Build America Bond Update: Power Agencies Petition U.S. Supreme Court To Review Federal Circuit Sequestration Ruling – Trials & Appeals & Compensation

On July 13, 2023, the plaintiffs in Indiana Mun. Power
Agency v. United States filed a pe،ion for a writ of
certiorari with the U.S. Supreme Court for review of a ruling by
the United States Court of Appeals for the Federal Circuit in which
the Court of Appeals ruled that Build America Bond interest refund
payments are subject to sequestration by federal agencies. The U.S.
Supreme Court has not yet responded to the pe،ion.

Background on Build America Bonds

In 2009, in response to the financial crisis, Congress p،ed
the American Recovery and Reinvestment Act (the “ARRA”),
which included a new program meant to incentivize infrastructure
investments by state and local governments and increase federal tax
revenues – the Build America Bonds program (the
“Program”). Under the Program, state and local
governments would issue taxable bonds instead of their normal tax
exempt bonds through an irrevocable election that the bonds be
taxable, and in exchange for paying the higher interest rates on
taxable bonds, the issuers would receive federal refunds of 35% of
the interest payments on said bonds. In reliance on the federal
government’s commitment to provide refunds, state and local
governments issued over $181 billion in taxable Build America
Bonds.

Sequestration

In 2013, the Office of Management and Budget (“OMB”),
the Department of the Treasury (“Treasury”) and the
Internal Revenue Service (“IRS”) determined that the
Build America Bond refunds were subject to mandatory budget
sequestration (reduction of spending) under the Budget Control Act
(as supplemented and extended by subsequent statutes) and stopped
making full refund payments under the Program.

Congress has extended sequestration through 2031, and thus the
determination will continue to have a detrimental impact on issuers
under the Program unless the U.S. Supreme Court rules that they are
en،led to full interest payments and that the Program is exempt
from sequestration. The consequence of this sequestration is
estimated at over $2 billion in unpaid refunds to state and local
government issuers.

The Case

Pe،ioners, a group of midwestern power agencies w، issued
taxable Build America Bonds under the Program, brought a case under
the theories that: 1) because of Congress’s express direction
that Treasury “shall pay” the interest refunds, the ARRA
was a money-mandating statute and any cancellation of obligations
under a money-mandating statute must be done expressly by Congress,
not federal agencies; and 2) by p،ing the ARRA, Congress created
a contractual obligation to make the 35% interest payment
refunds.

The Court of Appeals rejected both arguments, reasoning first
that Congress impliedly repealed the payment obligation when it
p،ed the American Taxpayer Relief Act of 2012 (the
“ATRA”) because the new ATRA contained sequestration
provisions that conflicted with the provisions for the Program
under the ARRA, and second, that for a statute to create a
contractual payment obligation, the statute must frame any payments
as a contractual obligation through language, and the ARRA did not
do so.

Pe،ioners, in their submission to the U.S. Supreme Court, have
argued that the Court of Appeals erred, because: 1) the ATRA
contained provisions clarifying that sequestration only applies to
programs not funded by appropriation acts, and the Program is
funded by an appropriation act (the ARRA), thus there was no
conflict between the ARRA and the ATRA; and 2) statutory
contractual obligations are evaluated with respect to context, and
the ARRA committed the government to “invest” in
infrastructure through the Program thus clearly creating an offer,
and state and local governments accepted that offer and provided
consideration when they issued taxable Build America Bonds and
forewent the opportunity to instead issue tax exempt bonds.

Unless and until the U.S. Supreme Court grants the pe،ion and
reverses the Court of Appeal’s decision, issuers of Build
America Bonds s،uld continue to plan for reduced refunds under the
Program.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice s،uld be sought
about your specific cir،stances.

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