APPA Raises Concerns over the President’s FY 2015 Budget Regarding Municipal Bond Interest, TVA

March 5, 2014

Press Release

Washington, D.C., March 5, 2014 – The American Public Power Association (APPA) today expressed concerns relating to a surtax on municipal bond interest and a possible change to the Tennessee Valley Authority’s business model proposed in President Barack Obama's recently released Fiscal Year 2015 budget.

APPA appreciates the President’s interest in spurring infrastructure investments; however, we believe that by repeating a proposal to impose an unprecedented federal surtax on municipal bond interest, his FY2015 budget would do more harm than good.

Such a surtax, of up to 15.4 percent for bondholders in the top marginal income tax bracket, would affect bond prices for all bondholders and not just those hit with the tax. In turn, this would drive up the interest rate demanded by all future investors—substantially increasing state and local borrowing costs. These borrowing costs include the costs associated with financing for power generation, energy conservation, power transmission, and grid security. Prior analysis of a similar proposal indicates it would have increased the cost of a AAA-rated municipal bond issuance in 2012 by roughly 80 basis points (e.g. from 3.2 percent to 4.0 percent).

The proposal is part of a plan that would also create a new Federal Infrastructure Bank, provide a refundable tax credit for renewable power generation, and restart the Build America Bonds program by creating America Fast Forward Bonds.

APPA and its members know the importance of investing in the future. Nearly $12 billion in municipal bonds is issued every year to finance new power-related projects. APPA also agrees our nation should seek greater energy independence and sustainability and welcomes the opportunity to work with the Administration to advance those goals through such efforts as the Quadrennial Energy Review. However, the likely cost of the proposed tax on municipal bonds dwarfs any additional savings or incentives proposed elsewhere in his budget.

In terms of TVA, APPA is concerned with the President’s continued interest in reviewing TVA’s business model, which works well for the Tennessee Valley. Specifically, APPA does not believe federal ties with TVA should be severed. In his Fiscal Year 2015 Budget submission to Congress, President Obama praised the TVA for taking steps to improve its “future operating and financial performance,” but signaled that he is still interested in working with Congress to cut federal ties to TVA.

“The Administration continues to believe that reducing or eliminating the Federal Government’s role in programs such as TVA, which have achieved their original objectives, can help mitigate risk to taxpayers,” the White House’s Office of Management and Budget wrote in an overview of the President’s budget submission.

TVA was established by Congress in 1933 to address a wide range of environmental, economic, and technological issues, including the delivery of low-cost electricity and the management of natural resources. President Roosevelt also cited the need for a "yardstick" by which to judge other power providers. TVA continues to fulfill these roles today and the response should be to strengthen it for the future, not auction it off. It is also important to note that TVA is self-supporting, does not receive taxpayer dollars, and its debt is not taxpayer funded.

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