June 8 (Bloomberg) -- Municipal borrowers in the U.S. face a “manageable” risk that they won’t get the full 35 percent interest-rate subsidy from the Build America Bond program, said John Cross, associate tax legislative counsel for the U.S. Treasury.
The U.S. Internal Revenue Service withheld less than 2 percent of subsidy payments as a result of unpaid payroll taxes in the federal program’s first year, Cross said today at a Government Finance Officers Association conference in Atlanta. Ben Watkins, who oversees bond sales for Florida, said last month the state was permanently suspending Build America offerings until the federal government guarantees the full subsidy.
“My admonition would be to try to reasonably assess this risk, which we think is a manageable risk and which we have a concern is the subject of an awful lot of overreaction in the market,” Cross said. “On tax offsets, overdue payroll taxes, less than 2 percent of the total amount of Build America bond payments in the first year were subject to any such offset.”
Build America securities, introduced last year as part of the American Recovery and Reinvestment Act, are the fastest-growing part of the $2.8 trillion municipal market. Congress is considering extending the program, which subsidizes interest costs if states and local governments sell taxable instead of tax-exempt bonds for new capital projects. Issuers have sold about $108 billion of the securities, according to data compiled by Bloomberg.
Florida officials decided to permanently suspend sales of the debt because the Treasury can withhold all or part of the subsidy if the issuer owes money to the federal government through programs such as Medicaid, Watkins said last month. The state is due $600 million in subsidies on $1.4 billion of bonds it already sold, he said.
The IRS 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.
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