Vol 6 (2009) - Issue 3

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Summary of Selected Provisions of the American Recovery and Reinvestment Act of 2009

On 17 February 2009, the American Recovery and Reinvestment Act (the ‘Act’) was signed into law by President Obama. The Act outlines a sweeping USD 800 billion plan combining tax incentives and direct federal government spending to address the current financial crisis and stimulate the US economy. Among the broad range of issues covered by the Act, the legislation provides for new means of state and local government debt funding by expanding the types of projects that can be financed on a tax-exempt basis, energy and transportation initiatives intended to provide tax and other incentives for renewable energy programs and funds for national infrastructure projects. This article briefly summarises certain provisions of the Act relating to the foregoing issues. For details on provisions of the Act as they relate to restrictions on executive compensation limitations for financial institutions receiving funding under the US government’s Troubled Asset Relief Program, please refer to ‘Executive Compensation and the American Recovery and Reinvestment Act of 2009’.

Provisions for state and local governments

The Act expands the types of state and local government projects that can be financed on a tax-exempt basis by creating several new categories of tax-exempt and tax-credit bonds and by giving state and local government issuers the ability to issue obligations as either taxable tax-credit bonds or subsidy bonds. In addition, the Act increases the tax benefits afforded to banks and other holders of tax-exempt bonds. It should be noted, however, that most of these provisions apply only to obligations issued in 2009 and 2010.

Build America Bonds

The Act allows state and local government issuers to elect to treat any bonds issued in 2009 and 2010 as ‘Build America Bonds’ (‘BABs’) provided that such bonds are (1) not private activity bonds, (2) otherwise tax-exempt under existing law, and (3) issued with no more than a de minimis amount of original issue premium. The most significant feature of the BAB provisions is the ability of issuers to elect to receive a direct federal cash subsidy with respect to certain BABs (‘Subsidy BABs’) in lieu of providing bondholders with a tax credit (‘Credit BABs’). Unlike traditional tax-exempt bonds or tax-credit bonds, BABs bear taxable interest for the holder. However, the federal government provides a tax benefit to issuers of BABs through a direct cash subsidy equal to 35% of the interest payable on the BABs (with a Subsidy BAB) or to holders of BABs with a credit against federal income tax equal to 35% of the interest payable on the BABs (with Credit BABs). In order for an issuer to elect to treat a BAB as a Subsidy BABs, 100% of the sale proceeds of a BAB must be used for (1) capital expenditures, (2) costs of issuance not exceeding 2% of the issue price, and (3) a reasonably required debt service reserve fund. Such restrictions are not applicable if a BAB is issued as a Credit BAB.