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Florida Stops Build America Sales on Subsidy Concerns

Florida won’t sell more Build America Bonds, the fastest-growing part of the $2.8 trillion municipal market, until the federal government guarantees the subsidy on the program, said Ben Watkins, who oversees the state’s debt sales.

Florida officials decided to permanently suspend sales of the securities because the U.S. Treasury can withhold all or part of the 35 percent interest subsidy if the issuer owes money to the federal government through programs such as Medicaid, Watkins said today in a telephone interview. The state is due $600 million in subsidies on $1.4 billion of bonds it already sold, he said.

“This is a consensus that we’ve reached after discussing it with policy makers,” said Watkins, who reports to the state’s bond finance division board, which is chaired by Governor Charlie Crist. “I want to use the program but I can’t as it’s currently configured.”

The suspension comes as Congress considers extending the program, under which states and municipalities sell taxable instead of tax-exempt securities for new capital projects. The Build America program was created last year as part of the economic stimulus and is set to expire at year-end. About $107 billion of the debt has been sold, according to data compiled by Bloomberg.

Seeking ‘Clarity’

Florida, the fourth-largest U.S. state by population, stopped issuing the bonds temporarily in March while it sought “clarity” on the risks associated with the subsidy, Watkins said at the time.

The Internal Revenue Service in February told Austin, Texas, it was withholding a subsidy payment of $617,284 on $78.5 million of Build America Bonds in a dispute over payroll taxes, according to Art Alfaro, city treasurer. Los Angeles had $28 garnished from a subsidy payment on $307.4 million of airport bonds sold in November, to offset an unspecified liability, said Ryan Yakubik, director of capital development and budget at Los Angeles World Airports.

Congress needs to guarantee that the subsidy payment won’t be reduced by offsets for Florida to rejoin the program, said Watkins, who is based in Tallahassee, the capital. The state gets $27.8 billion a year from the federal government through 30 programs other than Build America Bond subsidies, he said. Watkins said he has spoken with Florida Senators Bill Nelson, a Democrat, and George LeMieux, a Republican, about the issue.

‘Real Risk’

“It is a very real risk” that a subsidy payment may be garnished at some point over the life of the bonds, which is often about 30 years, Watkins said. “It’s my job to worry about it.”

Bruce Friedland, an IRS spokesman, declined to comment.

John Cross, associate tax legislative counsel for the Treasury, said the publicity about the possibility that Build America Bond payments may be withheld has been “extremely overblown and exaggerated.”

“It’s just part of the federal government’s system of payments,” Cross said at a Securities Industry and Financial Markets Association conference in Washington last month.

Local Florida borrowers such as Cape Coral are still issuing Build America debt, selling about $236 million of the securities since the state’s March suspension, according to data compiled by Bloomberg.

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