NAWC: Remove Private Activity Bond Volume Cap on Water Projects

By Michael Deane, executive director, National Association of Water Companies (NAWC)

A natural resource essential to the success of nearly every public and private enterprise in this country could be on the verge of receiving a long-needed revision in the tax code, thanks to a continuing bipartisan effort taking place in Washington, D.C.

The natural resource is water. The tax code revision would involve the removal of the federal volume cap on tax-exempt private activity bonds (PABs) used for water and wastewater treatment infrastructure projects. The bipartisan effort is being led by Senators Robert Menendez (D-NJ) and Michael Crapo (R-ID). If their efforts are successful, the infusion of capital into projects will generate revenue for local economies across the nation and accelerate access to capital for new water infrastructure.

Here is how this works: the legislation (S.2606) introduced by Sens. Menendez and Crapo would amend the Internal Revenue Code to remove public-purpose water and wastewater projects from the restrictive PAB volume cap. This modification would allow local communities to leverage private capital markets in combination with other financing mechanisms, as well as provide an influx of lower cost private capital to finance water infrastructure projects. The borrower, in turn, repays the bond issuances over time. Exceptions from the volume cap are currently provided for facilities such as airports, ports, high-speed intercity rail, and solid waste disposal sites.

The advantage of taking this action is significant. According to the U.S. Treasury (FY2015 Presidential Budget), removing this PAB restriction would result in $201 million in lost tax revenue over ten years but would also generate up to $50 billion in private capital investment over the same period.

Language in the proposed legislation makes the case in more specific terms. It states, “Removal of state volume caps for water and wastewater infrastructure will accelerate and increase overall investment in the Nation’s critical water infrastructure; facilitate increased use of innovative infrastructure delivery methods supporting sustainable water systems through public-private partnerships that optimize design, financing, construction, and long-term management, maintenance and viability; and provide for more effective risk management of complex water infrastructure projects by municipal utility and private sector partners.”

For more than 10 years, the National Association of Water Companies (NAWC) has been a leading advocate in Washington for legislation to expand access to PABs for water and wastewater. This issue came very close to the finish line in 2012, after the Senate Finance Committee approved the bill as part of the 2012 Highway bill, which subsequently passed the Senate.  The PABs provision was unfortunately not retained in the Highway bill during late stages of conference negotiations for procedural reasons.

Aging and crumbling public water and wastewater systems threaten economic vitality and public health. Incentives such as PABs for water and wastewater projects encourage private capital investment, create jobs and provide more affordable financing for water and wastewater infrastructure, which in many cities was constructed 50 to 100 years ago.

EPA studies show that $682 billion in infrastructure improvements are needed over the next twenty years in order to meet safe drinking water and wastewater treatment standards. Capital investment for such projects will be difficult as many states and local governments face mounting budget deficits, revenue shortfalls and opposition to new taxes.

Congress provides states with an annual allocation of PABs based upon population (Section 146 of the Internal Revenue Code). Historically, most of the tax-exempt bonds have been issued to fund short-term projects, such as housing and education loans. The annual volume cap hinders the use of PABs for water and wastewater infrastructure, which are generally multi-year projects and out of public sight. On average, only one percent of exempt facility bonds is issued to fund water and wastewater projects annually.

By lifting the volume cap for tax-exempt bonds for water infrastructure, we are investing in America. We are investing in our future and helping communities across the nation to better provide clean, safe drinking water to their citizens, while also benefiting wastewater projects that are vital to our health and environment.

Please join me, NAWC member companies and civic leaders in asking our elected leaders in Washington to support this vital legislation.