Financing costs for public water and wastewater utilities would increase under proposed tax reforms that limit or eliminate the federal income tax exemption for interest earned on municipal bonds, according to a white paper released in July by AMWA and the National Association of Clean Water Agencies (NACWA). The report, The Impacts of Altering Tax Exempt Municipal Bond Financing on Public Drinking Water and Wastewater Systems, employs several real world examples of recent municipal bond sales to fund water and wastewater infrastructure in order to estimate how much communities’ interest payments would increase under the various reform proposals being considered in Congress.
For more than a century, tax-exempt municipal bonds have provided eligible issuers, including drinking water and wastewater utilities, the lowest cost of capital and the maximum amount of financing flexibility. Low interest rates on municipal bonds allow communities to stretch ratepayer dollars further and have become the primary method of paying for water and wastewater investments.
Cities and towns have issued $258 billion of municipal bonds to fund water and wastewater infrastructure since 2003 – representing approximately 16 percent of all municipal bond issuance for infrastructure projects over the period, according to statistics cited in the report. In addition, 48 of the 50 states utilized tax exempt financing in 2012 to fund water and sewer projects.
Lawmakers are contemplating proposals that would limit or eliminate the federal income tax exemption for interest earned on municipal bonds. Rather than merely simplifying the tax code, adjusting the municipal bond tax exemption would cost local water system ratepayers millions of dollars per year in new interest costs, the report indicates. This “would make it even more difficult for communities to address their daunting water infrastructure challenges.”
The study shares specific examples of water and sewer bond issues from AMWA and NACWA members that were priced in the market since January 2012 and applied three proposed changes to the tax-exempt status of municipal bonds to estimate the increased debt service cost that would have to be absorbed by the issuers’ ratepayers. The analyses found that financing costs would increase for every surveyed utility under each of the proposed reform scenarios.
The report concludes: “At a time when aging wastewater and drinking water infrastructure is in desperate need of capital improvements, tinkering with the incentive for investors to buy tax-exempt bonds will negatively impact the interest costs associated with financing infrastructure improvements and negatively impact utility ratepayers.”
The white paper will be used to advocate on Capitol Hill in favor of preserving municipal bonds in their current form.
The AMWA /NACWA MUNICIPAL BOND white paper is online at http://tinyurl.com/m2zonmy.