PAB Provision Pulled from Highway Bill

On June 29, the House and Senate agreed on a reauthorization of the Highway Bill that sets transportation policies and funding levels through 2014. Removed from the bill during final negotiations, however, was a provision that would lift the cap on Private Activity Bonds (PABs) for water and sewer projects.

Private activity bonds are a form of tax-exempt financing for state and municipal governments looking to partner with a private entity to ?meet a public need,? such as construction of a wastewater treatment plant. Use of public-private partnerships makes infrastructure repair and construction more affordable for municipalities. PABs use private capital in lieu of public debt and shift the risk and long-term debt from the municipality to the private partner. The tax-exempt status of the bond provides lower cost financing for investors, which translates to lower costs for local governments and ultimately their customers.

However, federal tax law restricts PABs from reaching their maximum benefit. The Internal Revenue Code limits the amount of PABs that may be issued annually in a state. This ?volume cap? is based on the state population ? this year the cap was determined by the greater of $95 per resident or $277.82 million. Because water and wastewater projects are ?out of sight, out of mind,? tax-exempt funding is commonly directed toward more politically attractive projects such as public housing and student loans. As a result, in 2007 only 1.3 percent of all exempt facility bonds were issued to water and wastewater projects.

By lifting the cap on PABs that fund water and wastewater infrastructure projects, it has been estimated that up to $5 billion could be generated in annual private investment. However, no matter how great an idea may be, these days on Capitol Hill the question of ?how much does it cost? can obstruct even the best legislative proposals. The last ?score? or cost estimate conducted by the Joint Committee on Taxation found that this provision would cost $354 million over the next 10 years. The fact that this ?cost? is solely a mild loss of federal tax revenue is significant ? the measure doesn?t actually ?spend? a federal dime.

PABs are viewed by many within the water/wastewater sector to be a welcomed source of funding at a time in which many utilities are facing mounting needs, documented by various entities as reaching into the hundreds of billions of dollars. In addition to the infusion of capital to help build and maintain our water and wastewater infrastructure, investment of private capital could spur job creation. According to a 2009 Clean Water Council report, every $1 billion invested in water and wastewater infrastructure creates up to 27,000 new jobs with average annual earnings of more than $50,000, increases national output (i.e., demand for products and services in other industries) by up to $3.46 billion, and produces more than $1 billion in personal (spending) income. Importantly, a $1 billion investment also generates approximately $82.4 million in state and local tax revenue at a time when states and local communities need it most.

Removal of PAB caps is supported by the Sustainable Water Infrastructure Coalition, which includes 35 associations and companies active in the water/wastewater sector.?

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