Stephen J. Watson
March 25, 2010
The Hiring Incentives to Restore Employment Act (HIRE Act), signed into law by President Obama on March 18, provides issuers of Qualified School Construction Bonds (QSCBs), Qualified Zone Academy Bonds (QZABs), New Clean Renewable Energy Bonds (New CREBs), and Qualified Energy Conservation Bonds (QECBs) with an option to issue the bonds as interest-bearing taxable bonds (without providing tax credits to bondholders) and to receive federal cash subsidy payments to offset the interest costs. The cash subsidy will equal the lesser of (1) the amount of interest payable on the bonds or (2) the amount of interest that would have been payable on the bonds if they bore interest at the "credit rate" (or, in the case of New CREBs and QECBs, 70% of the credit rate) published by the Treasury Department for qualified tax credit bonds for the date the bonds were sold. This direct payment option is available for bonds issued after March 18, 2010.
The HIRE Act also makes two technical corrections relating to QSCB volume cap allocations and carryforwards, as discussed below.
QSCBs, QZABs, New CREBs, and QECBs are types of "qualified tax credit bonds" that are authorized by federal tax law to be issued by State or local governments and certain other entities in limited amounts, for limited terms, and for specified purposes. Very generally, QSCBs and QZABs are authorized to finance certain public school facilities and purposes; New CREBs may be issued to finance certain renewable energy projects; and QECBs are authorized for specified energy conservation programs.
Qualified tax credit bonds are designed to provide zero- or low-interest financing by allowing bondholders to claim federal income tax credits based on a credit rate set by the Treasury Department. The credit rate is the percentage of the principal amount of a bond that may be claimed as a tax credit each year, similar to an interest coupon. It is established for each business day based on current interest rates as a fixed rate that applies to any bond sold on that day by any issuer. The bonds are subject to maturity limits published by the Treasury Department for each month and applicable to all bonds sold in that month. As an illustration, the maturity limit for qualified tax credit bonds sold in March 2010 is 16 years. Owners of qualified tax credit bonds may use the credits to offset their tax liability but must include the credits in gross income as if they were interest payments.
Qualified tax credit bonds are subject to a number of other program requirements including: (1) a requirement to spend 100% of the available project proceeds within three years or to redeem bonds to the extent such proceeds are not so spent; (2) special arbitrage limits including the ability to fund a sinking fund no more rapidly than with equal annual installments if the yield on investments in the fund does not exceed the permitted sinking fund yield published daily by the Treasury Department (that yield was 4.39% for bonds sold on March 25, 2010); and (3) a requirement that the issuer obtain a volume cap allocation for the particular type of bond. In addition, the federal Davis-Bacon prevailing wage requirements apply to projects financed with QSCBs, QZABs, New CREBs, and QECBs.
Direct Payment Option
As indicated, the HIRE Act provides that, for QSCBs, QZABs, New CREBs, and QECBs issued after March 18, 2010, issuers can elect to issue the bonds as interest-bearing taxable bonds (without providing tax credits to bondholders) and to receive federal cash subsidy payments to offset the interest costs. If an issuer elects this direct payment option, then it will be entitled to receive a cash subsidy payment from the Treasury Department contemporaneously with each interest payment date throughout the term of the bonds. The cash subsidy payment for an interest payment date will equal the lesser of (1) the amount of interest payable on the bonds on that date or (2) the amount of interest that would have been payable on the bonds on that date if the bonds bore interest at the credit rate (or, in the case of New CREBs and QECBs, 70% of the credit rate) published by the Treasury Department for qualified tax credit bonds for the date the bonds were sold. As an illustration, the credit rate for qualified tax credit bonds sold on March 25, 2010, was 5.83%.
It is expected that the Internal Revenue Service will publish procedures for issuers to request federal subsidy payments for QSCBs, QZABs, New CREBs, and QECBs for which the direct payment option is elected, as it has done for "direct-pay" Build America Bonds.
If an issuer elects the direct payment option for QSCBs, QZABs, New CREBs, or QECBs, the general program requirements applicable to those bonds, including maturity and volume limits, expenditure requirements, special arbitrage and sinking fund restrictions, and Davis-Bacon requirements, will continue to apply.
Issuers also continue to have the option to issue these bonds in a form that provides tax credits to bondholders, without the right to receive cash subsidy payments, if they choose to do so.
Technical Corrections Regarding QSCB Volume Cap Allocations and Carryforwards
The HIRE Act makes the following two technical corrections to the program rules for QSCBs.
Allocation of State Volume Cap. The HIRE Act clarifies which agencies of a State are authorized to allocate to in-State issuers the State's portion of the $11 billion total nationwide QSCB volume cap for each of 2009 and 2010. Specifically, the HIRE Act indicates that the allocation may be made by the State education agency or any other agency authorized under State law to make the allocation. Prior to this amendment, the statute provided that the allocation was to be made by "the State." This clarification is especially important for the State of California, where QSCB issuance has been delayed due to questions regarding the State Education Department's authority to allocate volume cap.
Carryforward of Unused Volume Cap by Large Local Educational Agencies. The HIRE Act also provides that a large local educational agency (LLEA) that received directly from the Treasury Department a QSCB volume cap allocation for 2009 or 2010 may carry forward any unused portion of that allocation to a future year. Thus, for example, if an LLEA received directly from the Treasury Department a 2009 allocation that it has not used or relinquished to the State, then the LLEA may use the allocation in 2010 or a future year. As authorized under prior law, a State can also carry forward its unused QSCB volume cap to a future year.
This article was prepared by Steve Watson (email@example.com or 202 662 0361) from Fulbright's Public Finance Practice Group. For further information, please feel free to contact any of our public finance lawyers, including the public finance partners listed below.
Stephen T. Cole, 213 892 9313, firstname.lastname@example.org
Victor Hsu, 213 892 9326, email@example.com
Donald L. Hunt, 213 892 9316, firstname.lastname@example.org
Danny Kim, 213 892 9320, email@example.com
Richard L. Kornblith, 213 892 9312, firstname.lastname@example.org
Frederick G. Yanney, 213 892 9319, email@example.com
Stanford G. Ladner, 212 318 3212, firstname.lastname@example.org
James P. Marlin, 212 318 3368, email@example.com
Randolph J. Mayer, 212 318 3383, firstname.lastname@example.org
Joel H. Moser, 212 318 3312, email@example.com
W. Jeffrey Kuhn, 210 270 7131, firstname.lastname@example.org
Jane H. Macon, 210 270 7142, email@example.com
James P. Plummer, 210 270 7192, firstname.lastname@example.org
George W. Scofield, 210 270 7189, email@example.com
Michael L. Spain, 210 270 7184, firstname.lastname@example.org
Stephen J. Watson, 202 662 0361, email@example.com
Fulbright & Jaworski's Public Finance Practice Group
Fulbright & Jaworski's Public Finance Practice Group collaborates with clients to help them achieve their objectives in the municipal securities marketplace. Our municipal securities practice annually ranks as one of the most active in the nation. In 2009, Fulbright & Jaworski ranked 6th in the nation as bond counsel helping to raise more than $10.4 billion in capital in more than 265 municipal securities offerings.
Our attorneys have extensive experience as counsel to issuers of state and local debt obligations and as counsel to their underwriters, credit enhancers, derivatives dealers and liquidity providers.
Issuers of municipal obligations look to the Public Finance attorneys at Fulbright & Jaworski as bond, underwriter, disclosure, swap and general counsel for:
IRS Circular 230 Disclosure
To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or tax-related matter[s].
Stephen J. Watson