits for which public power utilities were not eligible. Roughly $540 million in New CREBs were issued by public power utilities, and roughly $460 million remain outstanding.3 BABs were authorized to be issued in 2009 and 2010 only, and the ability to issue New CREBs was repealed in 2017.

The Inflation Reduction Act (P.L. 117-169) allowed certain energy tax credits to be claimed as elective payment tax credits, making them directly available to public power utilities and rural electric cooperatives for properties they own. Previously, as tax-exempt entities, public power utilities could not claim such credits.

A failure to meet deficit reduction targets under the Budget Control Act of 2011 (BCA) triggered the Department of Treasury to implement automatic cuts to federal mandatory (entitlement) spending programs beginning March 1, 2013, through a process called sequestration. Ignoring earlier statements by the Treasury Department4 and congressional intent,5 the White House Office of Management and Budget (OMB) decided in 2012 that BAB and New CREB credit payments to BAB and New CREB issuers were subject to sequestration.6 BCA sequestration cuts were originally supposed to end after 2021, but Congress has repeatedly extended the period and annual cuts of 5.7 percent will now last through fiscal year (FY) 2031. According to OMB, BAB and New CREB credit payments have been cut by approximately $2.7 billion since 2013. APPA estimates that these payments will be cut by another roughly $800 million before sequestration ends at the end of FY 2031.

Further cuts could also be made under the Statutory Pay-as-You-Go Act of 2010 (PAYGO), which requires that any increase in the deficit caused by new tax or entitlement spending laws also triggers sequestration cuts to eliminate those deficits. These cuts are automatic unless PAYGO is waived, either as part of the new law or in subsequent legislation. For example, in December 2024, Congress voted to waive the budget effects of the American Rescue Plan Act of 2021 (ARPA), which added $1.9 trillion in deficit spending to the PAYGO “scorecard” and threatened to force the elimination of most mandatory spending, including payments to issuers of direct payment bonds and to refund payments of elective pay tax credits.

While congressional action resolved the issue for now, the threat of PAYGO sequestration will loom any time Congress approves new entitlement spending or tax cuts. This is unfair to issuers of direct payment bonds and needlessly clouds investment decisions by public power utilities seeking to take advantage of elective pay tax credits.
 

Congressional Action

In December 2024, H.R. 9494, the Fiscal Year 2025 Continuing Resolution and Other Matters Act, was signed into law. As discussed above, it waived the budget effects of ARPA, which added $1.9 trillion in deficit spending to the PAYGO “scorecard,” and threatened to force the elimination of most mandatory spending, including payments to issuers of direct payment bonds and to refund payments of elective pay tax credits. To offset the cost of certain additional health care expenditures, H.R. 9494 also extended BCA sequestration of Medicare expenses into 2024. However, sequestration of other programs, such as payments to BABs issuers, was not further extended.

APPA appreciates that H.R. 9494 did not further extend BCA sequestration covering BABs. However, PAYGO sequestration will remain a threat any time mandatory spending or revenue reductions are enacted into law unless PAYGO is waived, either as part of the new law or in subsequent legislation.
 

APPA Contact 

John Godfrey, Senior Government Relations Director, 202-467-2929 / jgodfrey@publicpower.org

  1. U.S. Department of Treasury, Treasury Analysis of Build America Bond Issuances and Savings, at 2 (May 16, 2011).
  2. Bloomberg L.P., MSRC Screen (“active municipal” and “ARRA program” as criteria) on June 2, 2023.
  3. Id.
  4. Tax Exempt and Taxable Government Bonds: Hearing before the H. Subcomm. on Select Revenues of the H. Comm. on Ways & Means, 111th Cong. 12 (2009) (Serial No. 111-22) (Statement of Alan B. Krueger, Assistant Sec’y. of Treasury of the United States).
  5. John Buckley, Remarks at the Urban-Brookings Tax Policy Center and George Mason Center for State and Local Government Leadership panel discussion Fallout from Federal Tax Reform: Implications for State and Local Revenues (Sept. 21, 2012) (Buckley, who as chief tax counsel for the House Ways and Means Committee helped write the BAB provision in ARRA, called OMB’s decision “extraordinary and strange”).
  6. Office of Mgmt. & Budget, Exec. Office of the President, OMB Report Pursuant to the Sequestration Transparency Act of 2012 (P.L. 112-155), at 157 (Sept. 24, 2012).