In March I wrote about how Florida had suspended its issuance of Build America Bonds because of concerns that the IRS could, and would, reduce the BAB subsidy if the municipality owed the IRS for separate, unrelated, issues (See Link).

Well, as reported yesterday by Bloomberg (See Link), the City of Austin is finding out the hard way that the IRS fully intends to exercise its ability to garnish BAB subsidies.  In February, Austin received a letter from the IRS stating that the IRS would be withholding $617,284 from the March 1 payment.  Luckily, Austin was prepared to transfer funds from a reserve account and continue to make the payments to bond holders.  The City continues to negotiate with the IRS over additional payments and may have more withheld from the next payment.

Since their inception, US municipalities have issued over $105 billion of Build America Bonds to the point where they represent the fastest growing segment of the municipal bond market.  The IRS’ willingness to withhold portions of its subsidy is very troubling.  While it appears that Austin and the IRS had been negotiating the withheld amount for some time and knew this was coming, the City of Los Angeles only found out about its reduction in payment when they performed an internal audit.  Fortunately, their’s was a small amount – $28.

As the use of BABs continues to grow, how long is it before the IRS withhold a subsidy from a locality that can’t afford to make up the difference for bond holders?  Or an even scarier thought, how long before the government decides it has the right (and obligation) to withhold BAB subsidies until the locality fully funds it pension plan!?!  Nothing good, for the locality or the bond holder, comes from this…

Well, here’s the official announcement: LINK

Just remember that you heard it here first…

I have a sneaking suspicion that Governor McDonnell will announce tonight the completion of the VPA lease of the Norfolk APM terminal. This is a great deal for both APM and the Port of Virginia. You heard it here first…

Yesterday, the Motley Fool website ran an interesting article by Nick Kapur titled “Why do we still listen to the ratings agencies“.  The general premise of the article is that the ratings agencies are either unable or unwilling to provide an accurate assessment of a company’s financial strength.  The author goes on to contemplate what role the ratings agencies played in the recent financial meltdown and how much responsibility we should assign them.

“The line here between ignorance and dutiful compliance is thin and not meaningful. Though many have alleged that the ratings agencies were on the take outright, it doesn’t really matter if they were or weren’t. Essentially, the ratings agencies were either crooked or they were stupid. Either way, they’re guilty.”

The article raises an interesting question of what role should a Moody’s or S&P rating play in an investors analysis?  Should they still be trusted, or have they lost all investor confidence?  Finally, is there an opportunity for a new player to emerge as a truly unbiased opinion, and what would that new player have to do to earn the respect of the investing community?

I believe there is an opportunity, but the road to respect will be a long one.  Thorough, independent analysis will always be worth much more than a 3rd party report from a vendor whose motivations may be cloudy at best.