WASHINGTON - President Obama's fiscal 2016 budget is expected to propose permanently increasing the qualified small issuer cap for bank-qualified bonds and allowing banks investing in munis to take a deduction - two provisions temporarily put in place six years ago by the American Reinvestment and Recovery.
A source familiar with the administration's plans said Obama will make these proposals on Feb. 2 in conjunction with others as part of a multi-pronged budget strategy to stimulate infrastructure investment.
The strategy also includes the proposal to create new Qualified Public Infrastructure Bonds that was announced by the White House last week. QPIBs would be a hybrid between governmental bonds and private-activity bonds with fewer restrictions than PABs. Unlike PABs, they would not be subject to issuance caps or the alternative minimum tax.
As in ARRA, Obama will propose raising the qualified small issuer cap for bank-qualified bonds to $30 million from $10 million. ARRA raised the cap during 2009 and 2010. Banks could buy the tax-exempt bonds of issuers who sold reasonably expected to issue less than $30 million of munis during the year.
He also will propose modifying the 2% de minimis rule for financial institutions to include banks. That provision would allow banks to deduct 80% of the cost of buying and carrying tax-exempt bonds, to the extent that their tax-exempt holdings do not exceed 2% of their assets. Banks currently are only able to take advantage of that 80% write-off when purchasing bank-qualified bonds.
Muni market participants are pleased with the idea of the president supporting permanently raising the qualified cap, something several sources said would strengthen demand for munis while meeting the goal of stimulating investment in America's transportation, water, and other crucial infrastructure.
"It's something we've pushed for a long time, said Mike Nicholas, chief executive officer of the Bond Dealers of America. "It was a shame when it expired."
Dustin McDonald, director of the Government Finance Officers Association's federal liaison center, said the group has supported legislation to raise the cap in the past and welcomes the support of the White House.
"That would be something the GFOA would absolutely support," McDonald said.
Micah Green, chair of the financial services and tax policy practice group at Squire Patton Boggs, said the White House's roll-out of QPIBs is a positive move towards Obama's efforts to shore up the nation's infrastructure.
"Investment in infrastructure is and should be one of those issues that enjoys bipartisan support," Green said. "So first, it is encouraging that the administration is focusing attention on this issue that is critically important to both quality of life in the US and our global competitiveness."
Chuck Samuels, an attorney at Mintz Levin and counsel to the National Association of Health and Educational Facilities Finance Authorities, said he would be interested in how the new raised cap would be applied to borrowers. Some entities borrow through a government issuer, and it should be the borrower's size that counts, he said.
Samuels added that the premise is extremely positive and proved to work during the temporary cap increase five years ago.
"It created a torrent of small infrastructure projects across the United States," he said.
The White House will also propose to expand a little-known program called Qualified Public Education Facility Bonds. First authorized in 2001, those bonds' issuance is currently capped at the greater of $5 million or $10.00 per capita.
The program has not been used much, if at all, because of its problematic requirement that an educational facility be both part of a public elementary or secondary school and owned by a private, for-profit corporation engaged in a public-private partnership with a state or local government.
Though further details of the proposal are not available, Obama will propose rolling the QPEF cap into the PAB cap, effectively expanding it, sources said.
Obama's proposals would need to get the nod from a Republican-controlled Congress, which some sources said could still be inclined to view the ideas as negative because of their association with the ARRA stimulus bill.
