In contrast to the theme song, “Movin’ on Up”, from the 1970s sitcom The Jeffersons, sometimes “moving on down” is better in certain circumstances. For example, it is preferable when discussing the sequestration rate for direct pay bonds.  Since sequestration began during the fiscal year ending September 30, 2013, the sequestration rate (i.e., the portion that the Federal government will not pay) has generally been going down. The IRS just announced that the 6.6% haircut for the fiscal year ending September 30, 2018, will apply to all subsidy payments made by the Treasury Department that are processed on or after October 1, 2017.   The 6.6% sequestration rate is lower than the current 6.9% sequestration rate. 

As a reminder, sequestration refers to the automatic, across-the-board spending cuts that apply to many of the federal government’s programs, projects and activities. The cuts resulted from the Budget Control Act of 2011 (“BCA”), which was signed into law by President Obama on August 2, 2011, as part of an agreement with Congress to resolve the debt-ceiling crisis at the time. Plan A under the BCA was that a special congressional panel, oftentimes referred to as the “Super Committee,” would find a less painful way to cut spending.   However, the Super Committee was not so super after all, and failed to reach an agreement by November of 2011. Accordingly, the across-the board spending cuts, which were Plan B under the BCA, became a reality. The spending cuts, however, did not take effect until March 1, 2013. The sequestration cuts apply equally to discretionary defense spending and to nondefense spending (both discretionary and mandatory).

The chart below sets forth the sequestration rate over the past several years.

Fiscal Year Ending                   Sequestration Rate

9/30/2013                                           8.7%

9/30/2014                                           7.2%

9/30/2015                                           7.3%

9/30/2016                                           6.8%

9/30/2017                                           6.9%

9/30/2018                                           6.6%

Sequestration applies to all outstanding direct pay bonds (i.e., Build America Bonds, Recovery Zone Economic Development Bonds and all qualified tax credit bonds that were issued on a direct payment, rather than a tax credit, basis). Sequestration is currently set to expire in the fiscal year ending September 30, 2025.

For more information on sequestration’s effect on direct pay bonds, please see the following blog posts by Johnny Hutchinson – #1 and #2.