Bonds and Financing

Association details bond modernization benefits

The American Public Power Association recently urged federal lawmakers to consider modernizing the tax treatment of municipal bonds, a move that the Association said could result in billions of dollars of borrowing savings and make the financing of public infrastructure simpler and more affordable.

The Association on March 20 submitted a statement for the record to the House Ways and Means Committee as a follow up to the committee’s early March hearing on infrastructure.

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.

“Tax-exempt municipal bonds finance construction, maintenance, and repair of schools, hospitals, roads, bridges, ports, airports, water systems, single- and multi-family housing, parks, fire stations, police stations, libraries, courthouses, jails, and other key infrastructure. Public power utilities alone are making $5 billion a year in tax-exempt-bond-financed investments in their generation, transmission, and distribution systems,” the Association said.

With interest rates near historic lows, the cost of financing these projects has been low. Indeed, the general consensus is that the cost of capital and access to capital is not the primary hurdle to additional infrastructure investment in the U.S., the Association said, adding that in some sectors, the main hurdle is permitting, whether because of regulatory restrictions or public opposition. “In others, the primary hurdle is unwillingness or inability to raise the revenue needed to provide funding.”

Nonetheless, 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.” 

Association calls for modernizing the tax treatment of municipal bonds

The Association said that one way to achieve such savings would be to modernize the tax treatment of municipal bond.

Such an agenda would reinstate tax-exempt advance refunding bonds, prevent the sequestration of credit payments to issuers of Build America Bonds, raise the small issuer exception from $10 million to $30 million and simplify private use rules. “This would make the public financing of public infrastructure simpler and more affordable,” the Association said.

The Government Finance Officers Association (GFOA) has outlined such an agenda, which has been adopted by the Public Finance Network of which the Association is a member.

Association urges caution when it comes to discussions of public-private partnerships

As part of its discussion of bond modernization, the GFOA notes that policymakers are considering proposals to incentivize “public-private partnerships,” i.e., long-term contracts that increase the participation of the private sector in the provision of public infrastructure.

While GFOA expresses no opinion on the matter, it states that governments should be aware of potential financial tools that are or may be available and evaluate them to determine if they may be appropriate for their government. The Association “strongly agrees with this statement, both in its framing of the issue and its conclusion.”

The Association said that the GFOA is right to describe these transactions as a financial tool, not a funding mechanism.

The Association went on to say that much of the public discussion of public-private partnerships and other variations of privatization “has been one-sided to the point of making critical evaluation and assessment difficult.”

There is “an almost universal – though unsubstantiated – claim by privatization advocates that the private sector is, per se, more efficient in the provision of public facilities than the public sector.”

However, this is not true in the electric utility sector, “where public power utility rates are lower and reliability is higher than other retail providers. It is also not true for other sectors according to data-based economic analyses that indicate that privatization offers no, per se, benefits in those sectors.”

In order to ensure full and fair deliberation, The Association said it “believes it is incumbent on those seeking to accommodate or incentivize any particular model of project delivery to provide data-driven proof of their benefits and full, frank, and objective answers to these types of questions.”

The Association’s members on Feb. 26 approved several new policy resolutions including one that urges Congress to improve tax-exempt municipal bonds.