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The Bond Buyer - March 8, 2010 - by Peter Schroeder
WASHINGTON — Sen. Charles Grassley is opposing the expanded bond provisions included in the jobs bill the House passed Thursday, arguing that the higher subsidy rates in the legislation will just boost profits for Wall Street underwriters.
The Iowa Republican, the ranking minority member on the Senate Finance Committee, issued a statement hours after the House passed the bill late Thursday, contending that the deeper subsidies will allow underwriters to “skim the cream” by charging higher fees to municipal bond issuers.
“With its vote today, the House has one-upped the Senate majority on directing more money to profits for big Wall Street banks, while claiming to pass legislation to create jobs,” Grassley said. “The truth is, school kids and green-energy efforts get what’s left after the bank fees are paid and city and state governments have released the funding.”
He also pointed out that the House would spend over $2 billion more on the Build America Bond provisions over the next 10 years.
The Joint Tax Committee scored the costs of the Senate provisions at $2.5 billion, while the House version is estimated to cost $4.6 billion through 2020.
The Senate is expected to take up to jobs measure sometime this week, after it clears “extenders” legislation.
Last month, Grassley asked Goldman, Sachs & Co. for information regarding how much it made selling BABs and how that compared to traditional tax-exempt bonds.
“I’m interested in finding out whether the big Wall Street investment banks being so involved in, and profiting from, the [BAB] program siphons off a lot of taxpayer dollars that are meant to help cities and states,” he said at the time, noting that BABs will likely become more significant in the future as the program is extended and expanded.
The House’s version of the jobs bill would allow issuers of four types of tax-credit bonds — qualified school construction bonds, qualified zone academy bonds, new clean renewable energy bonds, and qualified energy conservation bonds — to opt to receive direct-payment subsidies as opposed to receiving that subsidy in the form of tax credits provided to investors.
Under the measure, issuers of the bonds would receive direct payments that are roughly equal to the credit rate currently on the bonds — 100% of interest costs for QSCBs and QZABs, and 70% for new CREBs and QECBs.
Although the bill the Senate passed last month also extend Build America Bond-style subsidies to those programs, it offered significantly lower subsidy rates.
Under that version, large issuers would receive a subsidy rate of 45% of interest costs and small issuers would receive a 65% rate.
The bill defined small issuers as those that sell less than $30 million of bonds in the calendar year.
However, several muni market groups have spoken out against the Senate bill and in favor of the higher rates the House is pushing.
Under the Senate plan, the groups argued, no issuers would be willing to go the direct-subsidy route if it meant receiving half of the subsidy that could be obtained with tax credits.
“The RBDA is encouraged by House passage of [the jobs bill] and its provisions to allow the conversion of tax-credit bonds to BABs,” said Mike Nicholas, chief executive officer of the Regional Bond Dealers Association. “We think this is a positive first step in expanding the vibrant market for tax-exempt securities.”
And Ken Bentsen Jr., executive vice president of the Securities Industry and Financial Markets Association, told lawmakers in a letter that the House provisions enable “state and local school districts and governments ... to achieve the no-cost or low-cost financing that Congress originally intended, similar to the highly successful Build America Bonds (“BABs”) program.”
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