Build America Bonds

Build America Bonds The American Recovery and Reinvestment Act of 2009 (“ARRA”) authorized bonds known as Build America Bonds (“BABs”). ARRA added Section 54AA to the Internal Revenue Code (the “Code”), which authorizes state and local governments to issue BABs as taxable governmental bonds with federal subsidies for a portion of the borrowing costs. Direct Payment BABs are a type of Build America Bond that provides a direct federal subsidy to the government issuer in an amount equal to 35% of the state interest on the bonds. Recovery Zone Economic Development Bonds, like the Direct Payment BABs, provide a federal subsidy to the issuer in an amount equal to 45% of the state interest on the bonds. IRS Notice 2009-26 sets forth guidance on issuing BABs and on the payment of the interest Page 5 of 38 subsidy. BABs had to be issued prior to January 1, 2011. In general, a Build America Bond is any obligation that (1) is not a private activity bond, (2) but for Section 54AA of the Code, it would be a tax exempt obligation under Section 103 of the Code, (3) is issued before January 1, 2011, and (4) the issuer makes an election to have Section 54AA apply. In order for an issuer to receive the 35% subsidy from the US Treasury, the Build America Bonds must be “qualified bonds” under Section 54AA which means that 100% of “available project proceeds” of the bond issue must be used for capital expenditures after allowing for a reasonably required reserve fund. “Available project proceeds” are the excess of the proceeds of the sale of the BABs over costs of issuance financed by the issue of not more than 2 percent, plus investment earnings on the excess.