Private Activity Bonds for Water and Wastewater Infrastructure

Lifting the volume cap on private activity bonds (PABs) for water and sewer projects has been much-discussed over the last few years, with advocates saying that private investment could lead to more repair and replacement work on our aging infrastructure, resulting in more jobs and better environmental quality. PABs have also recently been debated in the halls of Congress as both the House and the Senate have introduced legislation that would lift the cap ? the Sustainable Water Infrastructure Investment Act (S. 3262) in the Senate and within the American Jobs and Closing Tax Loopholes Act of 2010 (H.R. 4213), which recently passed the? House.

UIM has invited two leading water advocates to share their views on private activity bonds and the potential impact lifting the cap may have on the water and wastewater sectors.

Private Sector Can Play a Role in Rebuilding Infrastructure

By Bill Pascrell Jr.

The Obama Administration and the passage of the American Recovery and Reinvestment Act have stemmed the nation?s monthly job losses. However, the country is still faced with the challenge of creating jobs that will get Americans back to work.

The U.S. jobs deficit has reached millions. Our unemployment rate is at an intolerable 9.9 percent. And yet, there is an obvious answer to reengaging our small businesses and American workers. It lies within our aging, deteriorating water infrastructure.

Earlier this year, the American Society of Civil Engineers gave the nation?s water and wastewater systems a grade of ?D minus,? the lowest mark of any infrastructure category. For too long, the water mains we depend on have lain underground out-of-sight and out-of-mind, but surely deteriorating. As a former mayor of Paterson, N.J., I understand that a strong water infrastructure is essential to the community?s public health and economic vitality.

The Environmental Protection Agency and Government Accountability Office estimate that community water systems will require $500 billion above their expected rate of investment in order to meet safe drinking water and sanitation needs over the next 20 years.

However, taxpayers cannot foot the entire bill for all of the repairs and upgrades that our water infrastructure needs. We must leverage private capital investment and look at options for public-private partnerships.

That is why I am proud that my legislation, the Sustainable Water Infrastructure Investment Act, is included in the American Jobs and Closing Tax Loopholes Act of 2010, H.R. 4213, which recently passed in the U.S. House of Representatives.

My legislation, which has bipartisan support, aims to repair our crumbling water infrastructure while leveraging private capital to create jobs. The bill makes it easier for water systems to access capital by removing state volume caps on private activity bonds (PABs) for water and wastewater financing.

Congress has already exempted airports, intercity high-speed rail, and solid waste disposal sites from these bond caps. The caps imposed on water systems impede them from tapping into the $180 billion that Standard and Poor?s estimates is available for infrastructure investment.

Of course, the greatest parts of this legislation are the economic benefits that will result from it. Economists estimate a $1 billion dollar investment in water infrastructure will create 28,500 local jobs and the bill could put Americans in every state to work within 120 days of enactment. That same $1 billion is expected to generate approximately $82.4 million in state and local tax revenue at a time when states and localities need it most.

Cities, towns and utilities will face a major challenge over the next several decades replacing their aging and worn out water infrastructure. The private sector has proven to be important and effective player in meeting municipalities? challenges and goals, and greater access to PABs will increase the private-sector options available to municipalities.

The time has come to really focus on creating jobs and building a strong infrastructure for future generations.

Bill Pascrell Jr. is the U.S. Congressman for the Eighth Congressional District of New Jersey.

Lifting the Cap on Tax-Exempt Private Activity Bonds Can Help Restore Infrastructure and Support Job Growth

By Donald L. Correll

Our country?s water infrastructure is in serious need of repair. Communities across the nation are faced with the challenge of replacing aging and deteriorating water and wastewater infrastructure at the estimated cost of over $2.5 trillion over the next 20 years, according to the U.S. Conference of Mayors (USCM).

Government-owned utilities have a limited taxpayer and revenue base, which must service all the municipalities? needs, not just water and wastewater services. As a result, many municipalities, particularly medium to smaller systems, find themselves with significant constraints in their ability to obtain the capital to make infrastructure improvements.

Conversely, large investor-owned water utilities, such as American Water, often have a greater ability to secure cost-effective capital to make major necessary investments. For example, last year American Water invested nearly $1 billion in capital improvements to ensure continued reliable, high-quality water services for the communities we serve.

The tax-exempt private activity bond (PAB) is one of the most useful tools the federal government can offer states and municipalities to help provide for long-term, capital-intensive infrastructure projects. But Congress controls the issuance of these bonds by limiting each state with an annual cap. In 2009, the state volume cap was equal to the greater amount of either $90 per state resident or $273.27 million. This cap hinders the use of PABs for water and wastewater infrastructure projects, which are generally multi-year projects, in favor of short-term, politically attractive projects such as housing and education. In fact, in 2007 only 1.3 percent of all PABs were issued to water and wastewater projects.

Including Rep. Bill Pascrell?s and Sen. Menendez?s Sustainable Water Infrastructure Investment Act (H.R.537; S.3262) in the upcoming American jobs bill removes the cap for public-purpose water and wastewater projects. This will not only address the nation?s deteriorating water and wastewater infrastructure, it will also generate thousands of jobs and help stimulate the economy.

Operating in 35 states, American Water knows the benefits of PABs firsthand. In Kentucky, American Water is nearing completion of a vital $162 million project that will meet current and future drinking water supply needs for the Central Kentucky region, including Lexington and surrounding areas. More than $70 million in tax-exempt PABs were used for this project, creating a savings for our customers of approximately $750,000 annually over the 30-year life of the bonds. The project created 140 construction jobs, maximized use of local vendors for major needs such as concrete and paving, and employed numerous local sub-contractors. Once completed, the project will add about $1.1 million per year in new property tax revenue for the four counties where it is located. Because of this project, Central Kentucky is among the national leaders in securing long-term water supplies, putting the region in an enviable position relative to additional jobs development over the next 20 to 30 years.

Working in public-private partnerships, West Virginia American Water has utilized PABs to help finance several projects over the last 10 years in a state challenged by mountainous terrain and a weakened economy. Two such examples are a $31 million project for the Boone County Regional Water System and a $48 million project for the Fayette Plateau Regional Water System. Both of these projects enhanced fire protection and enabled the delivery of public water service for the first time to thousands of residents who were previously relying on inadequate supplies. In addition to helping these local governments better serve their constituents, these projects enabled additional economic development and job growth opportunities.

These are just a few examples of the water solutions PABs can help achieve. The EPA projected that this simple change in the tax code could pump as much as $6 billion annually toward addressing our nation?s infrastructure challenges. The cost to the federal government, however, would be small; the U.S. Department of Treasury estimates it as $31 million over five years, or $354 million over the next decade.

The U.S. Conference of Mayors (USCM) and the Associated General Contractors of America have both estimated that $1 billion of investment in water/wastewater infrastructure supports or creates 28,500 jobs. Based on the water industry?s estimate of at least $2 billion worth of private water investment slated for 2010, 57,000 jobs could be supported this year.

USCM also estimates that for every one dollar of water and sewer infrastructure investment, GDP increases by $6.35 in the long-term; and for each additional dollar spent on operating and maintaining water and sewer industry, the increase of revenue or economic output for all industries is increased by $2.62 in that year.

This legislation will also result in lower-cost financing and those savings can be passed on to customers. It will also spread the financial risk to the private sector and help relieve all levels of government from the burden of funding these needed investments.

Exemptions from the volume cap are currently provided for other governmentally owned facilities, including airports, ports, high-speed intercity rail and solid waste disposal sites.

It is time for water and wastewater to be added to this list, so that Americans can continue to rely on our water and wastewater systems to sustain us.

Donald Correll is President and CEO of American Water, the largest investor-owned U.S. water and wastewater utility company.

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