Bonds and Financing

Association argues for bond modernization, comparable incentives

Congress should take action to implement various bond modernization proposals including the reinstatement of tax-exempt advance refunding bonds and allow for comparable incentives for energy investments and production, the American Public Power Association recently said.

The Association outlined its positions in a Statement for the Record submitted to the House Ways and Means Committee on Feb. 12, which was submitted in response to a hearing, “Paving the Way for Funding and Financing Infrastructure Investments.” The hearing was held by the committee on Jan. 29.

The Association wrote in support of the committee’s efforts to encourage continued and increased investment in our nation’s infrastructure. 

Bond modernization

With respect to bond modernization, the Association noted that in the last decade, states and localities made approximately $2.3 trillion in tax-exempt, bond-financed new investments in public infrastructure and are on track to make another $3 trillion in such investments over the next 10 years.

The statement pointed out that in the last decade, public power utilities alone have made nearly $70 billion in new investments in their generation, transmission, and distribution systems, but that rapid changes in the sector mean that pace cannot be slowed. As a result, the statement expresses the Association’s support for the committee’s efforts to update and improve tax-exempt municipal bonds.

The statement also said that public power “strongly believes that the volume of tax-exempt bond issuances is sufficient that even a modest change in the cost of borrowing would reap huge benefits. For example, just a 33-basis point reduction in the annual cost of borrowing would provide $10 billion a year in savings on the $3 trillion in municipal debt currently outstanding; a 66-basis point reduction would provide $20 billion a year in savings, and so on.” 

The Association said that one way to achieve such savings is the bond modernization agenda outlined by the Government Finance Officers Association (GFOA) last year and adopted by the Public Finance Network, of which the Association is a member. 

This agenda would (1) reinstate tax-exempt advance refunding bonds, (2) prevent the sequestration of credit payments to issuers of Build America Bonds, (3) raise the small issuer exception from $10 million to $30 million, and (4) simplify private use rules.

With respect to advance refunding bonds, the GFOA estimates that advance refundings from 2013-2017 saved state and local governments at least $12 billion through reduced interest expenses.  During the same time period, public power utilities alone used 154 advance refundings to generate net present value savings of at least $600 million, the statement noted.  These savings were passed on to residents in the form of lower rates or used to offset the cost of additional system investments. 

As a result, the Association strongly supports H.R. 2772, the Investing in Our Communities Act, which would reinstate the ability to issue tax-exempt advance refunding bonds.  H.R. 2772 would allow states and localities to refinance existing debt with the greatest flexibility, resulting in substantial reductions in borrowing costs.

(Click here to watch a video that explains the benefits of advance refunding bonds).

The Association also emphasized its strong support for H.R. 3967, the Municipal Bond Market Support Act, which would increase the small issuer threshold from $10 million in issuances to $30 million (indexed to inflation). 

“This will make such debt more attractive as an investment by banks – historically smaller local banks – and provide smaller issuers with access to capital that would not otherwise exist and/or reduce the cost of borrowing by increasing competition for debt of these utilities,” the statement said.

Comparable incentives

Meanwhile, the Association also used the statement to address the topic of comparable incentives.

Congress routinely seeks to incentivize certain types of energy investments and energy production. Sometimes this is done through direct federal grants, subsidized loans, and/or loan guarantees, but the most significant incentives are provided through the federal tax code, the Association said.

According to the most recent Joint Committee on Taxation estimate, energy-related tax expenditures were worth $11 billion to project developers in 2019 alone. “Further, this committee has indicated its intention to continue to use the tax code to provide financial incentives for energy-related investments, including as part of broad-based infrastructure legislation,” the statement noted.

However, tax-exempt entities, including public power utilities and electric cooperatives, cannot directly benefit from either the investment tax credit or the production tax credit. “Additionally, a public power utility cannot feasibly enter the sort of partnership flip transaction that other entities can use to indirectly access the ITC or PTC.” 

Public power utilities can indirectly benefit from such credits by entering long-term power-purchase agreements with taxable entities that can benefit from the credits.  However, the transactional costs of such agreements can be high.  Additionally, only a portion of the value of the tax credit is generally considered to be passed on to the purchaser, thus muting the incentive effect, the Association said.

Omitting tax-exempt entities from energy-related tax incentives makes it more costly for them to make investments in renewable resources that will be needed to reduce greenhouse gas emissions to address climate change. “This is a significant shortcoming if Congress is seeking market-wide changes in energy-related investment and production decisions.”

The Association therefore urged the committee to consider the provisions of S. 1288, the Clean Energy for America Act, which, as part of a move to provide technology neutral incentives to invest in clean energy, would create Clean Energy Bonds to be issued by public power utilities and rural electric cooperatives as an alternative to the tax credits proposed for for-profit utilities and merchant generators.

Such bonds could be issued for otherwise qualifying projects and the interest on which would be taxable to the bondholder but would generate a tax credit payable to the bondholder or payable directly to the issuer. This credit or direct payment would equal up to 70 percent of the interest paid on the qualifying bond. The Association believes that over time this would be roughly comparable to the 30 percent investment tax credit accrued by taxable entities.

In addition, or as an alternative, the Association also urged consideration of the tax credit refundability mechanism proposed under the discussion draft of the Growing Renewable Energy and Efficiency Now (GREEN) Act released in November. “This approach would provide potential investors with little or no tax appetite with an incentive to make targeted investments.”  While the trade group appreciates alternatives intended to provide comparability, such as H.R. 2704, the Renewable Energy Transferability Act, “we believe refundability may enjoy broader support and avoid some of the technical concerns raised by other approaches.”

Association signs on to letter

Meanwhile, the Association recently joined with twenty-seven other Public Finance Network members, including the Large Public Power Council, in submitting a letter to Committee Chairman Richard Neal, D-Mass., and Committee Ranking Republican Kevin Brady, R-Texas, by way of a statement for the record.

The letter said that funding and financing infrastructure “will remain an issue of paramount importance for many years to come.

We applaud this committee’s dedication to investigate these solutions and look forward to working with the Committee and our other federal partners to ensure our communities continue to thrive.”

The Public Finance Network consists of state and local governments and other tax-exempt bond issuers, borrowers and municipal market professionals.