Local governments that have issued direct-pay bonds, such as Build America Bonds, should be aware that their subsidies from the federal government on those bonds are potentially subject to the budget cuts mandated as part of the so-called “fiscal cliff.” Those subsidy payments cover 35% of the interest costs on direct-pay bonds. Should the scheduled sequestration take effect, subsidies on direct-pay bonds would be cut an average of 7.6%, according to the Office of Management and Budget.* Issuers would typically be responsible for making all interest payments on their own. Build America Bonds have not been issued since 2010.
*”OMB Report Pursuant to the Sequestration Transparency Act of 2012,” September 2012
