| Bonds Online |
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| 5/10/2013Market Performance |
| Municipal Bonds |
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S&P National Bond Index
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3.00% |
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S&P California Bond Index
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2.96% |
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S&P New York Bond Index
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3.13% |
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S&P National 0-5 Year Municipal Bond Index
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0.70% |
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| S&P/BGCantor US Treasury Bond |
400.09 |
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| Preferred Stocks |
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S&P U.S. Preferred Stock Index
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848.03 |
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S&P U.S. Preferred Stock Index (CAD)
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636.26 |
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S&P U.S. Preferred Stock Index (TR)
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1,701.05 |
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S&P U.S. Preferred Stock Index (TR) (CAD)
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1,276.26 |
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| REITs |
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S&P REIT Index
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174.07 |
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S&P REIT Index (TR)
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425.30 |
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| MLPs |
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S&P MLP Index
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2,469.58 |
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S&P MLP Index (TR)
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5,428.50 |
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See Data
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IRS Audits Send A Chill Through Muni-Bond Program |
DOW JONES NEWSWIRES - June 7, 2010 - by By Meena Thiruvengadam, Kelly Nolan and Romy Varghese
(This article was originally published Friday. Adds comments from IRS official in paragraphs six, seven and eight, and from Treasury official in last paragraph. Also adds detail on number of audits underway.)
By Meena Thiruvengadam, Kelly Nolan and Romy Varghese Of DOW JONES NEWSWIRES
WASHINGTON (Dow Jones)--Ambiguous statements from the Internal Revenue Service have jolted the $2.8 trillion municipal-bond market, raising concern that in the worst case, some states or cities could lose federal interest-rate subsidies on more than $100 billion worth of Build America Bonds that have already been sold.
Any moves to claw back federal subsidies on those securities could further squeeze local governments already reeling from diminished tax revenues and increased demand for unemployment insurance and other social services.
Build America Bonds, or BABs, are taxable municipal bonds that give issuers a 35% subsidy on interest cost under the U.S. government's stimulus program. They were designed to encourage construction projects and create jobs. The program has been popular since its start in April 2009, accounting for roughly a third of municipal bonds that have been sold.
But the IRS has said it was concerned that issuers may be offering bonds at prices that were too low, increasing the cost of subsidies from Washington. The IRS has started sending questionnaires to every agency that has sold a BAB, and Friday confirmed that it has opened audits into fewer than 10 sales.
On a conference call last week, an IRS official suggested that up to half of all BAB issues--almost 800 so far--could expect a formal audit, though the agency later backpedaled, saying that was an outside estimate and it was too early to say how many audits there ultimately might be.
"We don't know what the audit footprint is going to be," Steven Miller, the IRS's deputy commissioner for services and enforcement, said in an interview late Friday. "At this point we're just collecting information."
Miller also refuted a report from Moody's Investors Service that said it was the credit-ratings agency's understanding "that if any BABs issues are found to have been priced improperly, the IRS intends to disallow the full interest-rate subsidy."
"We generally would be going after what is the loss to the government not the entire amount," Miller said.
News of the audits comes on the heels of the agency reducing subsidy payments to a handful of municipal borrowers because they may owe money to the federal government.
Moody's cautioned there could be potentially negative credit impacts due to these two developments, since issuers might not get as much cash paid out by the federal government as originally expected. "If so, issuers would have to pay debt service with money intended for other purposes," the ratings agency said.
In a letter answering participant questions from a National Association of Bond Lawyers conference call last week, where the audit issue was first brought up, the IRS said it was in the "examination planning stage" with respect to future BABs audits, and "the actual number of examinations will not be determined until such planning process is complete." The group released the letter to give the IRS a chance to answer questions that couldn't be addressed during the call.
The tax agency has offered no further guidance, and declined to comment for this article.
Several market analysts and managers say the sale of BABs could drop off. Florida had stopped using the program in March, citing a different IRS policy to withhold BAB subsidy payments if the agency believed a state or local agency owed money to the federal government.
"I think it will likely have a chilling effect on issuance," Matt Fabian, managing director of Municipal Market Advisors in Connecticut, said of the audits. "Until issuers see the first few audits play out, I think it's reasonable of issuers to back away."
Ben Watkins, director of Florida's division of bond finance, said the IRS' conciliatory stance "is a positive development, but does not answer all the questions that are surrounding this issue."
"Issuers need to seriously consider the risks associated with not receiving the subsidy payments they expect when they sell the BABs," Watkins said. "They are making their decision to issue BABs based on whether it is the most cost-effective alternative, assuming they are getting the subsidy payment. If the subsidy payment is jeopardized or at risk, they need to consider that."
But California, the largest BAB issuer, plans to continue selling the bonds.
"We're confident that we have negotiated the best possible deals for taxpayers and by extension the federal government in our BAB deals," said Tom Dresslar, spokesman for California Treasurer Bill Lockyer.
Build America Bonds remain popular "with both issuers and investors," said Alan Krueger, Treasury's chief economist and assistant secretary for economic policy.
-By Meena Thiruvengadam, Kelly Nolan and Romy Varghese; Dow Jones Newswires; 212-416-2167; kelly.nolan@dowjones.com
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