Legislative Options for Financing Water
Water Infrastructure
Claudia Copeland
Specialist in Resources and Environmental Policy
William J. Mallett
Specialist in Transportation Policy
Steven Maguire
Specialist in Public Finance
August 9, 2012Steven Maguire
Acting Section Research Manager/ Specialist in Public Finance
William J. Mallett
Specialist in Transportation Policy
June 3, 2013
Congressional Research Service
7-5700
www.crs.gov
R42467
CRS Report for Congress
Prepared for Members and Committees of Congress
Legislative Options for Financing Water Infrastructure
Summary
This report addresses several options being considered by Congress to address the financing
needs of local communities for wastewater and drinking water infrastructure projects and to
decrease or close the gap between available funds and projected needs. Some of the options exist
and are well established, but they are under discussion for expansion or modification. Other
innovative policy options for water infrastructure have recently been proposed, especially to
in connection with water infrastructure,
especially to supplement or complement existing financing tools. Some are intended to provide
robust, long-termlongterm revenue to support existing financing programs and mechanisms. Some are
intended to
encourage private participation in furnishing drinking water and wastewater services.
Six options that are reflected in current or recent legislative proposals, including budgetary
implications, are
discussed.
•
Increase funding for the State Revolving Fund (SRF) programs in the Clean
Water Act (H.R. 31451877 in the 112th113th Congress) and the Safe Drinking Water Act
(H.R. 5320 in the 111th Congress),
•
Create a federal water infrastructure trust fund (H.R. 6249 and H.R. 3145 in the
1877 in the 113th Congress
and H.R. 6249 in the 112th Congress),
•
Create a “Water Infrastructure Finance and Innovation Act” Program, or WIFIA
(H.R. 3145 in the 112thS. 601 and S. 335 in the 113th Congress),
•
Create a National Infrastructure Bank (H.R. 4022084 and S. 652H.R. 505 in the 112th113th
Congress),
•
Lift private activity bond restrictions on water infrastructure projects (included in
the Administration’s FY2014 budget request and S. 939 and S. 939 and
H.R. 1802 in the
112th Congress), and
•
Reinstate authority for the issuance of Build America Bonds (included in the
Administration’s FY2013 budget requestFY2014 budget request and H.R. 535 and H.R. 789 in the 113th
Congress).
A number of these issues and options have beenwere examined in hearings by the House
Transportation and
Infrastructure Subcommittee on Water Resources and Environment (on
February 28 and March 21, 2012) and by the Senate
Environment and Public Works
Subcommittee on Water and Wildlife (December 13, 2011, and February 28, 2012)in the 112th Congress.
Consensus exists among many stakeholders—state and local governments, equipment
manufacturers and construction companies, and environmental advocates—on the need for more
investment in water infrastructure. There is no consensus supporting a preferred option or policy,
and many advocate a combination that will expand the financing “toolbox” for projects. Some of
the options discussed in this report may be helpful, but there is no single method that will address
needs fully or close the financing gap completely. For example, some may be helpful to projects
in large urban or multi-jurisdictional areas, while others may be more beneficial in smaller
communities. It is unlikely that any of the recently proposed options could be up and running
quickly, meaning that, at least for the near term, communities will continue to rely on the existing
SRF programs, tax-exempt governmental bonds, and tax-exempt private activity bonds to finance
their water infrastructure needs.
Congressional Research Service
Legislative Options for Financing Water Infrastructure
Contents
Introduction...................................................................................................................................... 1
Six Policy Options ........................................................................................................................... 2
Increase Funding for the SRF Programs.................................................................................... 3
Create a Federal Water Infrastructure Trust Fund ..................................................................... 7
Create a “Water Infrastructure Finance and Innovation Act” Program (WIFIA) ...................... 9 10
Create a National Infrastructure Bank ..................................................................................... 1213
Lift Private Activity Bond Restrictions on Water Infrastructure Projects ............................... 1516
Background on Private Activity Bonds ............................................................................. 1516
Current Proposals .............................................................................................................. 1718
Reinstate Authority for Issuance of Build America Bonds (BABs) ........................................ 1819
Conclusion ..................................................................................................................................... 2021
Figures
Figure 1. SRF Appropriations, FY2005-20132014 Request .................................................................... 5
Contacts
Author Contact Information........................................................................................................... 2021
Congressional Research Service
Legislative Options for Financing Water Infrastructure
Introduction
This report examines several legislative options to help finance water infrastructure that currently
are receiving attention in Congress. The options discussed here are intended to address capital
needs for building and upgrading wastewater and drinking water treatment systems and
improving water quality in order to meet requirements under federal law.
Localities are primarily responsible for providing water infrastructure services. According to the
most recent estimates by states and the Environmental Protection Agency (EPA), funding needs
for such facilities total $633 billion over the next 20 years, while EPA has estimated that the
financing “gap” between current capital spending levels and projected needs is $224 billion over
20 years, or $11 billion per year, if spread evenly over that period.1
Some analysts and stakeholders take issue with such estimates. Some say that EPA’s needs
estimates are too low because they do not fully reflect types of projects not currently eligible for
federal assistance, such as repair and replacement of aging systems, or needs that currently are
not well met by existing programs, such as security-related projects; on-site treatment systems in
small, dispersed communities; and projects that include mixed elements such as developing and
treating new water supply, especially in rural areas. Other estimates much larger than EPA’s have
been made by a number of groups. For example, the American Water Works Association recently
estimated that investment needs for “buried drinking water infrastructure” total more than $1
trillion over the next 25 years.2
However, assessing “need” is complicated by differences in purpose, criteria, and timing, among
other issues. One of the major difficulties is defining what constitutes a “need,” a relative concept
that is likely to generate a good deal of disagreement. In the infrastructure context, funding needs
estimates try to identify the level of investment that is required to meet a defined level of quality
or service, but this depiction of need is essentially an engineering concept. It differs from
economists’ conception that the appropriate level of new infrastructure investment, or the optimal
stock of public capital (infrastructure) for society, is determined by calculating the amount of
infrastructure for which social marginal benefits just equal marginal costs.3
Whether the estimates made by states and EPA understate or overstate capital needs, communities
face formidable challenges in providing adequate and reliable water infrastructure services.
Congress is considering ways to help meet those challenges.
1
EPA’s most recent estimate of capital needs for wastewater infrastructure was published in 2010. See U.S.
Environmental Protection Agency, Clean Watersheds Needs Survey 2008, Report to Congress, EPA-832-R-10-002,
May 2010. The most recent EPA needs estimate for drinking water infrastructure was issued in 2009. See U.S.
Environmental Protection Agency, Drinking Water Infrastructure Needs Survey and Assessment, EPA-816-R-09-001,
February 2009. Also see U.S. EPA, The Clean Water and Drinking Water Infrastructure Gap Analysis, EPA-816-R-02020, September 2002. Estimates in the latter report of the “gap” between needs and current wastewater and drinking
spending are
very likely to be larger today than when that report was written 10 years ago, because projected needs
have increased,
while available funds have not.
2
American Water Works Association, Buried No Longer: Confronting America’s Water Infrastructure Challenge,
March 2012, http://www.awwa.org/files/GovtPublicAffairs/GADocuments/BuriedNoLongerCompleteFinal.pdf.
3
For additional discussion, see CRS Report RL31116, Water Infrastructure Needs and Investment: Review and
Analysis of Key Issues, by Claudia Copeland and Mary Tiemann, and CRS Report R42018, The Role of Public Works
Infrastructure in Economic Recovery, by Claudia Copeland, Linda Levine, and William J. Mallett.
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Capital investments in water infrastructure are necessary to maintain high quality service that
protects public health and the environment. Capital facilities are a major investment for water and
wastewater utilities. Almost all capital projects are debt-financed (not financed on a pay-as-yougo basis from ongoing revenues to the utility). The principal financing tool that local
governments use is issuance of tax-exempt municipal bonds—at least 70% of U.S. water utilities
rely on municipal bonds and other debt to some degree to finance capital investments. In 2011,
bonds issued for water, sewer, and sanitation projects totaled $29.6 billion, of which $14.2 billion
was new-money financing and the remainder was for refunding to refinance prior governmental
bonds.4 Beyond municipal bonds, federal assistance through grants and loans is available for
some projects, but is insufficient to meet all needs. Finally, public-private partnerships, or P3s,
which are long-term contractual arrangements between a public utility and a private company,
provide limited capital financing. While they are increasingly used in transportation and some
other infrastructure sectors, P3s are uncommon in the water sector, especially for wastewater;
most P3s for water infrastructure involve contract operations for operation and maintenance.
Six Policy Options
This report addresses several financing options intended to address overall needs and decrease or
close the funding gap. Some of the options exist and are well established, but they are under
discussion for extension or modification. Other innovative policy options have recently been
proposed in connection with water infrastructure, especially to supplement or complement
existing financing tools. Some are intended to encourage private participation in furnishing
drinking water and wastewater services. Some are intended to provide robust, long-term revenue
to support existing financing programs and mechanisms. This report analyzes six policy options,
including budgetary implications, related to financing water infrastructure that are reflected in
current or recent legislation.45
•
Increase funding for the State Revolving Fund (SRF) programs in the Clean
Water Act (CWA) and the Safe Drinking Water Act (SDWA). Some propose
increasing federal appropriations for these existing programs, under which
federal capitalization grants are provided to states for the purpose of making
loans to communities for water infrastructure and other eligible projects.
•
Create a federal water infrastructure trust fund. Establishing such a fund could
help to provide a dedicated source of federal funding for water infrastructure.
•
Create a “Water Infrastructure Finance and Innovation Act” Program (WIFIA).
Modeled after the existing Transportation Infrastructure Finance and Innovation
Act (TIFIA) program, a WIFIA program would provide federal credit assistance
in the form of direct loans and loan guarantees to finance water infrastructure
projects.
4
Thomson-Reuters, The Bond Buyer 2012 Yearbook, p. 159.
This report does not address certain other concepts that have been suggested from time to time to help localities meet
financial challenges through better planning and prioritization of water infrastructure. For example, EPA encourages
localities to improve management of their infrastructure assets in order to extend current life and reduce need for new
infrastructure. Likewise, EPA and municipalities have discussed ways, and EPA issued a policy framework in June
2012, to integrate infrastructure planning and permitting, in order to prioritize investments.
5
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•
Create a National Infrastructure Bank. This federal entity would provide lowinterest loans and other types of credit assistance to stimulate investments by
states, localities, and the private sector in a variety of infrastructure projects.
•
Lift private activity bond restrictions on water infrastructure projects. This
proposal would eliminate the limit on the amount of tax-exempt private activity
bonds issued by states and localities to provide financing for privately owned
water infrastructure facilities.
•
Reinstate authority for the issuance of Build America Bonds (BABs). BABs are
taxable bonds for which the U.S. Treasury pays a direct subsidy of the interest
costs to the issuer (a state or local government), thus helping finance capital
projects with lower borrowing costs.
AIn the 112th Congress, a number of these issues and options have beenwere examined in hearings by the House
House Transportation and Infrastructure Subcommittee on Water Resources and Environment (on
February 28 and March 21, 2012) and by the Senate Environment and Public Works
Subcommittee on Water and Wildlife (December 13, 2011, and February 28, 2012).
4
This report does not address certain other concepts that have been suggested from time to time to help localities meet
financial challenges through better planning and prioritization of water infrastructure. For example, EPA encourages
localities to improve management of their infrastructure assets in order to extend current life and reduce need for new
infrastructure. Likewise, EPA and municipalities have discussed ways, and EPA issued a policy framework in June
2012, to integrate infrastructure planning and permitting, in order to prioritize investments.
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subcommittee held a subsequent hearing on March 13, 2013.
Increase Funding for the SRF Programs
The most prominent source of federal financial assistance for municipal water infrastructure
projects is the SRF programs, which can assist a variety of types of projects, including building
new and improving existing wastewater treatment and drinking water treatment facilities needed
to comply with standards and requirements of the CWA and SDWA. Clean water and drinking
water SRFs have been set up in all 50 states, and the programs are widely supported. The
programs’ principal strengths are that they are well established; project selection criteria are well
known; states have considerable flexibility in selecting which projects to assist; and operations
and procedures are familiar to stakeholders.
Established by Congress in the 1987 CWA amendments (P.L. 100-4), the clean water SRF
program provides seed money to states in the form of capitalization grants, which are matched by
states at least by 20%. A state, in turn, uses the combined federal-state monies to provide various
types of assistance, including making low- or no-interest loans, refinancing, purchasing or
guaranteeing local debt, and purchasing bond insurance. Loan recipients repay assistance to the
state, under terms set by the state, thus providing a permanent, revolving source of funds for
additional projects over time. In 1996, Congress enacted a similar drinking water SRF
program in
the SDWA (P.L. 104-182). At the federal level, the SRF programs are administered by
EPA, but
actual implementation is done by states.
Both programs allow federal, state, and local agencies to leverage limited dollars. According to
EPA, because of the funds’ revolving nature, the federal investment can result in the construction
of up to four times as many projects over a 20-year period as a one-time grant. Further, to the
extent that a state uses monies in its SRF to secure bonds and then lends proceeds from the bonds
for SRF-eligible activities, loan funding is increased. This financing technique, called leveraging,
is used by 2728 states and provides funding that exceeds the contribution from federal capitalization
grants. In total from 1988 through mid-2010, leveraged bonds, leveraged bonds and state contributions have comprised 48% of funds in
clean water SRFs, while federal capitalization grants and state contributions have comprised 44%
and 4%, respectively. Since the beginning of the drinking water SRF program in 1997, leveraged
bonds have comprised 28% of that program, while federal capitalization grants and state
contributions have comprised 58% and 11%, respectively52% of total SRF
investment, while federal capitalization grants have comprised 48%.
From the federal budgetary perspective, the SRF programs are grants, and federal appropriations
are fully scored; none of the funds provided to states as capitalization grants are returned to the
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U.S. Treasury. However, from the local government or utility’s perspective, SRFs are loans,
which are repaid to states and are intended to be sources of long-term assistance for water
infrastructure projects.
Although the SRF programs are considered to be highly successful in addressing water quality
problems, there are several concerns and criticisms of them.
First, although the SRF is a loan program, but some communities have long favored grants, which the
CWA (but not the SDWA) previously provided. The cost burden per customer of capital projects
tends to be greater in small communities, and rural and disadvantaged communities prefer grants
because many of them lack the tax base needed to repay a loan. Congress has responded to this
concern in several ways, including providing earmarked grants in appropriations acts until
recently and authorizing a separate CWA grant program for “wet weather” projects to address
sewer overflow problems, which has (although it never received appropriations). Further, Congress specified
in recent appropriations acts (such as EPA’s FY2012 appropriation, P.L. 112-74) that states shall
use a portion of both programs’ capitalization grants to provide subsidy in the form of principal
forgiveness, negative interest loans, or grants.56 Critics of the latter point out that, to the extent
5
The SDWA already allows but does not require states to provide subsidized assistance from drinking water SRFs.
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SRF assistance is partially subsidized and not fully repaid, the corpus of the state’s loan fund is
diminished, along with its capacity to make future loans.
Second, the potential for leveraging to increase overall funding is limited, because nearly half of
the states do not use that financing technique.
Third, some stakeholders—especially large cities—contend that the SRF programs favor small
and medium communities. According to this view, the programs do not benefit large projects,
because in many cases assistance to individual projects is limited to $20 million. However, the
general validity
of that concern is unclear, because where limits are imposed, this results from
state policies, not
federal. Neither the CWA nor the SDWA requires a state to limit SRF
assistance, and states
establish their own criteria for selecting projects, which are identified
annually in Intended Use
Plans (IUPs). In order to extend aid to more communities, some states
may adopt dollar limits by
rule or practice, but this is not universally the case.
Fourth, the CWA restricts SRF assistance to municipal, intermunicipal, interstate, and state
agencies, thus barring private utilities from the program. Some in the private sector contend that
this restriction provides an advantage to publicly owned utilities. Several legislative proposals to
allow clean water SRFs to assist non-public entities have been considered, but none has been
enacted. Modifying the CWA in that manner would conform the clean water program to its
counterpart in the Safe Drinking Water Act. However, critics of providing federal assistance to
private utilities contend that the credit subsidies have the potential of offering windfalls to those
companies.
Fifth, some are critical that Congress imposes restrictions on states’ use of SRF capitalization
grants in order to achieve broad policy objectives beyond clean and safe water. Examples include
Buy America or DavisBaconDavis-Bacon prevailing wage requirements. According to this view, by
mandating that all funded
projects meet certain non-water quality requirements, or that states use
a minimum percentage of
funds for “green” infrastructure such as energy efficiency projects (a
6
The SDWA already allows but does not require states to provide subsidized assistance from drinking water SRFs.
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requirement in recent appropriations acts), Congress adds to projects , Congress adds to projects
costs and limits state
flexibility.
Perhaps the most critical concern is the fact that federal capitalization grants are entirely subject
to appropriations, which generally have been flat or declining for more than a decade, as shown in
Figure 1. The FY2009 exception to this trend reflects temporary funding under the American
Recovery and Reinvestment Act of 2009 (ARRA, P.L. 111-5). The President’s FY2013 budget
request for
capitalization grants for the two SRF programs iswas 15% below the $2.38 billion total appropriated
in FY2012.
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appropriated in FY2012. The FY2014 request for the two programs totals $1.9 billion and is
nearly 20% below the FY2012-appropriated amount.
Figure 1. SRF Appropriations, FY2005-20132014 Request
(millions of dollars)
$Millions
$5,000
$4,000
$3,000
$2,000
$1,000
$0
FY 2005 FY 2006 FY 2007 FY 2008 FY 2009 FY 2010 FY 2011 FY 2012 FY 2013 FY 2014
request request
Clean Water SRF
Drinking Water SRF
5,000
$4,500
Millions of Dollars
$4,000
$3,500
$3,000
$2,500
$2,000
$1,500
$1,000
$500
$0
FY2005 FY2006 FY2007 FY2008 FY2009 FY2010 FY2011 FY2012 FY2013
request
Clean Water SRF Funds
Drinking Water SRF Funds
Source: Compiled by Congressional Research Service from appropriations acts and FY2013 Budget Justification
and FY2014 Budget
Justifications for EPA.
Notes: FY2009 funding included supplemental appropriations under the American Recovery and Reinvestment
Act of $4.0 billion for the clean water SRF and $2.0 billion for the drinking water SRF.
Securing future SRF appropriations is likely to be more difficult after FY2012in future years, under general
deficit deficit
reduction pressures and specific discretionary spending caps imposed by the debt
agreement agreement
embodied in the Budget Control Act of 2011 (BCA, P.L. 112-25).6 In a multi-step
, as amended by the American
Taxpayer Relief Act of 2012 (ATRA, P.L. 112-240).7 In a multi-step process, the statute set caps
on discretionary budget authority (appropriations) and resulted in
automatic spending reductions, which that began in FY2012 and an automatic
spending reduction process that began in FY2013, which together will reduce the deficit by a combined
roughly $2.1 trillion over the
FY2012-FY2021 period. The precise programmatic impact of reductions in discretionary
spending on clean water and drinking water SRF capitalization grants will be determined in the
appropriations process. However, if the appropriations process does not result in spending levels
that adhere to the cap levels and the cap levels are breached, a specified enforcement process
follows, beginning with sequestration in FY2013.7 If sequestration occurs, the FY2013 automatic
reduction in spending for non-exempt nondefense discretionary accounts is projected to be 8.5%
below the BCA cap. Moreover, while the BCA caps represent the upper limit of spending that will
meet the act’s deficit reduction targets, some Members of Congress favor even lower levels of
6
For full discussion, see CRS Report R42013, The Budget Control Act of 2011: How Do the Discretionary Caps and
Automatic Spending Cuts Affect the Budget and the Economy?, by Marc Labonte and Mindy R. Levit.
7
In addition to the deficit reduction achieved through the statutory caps on discretionary spending, the BCA put in
place an automatic process in the event a special joint committee fails to reach an agreement on spending reductions.
The BCA “Super Committee” announced in November 2011 that it had failed to reach such an agreement. As a result,
an automatic spending reduction process has been triggered to begin in January 2013 unless Congress and the President
act to eliminate or change the process before then. The automatic spending reductions affecting discretionary accounts
will take place via a sequestration process in FY2013 and a reduction in the original BCA caps in FY2014 and beyond.
Although some discretionary programs are exempt from the sequester process in FY2013, the clean water SRF program
is not. Ibid.
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spending than the BCA allows. The FY2013 budget resolution adopted by the House on March 29
(H.Con.Res. 112) sets a discretionary spending cap that is $19 billion (2%) below the 2013 level
established in the BCA and removes defense discretionary spending from possible sequestration,
meaning that nondefense discretionary programs would be affected to a greater degree. Overall,
no matter how much support there may be for more SRF spending, Congress faces many
competing needs, spending caps will affect
appropriators’ decisions concerning discretionary spending on clean water and drinking water
7
For full discussion, see CRS Report R42506, The Budget Control Act of 2011: The Effects on Spending and the
Budget Deficit , by Mindy R. Levit and Marc Labonte.
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SRF capitalization grants. Further, the BCA requires that if the appropriations process does not
result in spending levels that adhere to the BCA cap levels and the cap levels are breached, a
specified enforcement process follows.8 In FY2013, the automatic spending reduction is carried
out through an across-the-board sequester (cancellation) of previously authorized budgetary
resources. Failure to achieve the FY2013 BCA limits did, in fact, trigger the automatic spending
reduction process beginning on March 1, 2013. The Office of Management and Budget (OMB)
estimated that the FY2013 sequester will reduce non-exempt defense discretionary spending by
7.8% relative to the cap levels and non-defense discretionary spending (such as for clean water
and drinking water SRF capitalization grants) by 5.0% relative to the cap levels.9
Moreover, while the BCA caps represent the upper limit of spending that will meet the act’s
deficit reduction targets, some Members of Congress favor even lower levels of spending than the
BCA allows and redistributing reductions in order to protect some accounts, especially defense.
The FY2014 budget resolution adopted by the House on March 21 (H.Con.Res. 25) cuts
nondefense discretionary spending more than $1 trillion below the level established in the BCA
and removes defense discretionary spending from possible sequestration, meaning that
nondefense discretionary programs would be affected to a greater degree. Overall, no matter how
much support there may be for more SRF spending, Congress faces many competing needs,
priorities, and difficult choices.
Authorization of appropriations for clean water SRF capitalization grants expired in FY1994 and
for drinking water SRF capitalization grants in FY2003. Congress has considered water
infrastructure funding issues several times since the 107th Congress, but no legislation other than
appropriations has been enacted. Recent proposals have included provisions for more robustly
funded SRFs. In the 112th113th Congress, H.R. 31451877 would reauthorize the clean water SRF program at
a total of $13.8 billion over five years, as would have bills bills that were passed by the House in the 111th
(H.R.
1262) and 110th Congresses (H.R. 720). Regarding the drinking water SRF, in the 111th
Congress,
the House passed a bill to reauthorize that program at a total of $4.8 billion over three
years (H.R.
5320). Also in the 111th Congress, a bill to reauthorize both SRF programs was
reported in the
Senate (S. 1005); it included $20.0 billion for the clean water SRF program and
$14.7 billion for
the drinking water SRF program, each for five years. No similar House or Senate bill has been
introduced in the 112th Congress.
Legislation reported by congressional committees typically is “scored” by the Congressional
Budget Office (CBO) for the effects on discretionary and mandatory, or direct, spending and by
the Joint Committee on Taxation (JCT) for effects on revenues. Discretionary spending is the part
of federal spending that lawmakers generally control through annual appropriation acts. In
general, legislation that authorizes future appropriations for discretionary programs, by itself,
does not increase federal deficits or decrease surpluses. Any subsequent discretionary
appropriation to fund the authorized activity would affect the federal budget and would be subject
to spending limits under a budget resolution or the BCA.
8
In addition to the deficit reduction achieved through the statutory caps on discretionary spending, the BCA put in
place an automatic process in the event a special joint committee failed to reach an agreement on spending reductions.
The BCA “Super Committee” announced in November 2011 that it had failed to reach such an agreement. As a result,
an automatic spending reduction process was triggered unless Congress and the President act to eliminate or change the
process. The automatic spending reductions affecting defense and non-defense discretionary accounts take place via a
sequestration process in FY2013 and a reduction in the original BCA caps in FY2014 and beyond. Although some
discretionary programs are exempt from the sequester process in FY2013, the SRF programs are not. Ibid.
9
Office of Management and Budget, Report to the Congress on the Joint Committee Sequestration for FY2013, March
1, 2013.
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Enacting legislation that only authorizes future discretionary appropriations would not result in an
increase in CBO’s projection of federal deficit under its baseline assumptions and would not
implicate pay-as-you-go rules or the Statutory Pay-As-You-Go Act (P.L. 111-139), or PAYGO,
which generally require that direct spending and revenue legislation not increase the federal
deficit or that the spending be offset. However, authorizing legislation that affects direct spending
or federal revenues is subject to budgetary rules. Direct spending is provided in or controlled by
authorizing laws, generally continues without any annual legislative action, and includes
spending authority provided for in such programs as Medicare and unemployment compensation.
Direct spending also includes many offsetting collections, such as Medicare premiums, which are
treated as negative spending instead of as revenues.
Perspective on how the SRF provisions of H.R. 3145 1877 or similar legislation in the 113th Congress
likely would be scored is provided by
CBO’s report on H.R. 1262 in the 111th Congress, which
similarly authorized appropriations
totaling $13.8 billion for clean water SRF capitalization
grants. The CBO report stated that
certain provisions of the bill would affect direct spending and
revenues, and it cited the JCT’s
estimates that by increasing funds available under the clean water
SRF, H.R. 1262 would result in
some states leveraging SRF grants by issuing additional tax-exempttaxexempt bonds to finance water
infrastructure projects. The JCT estimated that those additional
bonds would result in reductions
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in federal revenue totaling $700 million over 10 years.8 To 10 To
offset the reduced revenue, H.R. 1262
(and H.R. 3145 in the 112th Congress) included offsetting receipts resulting from an increase in
per-ton duties imposed on vessels arriving at U.S. ports from foreign ports. These receipts offset
would
offset direct spending. The H.R. 1877 in the 113th Congress includes similar offsetting receipts. The
significance of needing to include the offsetting receipts in the legislation is
that, if states were to
increase leveraging and issue more tax-exempt bonds—such as might occur
if the state volume
cap on private activity bonds were lifted (see discussion below)—additional
offsetting receipts
likely would be required in SRF reauthorization legislation.
Create a Federal Water Infrastructure Trust Fund
One of the most common criticisms of the SRF programs, that capitalization grants are subject to
annual appropriations, is the focus of proposals to create a federal water infrastructure trust fund
modeled after existing mechanisms for other types of infrastructure such as the airport and
airways trust fund and the highway
trust fund for other types of infrastructure trust fund. A trust fund supported by dedicated revenues
would be
intended to provide sustainable and reliable long-term financing of water infrastructure
projects.
Proponents contend that trust fund expenditures would not impact the federal deficit
(assuming
that revenues are at least as large as program spending), because they would be drawn from
from collections that are dedicated by law for specified purposes. Whether the mechanism is
created as
a trust fund per se is not the critical issue,911 but, rather, the critical issue is creation of a dedicated
revenue and how it is recorded in the budget.
This idea is not new: Legislation was introduced in the House in 1993 to support clean water
infrastructure by creating a fund that would accrue $6 billion annually in revenues through a
combination of user fees and excise taxes. In 1996 EPA issued a report, requested by Congress,
on alternative financing options for water infrastructure, including a trust fund, and a 2009
Government Accountability Office (GAO) report, also requested by Congress, similarly assessed
options to generate revenue for a clean water trust fund.10 Legislation has been introduced (H.R.
4560 in the 109th Congress, and H.R. 6249 and H.R. 3145 in the current Congress). Issues
associated with alternative financing options have been explored during hearings by the House
Transportation and Infrastructure Water Resources and Environment Subcommittee in 2005,
2009, and 2012.
These proposals would create a dedicated revenue source that would be counted as an offsetting
receipt or collection and would be recorded in the budget as reducing or netting out outlays for
8
dedicated revenue and how it is recorded in the budget.
10
See U.S. Congress, House Committee on Transportation and Infrastructure, Water Quality Investment Act of 2009,
report to accompany H.R. 1262, 111th Congress, 1st session, H.Rept. 111-26, pp. 49-54. Similarly, the JCT estimated
that H.R. 5320 in the 111th Congress, authorizing capitalization grants for the drinking water SRF program, would
reduce federal revenues by $337 million over 10 years by increasing the use of tax-exempt bonds by states. Pay-as-yougo procedures would apply because enacting the legislation would affect revenues. See U.S. Congress, House
Committee on Energy and Commerce, Assistance, Quality, and Affordability Act of 2010, report to accompany H.R.
5320, 111th Cong., 2nd sess., July 1, 2010, H.Rept. 111-524, pp. 20-21.
911
Whether a particular fund is designated in law as a trust fund is, in many cases, arbitrary. In the federal budget, there
is no substantive difference between a trust fund (such as the Highway Trust Fund) and a special fund (e.g., the Nuclear
Waste Disposal Fund) or a revolving fund (such as the Postal Service Fund). All receive collections that are dedicated
by law for specific purposes. Office of Management and Budget, “Budget of the United States Government: Analytical
Perspectives, Supplemental Materials Fiscal Year 2013,” p. 455.
10
U.S. Environmental Protection Agency, Alternative Funding Study: Water Quality Fees and Debt Financing Issues,
Final Report to Congress, June 1996; and U.S. Government Accountability Office, Clean Water Infrastructure, A
Variety of Issues Need to Be Considered When Designing a Clean Water Trust Fund, GAO-09-657, May 2009.
Hereinafter, 2009 GAO Report.
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Legislative Options for Financing Water Infrastructure
water infrastructure projects.11(continued...)
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This idea is not new: Legislation was introduced in the House in 1993 to support clean water
infrastructure by creating a fund that would accrue $6 billion annually in revenues through a
combination of user fees and excise taxes. In 1996 EPA issued a report, requested by Congress,
on alternative financing options for water infrastructure, including a trust fund, and a 2009
Government Accountability Office (GAO) report, also requested by Congress, similarly assessed
options to generate revenue for a clean water trust fund.12 Legislation has been introduced in
several congresses (H.R. 1877 in the current Congress, and H.R. 6249 in the 112th Congress).
Issues associated with alternative financing options have been explored by the House
Transportation and Infrastructure Water Resources and Environment Subcommittee in several
hearings since 2005.
These proposals would create a dedicated revenue source that would be counted as an offsetting
receipt or collection and would be recorded in the budget as reducing or netting out outlays for
water infrastructure projects.13 Proponents contend that the proposal would be deficit-neutral
(again assuming that new revenue sources match or exceed program outlays) and would be a
consistent and protected source of revenue to help states replace, repair, and rehabilitate critical
water infrastructure facilities.1214 Both the 1996 EPA and 2009 GAO reports identified a number of
issues that need to be addressed in establishing a clean water trust fund, including how it should
be administered, whether it would be used to fund the clean water SRF or a separate program,
what type(s) of financial assistance should be provided for projects (grants or loans), and what
activities should be eligible for funding. These design issues are necessary, but they are relatively
straightforward to resolve legislatively.
The most difficult issues conceptually and politically concern how to generate the revenues.
Clean water lacks as clear a basis for charging or taxing a set of users as exists for either the
highway or aviation trust funds. As GAO observed, “each funding option poses various
implementation challenges, including defining the products or activities to be taxed, establishing
a collection and enforcement framework, and obtaining stakeholder support.”1315 Consensus on
these issues has been elusive. H.R. 6249 in the 112th Congress proposesproposed to raise at least $6.5
billion annually through excise taxes on water-based beverages, pharmaceutical products, and
items disposed in wastewater (such as cosmetics and toilet paper). These revenues would be
available to fund grants and loans under the clean water SRF program, as well as wastewater
technology research, regional water research centers, and other programs. A portion of revenues
(...continued)
Waste Disposal Fund) or a revolving fund (such as the Postal Service Fund). All receive collections that are dedicated
by law for specific purposes. Office of Management and Budget, “Budget of the United States Government: Analytical
Perspectives, Supplemental Materials Fiscal Year 2013,” p. 455.
12
U.S. Environmental Protection Agency, Alternative Funding Study: Water Quality Fees and Debt Financing Issues,
Final Report to Congress, June 1996; and U.S. Government Accountability Office, Clean Water Infrastructure, A
Variety of Issues Need to Be Considered When Designing a Clean Water Trust Fund, GAO-09-657, May 2009.
Hereinafter, 2009 GAO Report.
13
Offsetting collections are usually authorized to be spent for specified purposes and generally are available for use
when collected, without further action by the Congress. Offsetting receipts may or may not be designated for a specific
purpose. If designated for a particular purpose, in some cases the offsetting receipts may be spent without further action
by Congress. When not so designated, offsetting receipts are credited to the general fund. See “Analytical Perspectives
on the FY2014 Budget, Offsetting Collections and Offsetting Receipts,” http://www.whitehouse.gov/sites/default/files/
omb/budget/fy2014/assets/receipts.pdf.
14
Rep. Earl Blumenauer, “The Water Protection and Reinvestment Act, Updated for the 112th Congress,” August 1,
2012.
15
2009 GAO report, p. 13.
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in the fund also would be used for an innovative financing program modeled after the TIFIA
program (see “Create a “Water Infrastructure Finance and Innovation Act” Program (WIFIA),”
below). Other revenue options proposed in the past include fees on industrial discharge of toxic
pollutants, and an excise tax on the active ingredients of pesticides and fertilizers. Also in the
112th In the 113th
Congress, Title IV of H.R. 31451877 proposes a $10 billion per year fund, but it defers
identifying identifying
potential funding mechanisms and funding sources, pending a study by CBO.
From a budgetary perspective, there are no hurdles to enacting legislation to collect revenues for a
water infrastructure trust fund. That is, assuming that the policy issues of who or what to tax and
at what levels are resolved, budget rules do not prohibit enacting a measure to collect new
revenues. However, most programs with dedicated revenues, including most trust funds, are not
set up to be spent without authorization or appropriation by Congress, making it difficult to assure
that all revenues and interest will be spent each year for water infrastructure purposes.
Accomplishing the objectives laid out by proponents of the clean water trust fund would involve
complicated steps: creating dedicated revenue that is classified in the budget so that it will net out
the outlays, preventing spending on the program from being reduced by the congressional
authorization and appropriation process, and setting up the program to ensure that it does not
count against congressional budget rules such as PAYGO and discretionary spending caps.
In the past, Congress has sought to create a mechanism to guarantee spending for some existing
infrastructure trust funds. For example, since 2000, legislation authorizing appropriations from
11
Offsetting collections are usually authorized to be spent for specified purposes and generally are available for use
when collected, without further action by the Congress. Offsetting receipts may or may not be designated for a specific
purpose. If designated for a particular purpose, in some cases the offsetting receipts may be spent without further action
by Congress. When not so designated, offsetting receipts are credited to the general fund. See “Analytical Perspectives
on the FY2013 Budget,” http://www.whitehouse.gov/omb/budget/Analytical_Perspectives.
12
Rep. Earl Blumenauer, “The Water Protection and Reinvestment Act, Updated for the 112th Congress,” August 1,
2012.
13
2009 GAO report, p. 13.
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the Airport and Airway Trust Fund included a provision making it out of order in the House or
Senate to consider legislation that fails to use all aviation trust fund receipts and interest annually.
The recently enacted2012 FAA reauthorization act, P.L. 112-95, modifiesmodified this guarantee to restrict the
amount amount
made available for each fiscal year to 90% of the receipts of the aviation trust fund plus
interest interest
credited for the respective year as estimated by the Secretary of the Treasury.1416 Further,
since since
1998, House rules effectively created funding guarantees for transportation activities within
the the
highway and mass transit categories by making any legislation that would cause spending to
be be
less than the amount authorized subject to a point of order. This rule, in clause 3 of Rule XXI,
was amended at the beginning of the 112th Congress to allow an appropriations measure to reduce
spending for highway and mass transit activities below the authorized level, as long as those
funds were not made available for a purpose not authorized in the surface transportation act.1517
These two examples illustrate the difficulty of assuring that trust fund revenues that are subject to
appropriations are spent fully. Moreover, spending guarantees can still be trumped by broader
budget policy goals (such as deficit reduction) or by the spending priorities of appropriators—that
is, points of order can be waived.
Conceptually, creating a mechanism to protect spending could be done by amending the Balanced
Budget and Emergency Deficit Control Act of 1985 to create a separate budget category for water
infrastructure programs. Funding from within this category could not be used to, in effect, offset
increased spending elsewhere in the budget, thereby removing any incentive for restraining the
spending of available trust fund revenues. However, this option reduces the appropriations
16
This restriction in the bill was described in the House Transportation Committee’s report, H.Rept. 112-29, pt. 1, as
necessary to “mitigate the effect of over-optimistic revenue projections in the future.” The 90% restriction would
provide room for error in revenue estimates. Once the actual level of revenues for the trust fund is known, an
adjustment would be made in the amount actually made available from the trust fund for that year, according to the
committee’s report.
17
See CRS Report R41926, House Rules Changes Affecting the Congressional Budget Process Made at the Beginning
of the 112th Congress, by Bill Heniff Jr.
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Legislative Options for Financing Water Infrastructure
committees’ influence on spending, which they could be expected to vigorously resist, and also
would involve amending the Budget Act, thus requiring the acquiescence of the House and Senate
budget committees.
Create a “Water Infrastructure Finance and Innovation Act”
Program (WIFIA)
One option for supporting investment in water infrastructure is the creation of a program modeled
on the Transportation Infrastructure Finance and Innovation Act (TIFIA) Program. As the name
suggests, only transportation projects are eligible for TIFIA assistance, but operation of the TIFIA
program over the past 1415 years has generated interest in creating a similar program for water
infrastructure, a so-called Water Infrastructure Finance and Innovation Act (WIFIA) Program.1618
TIFIA, enacted in 1998 as part of the Transportation Equity Act for the 21st Century (TEA-21;
P.L. 105-178), was reauthorized in July 2012 in the Moving Ahead for Progress in the 21st
Century Act (MAP-21; P.L. 112-141). TIFIA provides federal credit assistance up to a maximum
of 49% of project costs in the form of secured loans, loan guarantees, and lines of credit (23
14
This restriction in the bill was described in the House Transportation Committee’s report, H.Rept. 112-29, pt. 1, as
necessary to “mitigate the effect of over-optimistic revenue projections in the future.” The 90% restriction would
provide room for error in revenue estimates. Once the actual level of revenues for the trust fund is known, an
adjustment would be made in the amount actually made available from the trust fund for that year, according to the
committee’s report.
15
See CRS Report R41926, House Rules Changes Affecting the Congressional Budget Process Made at the Beginning
of the 112th Congress, by Bill Heniff Jr.
16
For example, see American Water Works Association and Water Environment Federation, “A Water Infrastructure
Financing Innovations Authority (WIFIA) and Other Infrastructure Financing Tools,” http://www.awwa.org/files/
GovtPublicAffairs/PDF/2011WIFIA.pdf.
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Legislative Options for Financing Water Infrastructure
U.S.C. 601 et seq.). Transportation projects costing at least $50 million (or at least $25 million in
rural areas) are eligible for TIFIA financing.1719 Projects must also have a dedicated revenue stream
to be eligible for credit assistance. TIFIA can provide senior or subordinated debt. With the
enactment of MAP-21, funding authorized for the TIFIA program has increased from $122
million annually to $750 million in FY2013 and $1 billion in FY2014.
Prior to the enactment of MAP-21, a project seeking TIFIA assistance had to satisfy a number of
eligibility criteria such as project cost and planning requirements. Projects were then selected by
the Department of Transportation (DOT) from among those eligible based on eight weighted
factors: private participation (20%); environmental impact (20%); national or regional
significance (20%); project acceleration (12.5%); creditworthiness (12.5%); use of new
technologies (5%); reduced federal grant assistance (5%); and consumption of budget authority
(5%). MAP-21 eliminates these selection criteria and now provides TIFIA assistance purely on a
project’s eligibility. One of the key eligibility criteria is the creditworthiness of the project. To be
eligible, a project’s senior debt obligations and the federal credit instrument must receive an
investment-grade rating from at least one nationally recognized credit agency. The TIFIA
assistance must also be determined to have several beneficial effects: fostering a public-private
partnership, if appropriate; enabling the project to proceed more quickly; and reducing the
contribution of federal grant funding. Other eligibility criteria include satisfying planning and
environmental review requirements and being ready to contract out construction within 90 days
after the obligation of assistance.
FromSince the beginning of the program through June 18, 2012, TIFIAin 1998, TIFIA has provided 2730 direct loans and
one loan
guarantee. Loan amounts ranged from $4240 million to $900 million. Total credit
assistance assistance
provided over the life of the program amounts to $9.210.5 billion. The amount of credit
assistance is assistance is
18
For example, see American Water Works Association, Water Environment Federation and Association of
Metropolitan Water Agencies, “A Cost Effective Approach to Increasing Investment in Water Infrastructure, The
Water Infrastructure Financing Innovations Authority (WIFIA) ,” http://www.awwa.org/portals/0/files/legreg/
documents/wifia.pdf.
19
The threshold for Intelligent Transportation Systems projects is $15 million.
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Legislative Options for Financing Water Infrastructure
much larger than the appropriated amount over this period because the appropriated
funds need
only cover the administrative and subsidy cost of the program (see below for a more
detailed detailed
discussion of this point). Projects involving TIFIA financing amount to $3642 billion in total
costs.18 20
TIFIA typically provides financing to fill a gap in a much larger financial package that
sometimes sometimes
involves private equity and private debt. For example, the $2.6 billion IH-635
Managed Lanes
project in Dallas, TX, is being financed with $606 million in private activity
bonds, a $672
million equity contribution from the private sector partner, $17 million in toll
revenues, $490
million in public funds, and an $850 million TIFIA loan.19
A draft discussion WIFIA bill has been circulated by the Water Resources and Environment
Subcommittee. It21
In the 113th Congress, two bills to create a WIFIA program have been introduced. The first, S.
335, would empower the Administrator of the Environmental Protection Agency
(EPA) to provide
credit assistance to drinking water and wastewater infrastructure projects, much
like TIFIA is able
to do for transportation projects. WIFIA credit assistance would be available
(loans or loan guarantees) would be
available directly to sponsors of projects or to state revolving funds (SRFs) for a group infrastructure financing authorities for a group
of projects that are
combined for the purpose of receiving credit assistance. The Administrator of
EPA would select
projects for assistance based on a number of criteria such as creditworthiness, ;
the need for federal
assistance, assistance; the contribution of non-federal assistance, including from the
private sector, and the
17
The threshold for Intelligent Transportation Systems projects is $15 million.
Federal Highway Administration, “Projects and Project Profiles: TIFIA Portfolio,” http://www.fhwa.dot.gov/ipd/
tifia/projects_project_profiles/tifia_portfolio.htm.
19
Federal Highway Administration, “TIFIA Project Profiles: IH 635 Managed Lanes,” http://www.fhwa.dot.gov/ipd/
project_profiles/tx_lbj635.htm.
18
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; and the extent to which the project is of national or regional significance. According to the draft bill,
credit provided through the program would have to be for $20 million or more.20
One of the main benefits of the TIFIA program is that it provides capital at a low cost to the
borrower. Moreover, TIFIA financing is often characterized as patient capital because loan
repayment does not need to begin until five years after substantial completion of a project, the
loan can be for up to 35 years from substantial completion, and the amortization schedule can be
flexible. The draft WIFIA bill likewise is intended to provide these benefits. As total TIFIA
assistance cannot exceed 49% of project costs, the program is intended to encourage non-federal
and private sector financing. The draft WIFIA bill would likely encourage some non-federal
financing, including from the private sector, but how much is unclear, in part, because it does not
contain a maximum amount or share of a project’s cost that WIFIA could fund or guarantee.
Another possible benefit of a WIFIA program is that it would not duplicate existing water
infrastructure financing tools. Many argue that the SRF program is useful primarily for smaller
communities and smaller projects, as discussed previously. This might argue for expanding the
SRF program, while keeping the WIFIA solely for larger projects. Arguably, then, the $20 million
minimum threshold for credit assistance contained in the draft bill could be about the right level
so as not to duplicate assistance from SRFs.21 The draft bill, however, also provides access to
WIFIA financing for smaller projects by grouping, or aggregating, them through a SRF. One
possible downside of providing smaller projects access to WIFIA financing, grouped or not, is the
time and expense of administering the program.
As provided under the draft bill, a WIFIA may shift some decision making for financing water
infrastructure projects from the state and local level to the federal level, specifically to the EPA.
Prior to the enactment of MAP-21, authority to make TIFIA loans and to provide other credit
assistance was vested in DOT. MAP-21 makes DOT’s role more administrative, predominantly
by making the program based on eligibility. Among other things it is hoped that this will speed
the delivery of credit assistance.
From the federal perspective, an advantage of TIFIA is that it can provide a large amount of credit
assistance relative to the amount of budget authority provided. The volume of loans and other
types of credit assistance that TIFIA can provide is determined by the size of congressional
appropriations and calculation of the subsidy cost.22 The subsidy cost largely determines the
amount of money that can be made available to project sponsors.23 Currently in the TIFIA
20
The draft discussion bill differs from WIFIA-type legislation introduced in the 112th Congress, H.R. 3145 (Title V).
For example, assistance under H.R. 3145 would be limited to wastewater projects, while the draft discussion bill would
allow assistance for wastewater and drinking water capital projects. H.R. 3145 does not specify a threshold for
assistance. H.R. 3145 would provide WIFIA assistance through the existing SRF program, but not directly to owners or
operators of a water infrastructure facility, as the draft bill would.
21
U.S. Congress, House Committee on Transportation and Infrastructure, Subcommittee on Water Resources and
Environment, Testimony of Aurel Arndt, Hearing on Innovative Funding of Water Infrastructure of the United States,
112th Cong., 2nd sess., February 28, 2012, http://republicans.transportation.house.gov/Media/file/TestimonyWater/
2012-02-28-Arndt.pdfCredit
assistance provided through the program would have to be for projects (individual or grouped by
an SRF) totaling not less than $20 million.
A second measure is S. 601, the Water Resources Development Act of 2013, which the Senate
passed on Mary 15, 2013. Title X of the bill authorizes a five-year WIFIA pilot program. Under
the bill, EPA would be authorized to provide credit assistance for drinking water and wastewater
projects, and the U.S. Army Corps of Engineers would be authorized to provide similar assistance
for water resource projects, such as flood control or hurricane and storm damage reduction. Each
agency would be authorized $50 million annually to provide this assistance. Like S. 335, projects
would have to be $20 million or larger in costs to be eligible for credit assistance.
From the federal perspective, an advantage of TIFIA is that it can provide a large amount of credit
assistance relative to the amount of budget authority provided. The volume of loans and other
types of credit assistance that TIFIA can provide is determined by the size of congressional
appropriations and calculation of the subsidy cost.22 The subsidy cost largely determines the
amount of money that can be made available to project sponsors.23 Currently in the TIFIA
program, the average project subsidy cost is approximately 10%. Of the $122 million annual
appropriation for TIFIA in FY2012, DOT was able to use approximately $110 million to cover
loan subsidy costs. The rest went for administrative costs and other deductions. DOT estimated
that $110 million would support about $1.1 billion in TIFIA credit assistance ($110 million
20
Federal Highway Administration, “Projects and Project Profiles: TIFIA Portfolio,” http://www.fhwa.dot.gov/ipd/
tifia/projects_project_profiles/tifia_portfolio.htm.
21
Federal Highway Administration, “TIFIA Project Profiles: IH 635 Managed Lanes,” http://www.fhwa.dot.gov/ipd/
project_profiles/tx_lbj635.htm.
22
According to the Federal Credit Reform Act of 1990, the subsidy cost is the “estimated long-term cost to the
Government of a direct loan or loan guarantee, calculated on a net present value basis, excluding administrative costs”
(104 Stat. 1388-610). The Federal Credit Reform Act of 1990 was enacted as part of the Omnibus Budget
Reconciliation Act of 1990 (P.L. 101-508).
23
Douglas J. Elliott, Budgeting for Credit Programs: A Primer, Center for Federal Financial Institutions, April 2004, at
http://www.coffi.org/pubs/Budgeting%20Primer.pdf.
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program, the average project subsidy cost is approximately 10%. Of the $122 million annual
appropriation for TIFIA in FY2012, DOT was able to use approximately $110 million annually to
cover loan subsidy costs. The rest went for administrative costs and other deductions. DOT
estimated that $110 million would support about $1.1 billion in TIFIA credit assistance ($110
million divided by 10% equals $1.1 billion).24 Proponents of a WIFIA argue that loans for water
projects projects
could be even less risky than transportation projects, because water rates are an
established established
repayment mechanism, thus the subsidy cost would be lower and the amount of credit
assistance assistance
higher (per dollar of budget authority).25 However, analysts note that, even with stable
rate rate
mechanisms, some communities and water utilities have recently experienced problems with
borrowing and bond repayments.26 The draft bill would also allow borrowers to pay the subsidy
and administrative costs associated with a loan or loan guarantee, potentially enlarging the
amount of credit assistance available.
Another benefit of the TIFIA program from the federal perspective is that it potentially limits the
federal government’s exposure to default by relying on market discipline through
creditworthiness standards and the encouragement of private capital investment. On the other
hand, the Congressional Budget Office argues that the federal government underestimates the cost
of providing credit assistance under programs like TIFIA.27 This is because it excludes “the cost
of market risk—the compensation that investors require for the uncertainty of expected but risky
cash flows. The reason is that the FCRA [Federal Credit Reform Act] requires analysts to
calculate present values by discounting expected cash flows at the interest rate on risk-free
Treasury securities (the rate at which the government borrows money). In contrast, private
financial institutions use risk-adjusted discount rates to calculate present values.”28
Create a National Infrastructure Bank
Another idea for improving the nation’s investment in infrastructure is the creation of a national
infrastructure bank.29 Several bills to establish a national infrastructure bank have been introduced
in the 112th Congress, including the Building and Upgrading Infrastructure for Long-Term
Development (S. 652) and the National Infrastructure Development Bank Act of 2011 (H.R. 402).
An infrastructure bank is a government-established entity that provides credit assistance to
sponsors of infrastructure projects. An infrastructure bank can take many different forms, such as, so repayment of a WIFIA loan is not a certainty.26
One of the main benefits of the TIFIA program is that it provides capital at a low cost to the
borrower. Moreover, TIFIA financing is often characterized as patient capital because loan
repayment does not need to begin until five years after substantial completion of a project, the
loan can be for up to 35 years from substantial completion, and the amortization schedule can be
flexible. The WIFIA legislation likewise is intended to provide these benefits. As total TIFIA
assistance cannot exceed 49% of project costs, it is intended to encourage non-federal and private
sector financing. The WIFIA bills, with similar 49% caps on assistance, would likely encourage
some non-federal financing, including from the private sector, but how much is unclear.
Another possible benefit of a WIFIA program is that it is intended to not duplicate existing water
infrastructure financing tools. Many argue that the SRF program is useful primarily for smaller
communities and smaller projects, as discussed previously. This might argue for expanding the
SRF program, while keeping the WIFIA solely for larger projects. Arguably, then, the $20 million
minimum threshold for credit assistance contained in S. 335 and S. 601 could be about the right
level so as not to duplicate assistance from SRFs.27 Both bills, however, also provide access to
WIFIA financing for smaller projects by grouping, or aggregating, them through a SRF to meet
the $20 million threshold. One possible downside of providing smaller projects access to WIFIA
financing, grouped or not, is the time and expense of administering the program.
A WIFIA may shift some decision making for financing water infrastructure projects from the
state and local level to the federal level, specifically to the EPA (or the Army Corps, under S.
601), a change that concerns some stakeholders. Prior to the enactment of MAP-21, authority to
make TIFIA loans and to provide other credit assistance was vested in DOT. MAP-21 makes
DOT’s role more administrative, predominantly by making the program based on eligibility.
Among other things it is hoped that this will speed the delivery of credit assistance.
Another benefit of the TIFIA program from the federal perspective is that it potentially limits the
federal government’s exposure to default by relying on market discipline through
creditworthiness standards and the encouragement of private capital investment. On the other
24
Department of Transportation, “Letters of Interest for Credit Assistance Under the Transportation Infrastructure
Finance and Innovation Act (TIFIA) Program,” 76 Federal Register 68257-68260, November 3, 2011,
http://www.fhwa.dot.gov/ipd/pdfs/tifia/NOFA_Published_110311.pdf.
25
U.S. Congress, House Committee on Transportation and Infrastructure, Subcommittee on Water Resources and
Environment, Testimony of Aurel Arndt, Hearing on Innovative Funding of Water Infrastructure of the United States,
112th Cong., 2nd sess., February 28, 2012, http://republicans.transportation.house.gov/Media/file/TestimonyWater/
2012-02-28-Arndt.pdf.
26
LaShell Stratton-Childers, “Navigating a rough terrainRough Terrain,” Water Environment and Technology, January 2012, pp. 2429
24-29. This article describes the November 2011 bankruptcy filing by Jefferson County, AL, in part resulting from the
county’s inability to cover debts for wastewater system upgrades.
27
For more on this topic generally, see Congressional Budget Office, Fair-Value Accounting for Federal Credit
Programs, Issue Brief, March 2012, http://www.cbo.gov/sites/default/files/cbofiles/attachments/03-05FairValue_Brief.pdf.
28
Congressional Budget Office, “Estimating the Value of Subsidies for Federal Loans and Loan Guarantees,” August
2004, p. 2, http://www.cbo.gov/ftpdocs/57xx/doc5751/08-19-CreditSubsidies.pdf.
29
For more on this topic, see CRS Report R42115, National Infrastructure Bank: Overview and Current Legislation,
by William J. Mallett, Steven Maguire, and Kevin R. Kosar.
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an independent federal agency, a federal corporation, a government-sponsored enterprise, or a
private-sector, non-profit corporation. Both S. 652 and H.R. 402 would create a wholly owned
federal government corporation. 30
The wholly owned government corporation created by S. 652 would be called the American
Infrastructure Financing Authority (AIFA). AIFA would be governed by seven presidentially
appointed board members. AIFA would be authorized to provide loans and loan guarantees to
eligible transportation, water, and energy infrastructure projects. To be eligible for assistance a
project would have to cost at least $100 million, or at least $25 million in rural areas. The bank
would be capitalized with a $10 billion appropriation. The bank would be permitted to collect
fees to cover the administrative costs associated with AIFA.
The wholly owned government corporation created by H.R. 402 would be the National
Infrastructure Development Bank (NIDB), governed by five presidentially appointed directors.
The NIDB would be able to issue public benefit bonds (PBBs) to help finance infrastructure,
mainly through loans and loan guarantees. But the NIDB would also be able to make grants. The
bank would be capitalized by Congress with $5 billion annually from FY2012 through FY2016.
The total $25 billion appropriation would be 10% of the total subscribed capital of the bank. Up
to 90% of the subscribed capital would be callable by the Treasury Secretary. The total
outstanding bonds issued by the NIDB would not be allowed to exceed 250% of the subscribed
capital.
The NIDB would be authorized to help finance the construction or reconstruction of
infrastructure in several areas including energy, water and wastewater, telecommunications, and
transportation. State revolving funds would be eligible for assistance. Among the criteria for
evaluating projects for assistance from the NIDB would be the extent to which assistance will
maximize private investment in the project while providing a public benefit. Unlike other
infrastructure bank legislation, H.R. 402 does not include a minimum project size requirement.31
According to its proponents, a national infrastructure bank would provide several major benefits
for U.S. Congress, House Committee on Transportation and Infrastructure, Subcommittee on Water Resources and
Environment, Testimony of Aurel Arndt, Hearing on Innovative Funding of Water Infrastructure of the United States,
112th Cong., 2nd sess., February 28, 2012, http://republicans.transportation.house.gov/Media/file/TestimonyWater/
2012-02-28-Arndt.pdf.
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hand, the Congressional Budget Office argues that the federal government underestimates the cost
of providing credit assistance under programs like TIFIA.28 This is because it excludes “the cost
of market risk—the compensation that investors require for the uncertainty of expected but risky
cash flows. The reason is that the FCRA [Federal Credit Reform Act] requires analysts to
calculate present values by discounting expected cash flows at the interest rate on risk-free
Treasury securities (the rate at which the government borrows money). In contrast, private
financial institutions use risk-adjusted discount rates to calculate present values.”29
Enacting a WIFIA program raises another federal budgetary and revenue issue. The initial CBO
cost estimate for S. 601, as approved by the Environment and Public Works Committee,
concluded that the WIFIA provisions would cost $260 million over five years. In addition, it
would result in certain revenue loss to the U.S. Treasury, thus, pay-as-you-go procedures would
apply to the bill. CBO cited the Joint Committee on Taxation’s (JCT) estimate that enactment of
the bill would reduce revenues by $135 million over 10 years, because states would be expected
to issue tax-exempt bonds in order to acquire additional funds not covered by WIFIA assistance.30
To avoid the pay-as-you-go problem in the bill, the committee added a provision to S. 601 to
prohibit recipients of WIFIA assistance from issuing tax-exempt bonds for the non-WIFIA
portions of project costs (Section 10009(a)(5) of S. 601). CBO re-estimated the bill and
concluded that, because the change would make the WIFIA program less attractive to entities,
most of whom rely on tax-exempt bonds for project financing, the cost of the bill would be $200
million less over five years but would have no impact on revenues, because the demand for
federal credit would be lower without the option of using tax-exempt financing.31 Thus, the
apparent solution to one problem in the legislation—potential revenue loss—raises a different
kind of problem for entities seeking WIFIA credit assistance.
Create a National Infrastructure Bank
Another idea for improving the nation’s investment in infrastructure is the creation of a national
infrastructure bank.32 An infrastructure bank is a government-established entity that provides
credit assistance to sponsors of infrastructure projects. An infrastructure bank can take many
different forms, such as an independent federal agency, a federal corporation, a governmentsponsored enterprise, or a private-sector, non-profit corporation. Under most infrastructure bank
proposals, the bank would be authorized to help finance the construction or reconstruction of
infrastructure in several areas including energy, water and wastewater, telecommunications, and
transportation.
28
For more on this topic generally, see Congressional Budget Office, Fair-Value Accounting for Federal Credit
Programs, Issue Brief, March 2012, http://www.cbo.gov/sites/default/files/cbofiles/attachments/03-05FairValue_Brief.pdf.
29
Congressional Budget Office, “Estimating the Value of Subsidies for Federal Loans and Loan Guarantees,” August
2004, p. 2, http://www.cbo.gov/ftpdocs/57xx/doc5751/08-19-CreditSubsidies.pdf.
30
Congressional Budget Office, Cost Estimate for S. 601, Water Resources Development Act of 2013, April 9, 2013,
p. 6.
31
Congressional Budget Office, Cost Estimate for S. 601, Water Resources Development Act of 2013, April 17, 2013,
p. 7.
32
For more on this topic and legislation in the 112th Congress, see CRS Report R42115, National Infrastructure Bank:
Overview and Current Legislation, by William J. Mallett, Steven Maguire, and Kevin R. Kosar.
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According to proponents, a national infrastructure bank would provide several major benefits for
infrastructure projects, including water and wastewater capital projects. An infrastructure bank
might help facilitate water infrastructure projects by providing large amounts of financing on
advantageous terms, including low interest rates and long maturities. This might encourage
investment that would otherwise not take place, particularly in large, expensive projects whose
costs are borne locally but whose benefits are regional or national in scope. On the other hand, an
infrastructure bank may not be the lowest-cost means of achieving that goal. The Congressional
Budget Office has pointed out that a special entity that issues its own debt would not be able to
match the lower interest and issuance costs of the U.S. Treasury.3233
Whether providing financing on advantageous terms by a national infrastructure bank would lead
to an increase in the total amount of capital devoted to infrastructure investment is unclear.
Another purported advantage of certain types of infrastructure banks is access to private capital,
such as pension funds and international investors. These entities, which are generally not subject
30
Another infrastructure bank bill introduced in the 112th Congress is the American Infrastructure Investment Fund Act
of 2011 (S. 936). S. 936 would create a “fund” within the Department of Transportation.
31
For example, under another current infrastructure bank proposal, S. 652, individual projects eligible for funding
would have to be at least $100 million, or, for rural infrastructure projects, $25 million.
32
Congressional Budget Office, “Issues and Options in Infrastructure Investment,” May 2008, p. 28, at
http://www.cbo.gov/ftpdocs/91xx/doc9135/05-16-Infrastructure.pdf.
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to U.S. taxes, may be uninterested in purchasing the tax-exempt bonds that are traditionally a
major source of project finance, but might be willing to make equity or debt investments in
infrastructure in cooperation with a national infrastructure bank. If this shift were to occur,
however, it could be to the detriment of existing investment, as the additional investment in
infrastructure may be drawn from a relatively fixed amount of available investment funds.
Another putative benefit of a national infrastructure bank is that it might improve project
selection. A frequent criticism of current public infrastructure project selection is that it is often
based on factors such as geographic equity and political favoritism instead of the demonstrable
merits of the projects themselves.3334 In many cases, funding goes to projects that are presumed to
be the most important, without a rigorous study of the costs and benefits. Proponents of an
infrastructure bank assert that it would select projects based on economic analyses of all costs and
benefits.3435
Selecting projects through an infrastructure bank has possible disadvantages as well as
advantages. First, it would most likely direct financing to projects that are the most viable
financially rather than those with the greatest social benefits. Unless there were set-asides for
particular types of projects, water and wastewater projects would be in competition with
infrastructure projects across a wide spectrum of sectors. Second, financing projects through an
infrastructure bank might serve to exclude small urban and rural areas because infrastructure
banks would likely focus on large, expensive projects that tend to be located in major urban
centers. This may be true even without a minimum project cost threshold set in law. A third
possible disadvantage is that a national infrastructure bank may shift some decision making from
the state and local level to the federal level.
Once established, a national infrastructure bank might help accelerate worthwhile infrastructure
projects by bearing more of the financial risk. Large projects are often slowed by funding and
33
Congressional Budget Office, “Issues and Options in Infrastructure Investment,” May 2008, p. 28, at
http://www.cbo.gov/ftpdocs/91xx/doc9135/05-16-Infrastructure.pdf.
34
Everett Ehrlich, A National Infrastructure Bank: A Road Guide to the Destination, Policy Memo, Progressive Policy
Institute, October 2010, at http://www.progressivefix.com/wp-content/uploads/2010/09/09.2010-Ehrlich_A-NationalInfrastructure-Bank.pdf.
35
The extent to which this would be done varies depending on the specific proposal. If Congress were to direct the
bank to consider factors such as job creation and poverty reduction, then those requirements might constrain its ability
to assist the most economically viable projects.
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financing problems given the degree of risk. These large projects might also be too large for
financing from a state infrastructure bank or from a state revolving loan fund. Moreover, even
with a combination of grants, municipal bonds, and private equity, mega-projects often need
another source of funding to complete a financial package. Financing is also sometimes needed to
bridge the gap between construction and when the project generates revenues. Although a
national infrastructure bank might help accelerate projects over the long term, it will likely to take
several years for a bank to be fully functioning after enactment.
One attraction of national infrastructure bank proposals is the potential to encourage significant
non-federal infrastructure investment over the long term for a relatively small amount of federal
budget authority. Ignoring administrative costs, an appropriation of $10 billion for the
infrastructure bank, as proposed by S. 652, could provide $100 billion of credit assistance if the
subsidy cost were similar to that of the TIFIA program (see above).35
33
Everett Ehrlich, A National Infrastructure Bank: A Road Guide to the Destination, Policy Memo, Progressive Policy
Institute, October 2010, at http://www.progressivefix.com/wp-content/uploads/2010/09/09.2010-Ehrlich_A-NationalInfrastructure-Bank.pdf.
34
The extent to which this would be done varies depending on the specific legislation. If Congress were to direct the
bank to consider factors such as job creation and poverty reduction, as H.R. 402 does, then those requirements might
constrain its ability to assist the most economically viable projects.
35
As noted earlier, according to the Federal Credit Reform Act of 1990 the subsidy cost is the “estimated long-term
cost to the Government of a direct loan or loan guarantee, calculated on a net present value basis, excluding
administrative costs” (104 Stat. 1388-610).
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Legislative Options for Financing Water Infrastructure
The budgetary implications of H.R. 402 are somewhat different from those of other infrastructure
bank proposals. This bill proposes to capitalize an infrastructure bank with appropriations of $25
billion and to provide another $225 billion in “callable capital,” which would be made available
from the Treasury only if it is needed by the bank to meet its obligations. Under this proposal, the
bank would be permitted to issue bonds up to 250% of the bank’s total capital (capital plus
callable capital). This means the bank could support up to $625 billion of bonds, which would be
backed by the full faith and credit of the U.S. Treasury. In addition to the $25 billion, the callable
capital of $225 billion would likely be scored as an appropriation.
The federal government already has a number of programs to support water and wastewater
infrastructure projects. But a national infrastructure bank could provide assistance to
infrastructure projects that are currently too large to be financed using existing mechanisms. The
creation of an infrastructure bank might provide another mechanism for financing drinking water
and wastewater projects, but would set those projects in competition with projects in energy,
transportation, and telecommunications. A national infrastructure bank is probably most like the
existing TIFIA program.36 Hence, the creation of both a national infrastructure bank and a WIFIA
would likely be duplicative.
Lift Private Activity Bond Restrictions on Water Infrastructure
to that of the TIFIA program (see above).36
The federal government already has a number of programs to support water and wastewater
infrastructure projects. But a national infrastructure bank could provide assistance to
infrastructure projects that are currently too large to be financed using existing mechanisms. The
creation of an infrastructure bank might provide another mechanism for financing drinking water
and wastewater projects, but would set those projects in competition with projects in energy,
transportation, and telecommunications. A national infrastructure bank is probably most like the
existing TIFIA program.37 Hence, the creation of both a national infrastructure bank and a WIFIA
would likely be duplicative.
Two bills to establish a national infrastructure bank have been introduced in the 113th Congress—
the Partnership to Build America Act of 2013 (H.R. 2084), and provisions of the Balancing Act
(sections 765-779 of H.R. 505).38
H.R. 2084 would create a wholly owned government corporation called the American
Infrastructure Fund (AIF). It would be headed by an 11-member board of trustees whose mission
would be to operate the AIF to be a low cost provider of bond guarantees, loans, and equity
investments to state and local governments and non-profit infrastructure providers for non-profit
infrastructure projects. The board would only consider projects put forth by state and local
governments to assist transportation, energy, water, communications, or educational facilities. At
least 25% of its assistance is to be provided to projects for which at least 20% of the project
financing comes from private debt or equity. The bank would be initially capitalized with
proceeds from $50 billion in American Infrastructure Bonds to be issued by the U.S. Treasury.
Proponents estimate that the AIF would leverage the $50 billion at a 15:1 ratio to provide up to
$750 billion in assistance.39
36
As noted earlier, according to the Federal Credit Reform Act of 1990 the subsidy cost is the “estimated long-term
cost to the Government of a direct loan or loan guarantee, calculated on a net present value basis, excluding
administrative costs” (104 Stat. 1388-610).
37
U.S. Congress, House Committee on Transportation and Infrastructure, Subcommittee on Highways and Transit,
Testimony of Geoffrey S. Yarema, Hearing on National Infrastructure Bank: More Bureaucracy and More Red Tape,
112th Cong., 1st sess., October 12, 2011.
38
Another infrastructure bank bill introduced in the 113th Congress is the American Infrastructure Investment Fund Act
of 2013 (S. 387). It would create a “fund” within the Department of Transportation to support transportation projects.
Similar legislation in the 112th Congress was S. 936.
39
Rep. John Delaney, Information on Rep. Delaney’s Infrastructure Bill, May 6, 2013, http://delaney.house.gov/
information-on-congressman-delaneys-infrastructure-bill.
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The wholly owned government corporation created by the infrastructure bank provisions of H.R.
505 would be called the American Infrastructure Financing Authority (AIFA). AIFA would be
governed by seven presidentially appointed board members. AIFA would be authorized to provide
loans and loan guarantees to eligible transportation, water, and energy infrastructure projects. To
be eligible for assistance a project would have to cost at least $100 million, or at least $25 million
in rural areas. The bank would be capitalized with a $10 billion appropriation. The bank would be
permitted to collect fees to cover the administrative costs associated with AIFA.
Several bills to establish a national infrastructure bank also were introduced in the 112th Congress,
including the Building and Upgrading Infrastructure for Long-Term Development (S. 652, similar
to the infrastructure bank provisions of H.R. 505 in the 113th Congress) and the National
Infrastructure Development Bank Act of 2011 (H.R. 40240).
Lift Private Activity Bond Restrictions on Water
Infrastructure Projects
Water infrastructure can be owned and operated by the private sector, a governmental entity, or
through a so-called partnership between a government and a private entity. A partnership could
involve a private entity investing in water infrastructure and receiving a market rate of return on
that investment. This investment could be an equity share (part ownership) or some other
agreement that provides a stream of revenue generated by the facility. Or, the partnership could be
the government issuing tax-exempt debt on behalf of the private entity with so-called “private
activity bonds.”
Among the options to modify the existing framework for federal assistance for investment in
water infrastructure, one option for greater federal involvement includes expanding the
availability of tax-exempt financing to private entities, e.g.for example, private activity bonds.
Background on Private Activity Bonds
Generally, under current law, privately owned water furnishing and water treatment facilities are
not eligible for tax-exempt financing. The tax code, however, does provide that privately owned
water furnishing facilities that (1) are operated by a governmental unit or (2) charge rates that are
approved by a political subdivision of the host community, can issue qualified private activity
bonds (PABs) which are tax-exempt.37 Most qualified PABs, including bonds for water furnishing
36
U.S. Congress, House Committee on Transportation and Infrastructure, Subcommittee on Highways and Transit,
Testimony of Geoffrey S. Yarema, Hearing on National Infrastructure Bank: More Bureaucracy and More Red Tape,
112th Cong., 1st sess., October 12, 2011.
37
Sections 142(a)(4), 142(a)(5), 142(e), and 146 of the Internal Revenue Code (I.R.C.).
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Legislative Options for Financing Water Infrastructure
and water treatment facilities, are subject to a state volume limit.38 In 2012, the volume cap is the
greater of $95 multiplied by the state population or $284,560,000.
41 Most qualified PABs, including bonds for water furnishing
and water treatment facilities, are subject to a state volume limit.42 In 2013, the volume cap is the
greater of $95 multiplied by the state population, or $291,875,000.
40
H.R. 402 would create the National Infrastructure Development Bank (NIDB), governed by five presidentially
appointed directors. The NIDB would be able to issue public benefit bonds (PBBs) to help finance infrastructure,
mainly through loans and loan guarantees. The NIDB would also be able to make grants. The bank would be
capitalized by Congress with $5 billion annually for five years. The total $25 billion appropriation would be 10% of the
total subscribed capital of the bank. Up to 90% of the subscribed capital would be callable by the Treasury Secretary.
The total outstanding bonds issued by the NIDB would not be allowed to exceed 250% of the subscribed capital.
Among the criteria for evaluating projects for assistance from the NIDB would be the extent to which assistance will
maximize private investment in the project while providing a public benefit.
41
Sections 142(a)(4), 142(a)(5), 142(e), and 146 of the Internal Revenue Code (I.R.C.).
42
Two types of private activity bonds are outside the annual volume limit, those issued by 501(c)(3) organizations like
(continued...)
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Legislative Options for Financing Water Infrastructure
The opportunity to use bonds whose interest payments are exempt from federal income taxation
confers a considerable subsidy to bond issuers and to investors who buy the bonds. The FY2013FY2014
budget estimates that the federal tax expenditure for “water, sewage, and hazardous waste
disposal facilities” will be $3.6421 billion over the 2013 to 20172014 to 2018 budget window.3943
The private activity bond volume limit noted above originated in the Deficit Reduction Act of
1984 (P.L. 98-369). The limit was implemented because “Congress was extremely concerned
with the volume of tax-exempt bonds used to finance private activities.”4044 The limit and the list of
qualified activities were both modified again under the Tax Reform Act of 1986 (TRA 1986, P.L.
99-514). At the time of the TRA 1986 modifications, the Joint Committee on Taxation identified
the following specific concerns about tax-exempt bonds issued for private activities:4145
•
the bonds represent “an inefficient allocation of capital”;
•
the bonds “increase the cost of financing traditional governmental activities”;
•
the bonds allow “higher-income persons to avoid taxes by means of tax-exempt
investments”; and
•
the bonds contribute to “mounting [federal] revenue losses.”
The inefficient allocation of capital arises from the economic fact that additional investment in
tax-favored private activities will necessarily come from investment in other public projects. For
example, if bonds issued for water infrastructure did not receive special tax treatment, some
portion of the bond funds could be used for other government projects such as schools or other
public infrastructure.
The greater volume of tax-exempt private activity bonds then leads to the second Joint Committee
on Taxation concern listed above, higher cost of financing traditional government activities.
Investors have limited resources; thus, when the supply of tax-exempt bond investments
increases, issuers must raise interest rates to lure them into investing in existing government
activities. In economic terms, issuers raising interest rates to attract investors is analogous to a
retailer lowering prices to attract customers. The higher interest rates make borrowing more
expensive for issuers.
The final two points are less important from an economic efficiency perspective but do cause
some to question the efficacy of using tax-exempt bonds to deliver a federal subsidy. Tax-exempt
interest is worth more to taxpayers in higher brackets; thus, the tax benefit flows to higher income
taxpayers, which leads to a less progressive income tax regime.
38
Two types of private activity bonds are outside the annual volume limit, those issued by 501(c)(3) organizations like
(...continued)
hospitals and those issued by private universities. For more on private activity bonds, see CRS Report RL31457,
Private Activity Bonds: An Introduction, by Steven Maguire.
3943
Office of Management and Budget, “Budget of the United States Government: Analytical Perspectives,
Supplemental Materials Fiscal Year 2013
2014,” Table 1716-1.
4044
U.S. Congress, Joint Committee on Taxation, General Explanation of the Revenue Provisions of the Deficit
Reduction Act of 1984, 98th Cong., 2nd sess. (Washington: GPO, 1984), p. 930.
4145
U.S. Congress, Joint Committee on Taxation, General Explanation of the Tax Reform Act of 1986, 100th Cong., 1st
sess. (Washington: GPO, 1987), p. 1151.
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The revenue loss generated by tax-exempt bonds also expands the deficit.4246 A persistent budget
deficit ultimately leads to generally higher interest rates as the government competes with private
entities for scarce investment dollars. Higher interest rates further increase the cost of all debtfinanced state and local government projects.
Current Proposals
The implicit assumption of several current proposals is that the current cap is binding, preventing
the investment in needed water infrastructure projects. Proponents argue that the opportunity for
more private entities to meet the requirements for tax-exempt bond financing may induce
additional infrastructure investment. What is unclear is how much new investment will be
undertaken with PABs if these restrictions were relaxed. Underlying the estimates of potential
new investment is demand for new water infrastructure. Following is a discussion of the current
use of PABs for water infrastructure.
Demand for the use of PAB capacity for water infrastructure has been relatively low. The Internal
Revenue Service (IRS) reports that for the 2008 tax year, new money bonds (in contrast to
refunding bonds) were issued for 88 private water furnishing, sewage, and solid waste disposal
facilities projects accounting for roughly $2.6 billion of the $50.9 billion of volume capacity
available.4347 For comparison, other private activities subject to the cap consumed $12.3 billion:
residential rental facilities ($4.6 billion), mortgage bonds ($5.1 billion), small issue bonds ($1.2
billion), and student loan bonds ($1.4 billion). The remainder of the cap space was used for other
projects, carried forward to the following year, or abandoned.
The IRS data also provide information on the issuance by state. In 2008, 22 states did not commit
any volume capacity to water, sewage, and solid waste disposal. In contrast, two states, California
(16 projects) and Texas (17 projects), combined for 33 of the projects and $1.1 billion of the
issuance. The limited number of states using PABs may reflect lack of demand for privately
owned water infrastructure or may reflect the relative size of water projects limiting the use of
PABs. The average PAB amount issued for water, sewer, and solid waste was $29.3 million,
whereas the average PAB new money issuance was smaller at $21.4 million. The remainder
includes mortgage revenue bonds, which typically have a smaller average issue size.
Private entities also invest in water infrastructure beyond the partnership with governments
through PABs. For example, the largest investor-owned U.S. water and wastewater utility
company, American Water, reported investing $1 billion in water infrastructure capital in 2008.4448
In its 2010 Annual Report, American Water reported $766 million of capital investment.4549 Private
4246
The Joint Committee on Taxation estimated that a provision in highway program legislation approved by the Senate
on March 14, 2012, the Moving Ahead for Progress in the 21st Century Act or MAP-21 (S. 1813), which proposed to
lift the volume cap on water infrastructure projects for 6 years, would reduce revenues to the Treasury by $95 million
over 6 years, and by $305 million over 11 years. See http://www.jct.gov/publications.html?func=startdown&id=4404.
This provision was not included in the enacted surface transportation reauthorization bill enacted in July (P.L. 112-141).
4347
Internal Revenue Service, “Tax-Exempt Bonds, 2008,” Statistics of Income Bulletin, winter 2011, Table 10, p. 147
and Community Development Finance Agencies, 2008 National Volume Cap Report , available at http://www.cdfa.net/
cdfa/volumecap.nsf/index.html.
4448
American Water, 2008 Annual Report, p. 48.
4549
American Water, 2010 Annual Report, p. 41.
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entities like American Water use a mix of current revenue and debt, including PABs, corporate
debt, and equity investment, to finance this capital spending.
One legislative option that has been discussed in the 112th Congress is H.R. 1802/S. 939, which
would The President’s FY2014 budget request (like the FY2013 request) supports eliminating the
volume cap for PABs for water infrastructure. Treasury estimates that this proposal would result
in loss of $258 million in revenue between 2014 and 2023.50
One legislative option discussed in the 112th Congress was H.R. 1802/S. 939, which would
permanently exclude water infrastructure from the volume cap.46 In March 2012, the Senate
passed passed
surface transportation legislation (S. 1813) that included a provision to lift the volume cap
for six
years, but this provision was not included in the enacted bill (P.L. 112-141). As the data
above above
suggest, excluding PABs for water infrastructure from state volume caps would likely
generate generate
marginally more investment in water infrastructure. The private entities that already
have used
PABs in conjunction with other financial tools would likely increase the use of PABs.
What is
unclear, however, is if the expanded use of PABs would necessarily reflect substantially
new new
infrastructure investment or just change the mix of financing tools employed for already
planned planned
projects. If the latter, then the potential revenue loss may not achieve the intended policy
objective of increasing investment in water infrastructure.47
The proposed PAB expansion may also be a limited success as many communities have chosen
government provision of water infrastructure. In 20102011, over $3929 billion in governmental bonds
were issued for 1,479244 water, sewer, and sanitation projects.51 More than $14 billion and sewer projects.48 The vast majority of these bonds
were new
money bonds. For 2008, $31.3 billion was issued for 914 water and sewer projects money bonds. By comparison, for 2010, $40.4 billion was issued for 1,546 water,
sewer, and sanitation projects, and $24 billion of the total was new money financing. The reliance
on government provision may reflect market conditions that make private provision infeasible or
public preference for government owned and operated water infrastructure.
Reinstate Authority for Issuance of Build America Bonds (BABs)
Another option under discussion to modify the existing framework for federal assistance for
water infrastructure investment is to expand or extend the use of Build America Bonds (BABs).
BABs were created by the American Recovery and Reinvestment Act of 2009 (ARRA).4952 The
volume of BABs was not limited and the purpose was constrained only by the requirement that
“the interest on such obligation would (but for this section) be excludible from gross income
under section 103.”5053 Thus, BABs could have been issued for any purpose that would have been
eligible for traditional tax-exempt bond financing other than private activity bonds, thus they did
not allow for private sector participation (unlike PABs). The authority to issue BABs expired on
December 31, 2010.
BABs are modeled after the “taxable bond option,” which was first considered in the late 1960s.
In 1976, the following was posited by the then president of the Federal Reserve Bank in Boston,
Frank E. Morris:
46
Similar language is included in the draft discussion WIFIA bill that has been circulated by the Water Resources and
Environment Subcommittee, discussed above.
47
50
The Bush Administration also proposed a permanent exemption for water and sewage facilities as part of several budget
requests. In the FY2009 budget, the Treasury Department estimated that the revenue effect would be $214 million over
10 years. See http://www.treasury.gov/resource-center/tax-policy/Documents/bluebk08.pdf, pp. 45-46.
48
budget requests.
51
Thomson-Reuters, The Bond Buyer 20112012 Yearbook, p. 160.
49159.
52
For more, see CRS Report R40523, Tax Credit Bonds: Overview and Analysis, by Steven Maguire.
5053
26 U.S.C. § 54AA(d)(1)(A). BAB proceeds that use the direct payment options are to be used only for capital
expenditures.
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BABs are modeled after the “taxable bond option,” which was first considered in the late 1960s.
In 1976, the following was posited by the then president of the Federal Reserve Bank in Boston,
Frank E. Morris:
The taxable bond option is a tool to improve the efficiency of our financial markets and, at
the same time, to reduce substantially the element of inequity in our income tax system
which stems from tax exemption [on municipal bonds]. It will reduce the interest costs on
municipal borrowings, but the benefits will accrue proportionally as much to cities with
strong credit ratings as to those with serious financial problems.51
54
One benefit of the BAB program was that it tapped into a broader market for investors without
regard to tax liability (such as pension funds, which typically do not invest in tax-exempt bonds).
Traditional tax-exempt bonds have a narrow class of investors, generally consisting of individuals
and mutual funds. BABs offered an issuer a credit equal to 35% of the interest rate established
between the buyer
and issuer of the bond.5255 The Treasury Department estimated that the $181
billion in BABs issued
from April 2009 through December 2010 will allow state and local
governments to save an
estimated $20 billion in borrowing costs, in present value savings, as
compared to issuing
traditional tax-exempt bonds.5356
One option would be to extend BABs to investment in privately owned water infrastructure.
Many of the disadvantages cited for PABs identified earlier could be avoided, such as the
windfall gain for high-income investors and the economic inefficiency of using a third party to
deliver a federal subsidy. 5457 The FY2013FY2014 budget suggests that the BAB program potentially “…
has a more streamlined tax compliance framework focusing directly on governmental issuers who
benefit from the subsidy.”5558 In the case of PAB-like arrangements, the partner government or
water authority would “issue” bonds at the low rate and pass through the value of the subsidy to
the private entity. The private entity would own and operate the water infrastructure.
In the 112th113th Congress, several billsH.R. 535 and H.R. 789 have been introduced to extend and expand a
modified version
of BABs, including H.R. 11, H.R. 736, H.R. 747, and H.R. 992 of BABs. The President’s FY2013 budget
proposed to reinstate BABs at a 30% credit rate for 2013 and 2014 and permanently at 28%
thereafterFY2014 budget proposes to reinstate BABs—now to
be called America Fast Forward Bonds—at a 28% credit rate. In addition, the President’s FY2013 FY2014
Budget proposed expanding the eligible uses to
Section 501(c)(3) nonprofit entities such as
hospitals and universities.
According to CBO, the interest subsidy of BABs would be recorded in the federal budget as
outlays, like other payments to state and local governments. At the same time, by substituting
taxable for tax-exempt bonds, the program would increase taxable interest income. The Joint
Committee on Taxation analyzed a similar proposal in the President’s FY2012 budget and
estimated that it would boost outlays by $76 billion over 10 years and raise revenues by $70
billion, with a net effect of increasing the cumulative deficit by $6 billion.56
5154
Frank E. Morris, “The Taxable Bond Option,” National Tax Journal, vol. 29, no. 3, September 1976, p. 356.
Note that the issuer credit is an outlay of the federal government. This simple example does not consider issuance
and underwriter fees.
5356
U.S. Department of the Treasury, “Treasury Analysis of Build America Bonds Issuance and Savings,” May 16, 2011,
p. 11, http://www.treasury.gov/initiatives/recovery/Documents/BABs%20Report.pdf.
5457
Researchers have determined that the federal government subsidy for BABs “… disadvantages individual U.S.
taxpayers, who are the main holders of municipal bonds, and benefits new entrants in the municipal bond market.” New
entrants would include international investors and pension funds. See Ang, Andrew, Vineer Bhansali, and Yuhan Xing,
“Build America Bonds,” National Bureau of Economic Research, Working Paper 16008, May 2010.
5558
U.S. Department of the Treasury, “General Explanations of the Administration’s Fiscal Year 20132014 Revenue
Proposals,” February 2012, p. 12.
56
U.S. Congressional Budget Office, Preliminary Analysis of the President’s Budget for 2012, March 18, 2011, p. 7.
52
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Legislative Options for Financing Water InfrastructureApril 2013, p. 109.
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Legislative Options for Financing Water Infrastructure
estimated that it would boost outlays by $76 billion over 10 years and raise revenues by $70
billion, with a net effect of increasing the cumulative deficit by $6 billion.59
Conclusion
Consensus exists among many stakeholders—state and local governments; equipment
manufacturers, construction companies, and engineers; and environmental advocates—on the
need for more investment in water infrastructure. Many in these varied groups support one or
more options for doing so. There is no consensus supporting a preferred option or policy, and
many advocate a combination that will expand the financing “toolbox” for projects. Some of the
options discussed in this report may be helpful in addressing financing problems, but there is no
single method or “silver bullet” that will address needs fully or close the financing gap
completely. For example, some such as a WIFIA or National Infrastructure Banka national infrastructure bank may be helpful
to projects in large urban or multi-jurisdictional areas, while others such as expanded SRF
programs may be more beneficial in smaller communities. It is unlikely that any of the recently
proposed options such as a WIFIA or a trust fund could be enacted and up and running quickly,
meaning that, at least for the near term, communities will continue to rely on the existing SRF
programs, tax-exempt governmental bonds, and available tax-exempt private activity bonds to
finance their water infrastructure needs.
The Obama Administration’s views on some of these issues are largely unknown for now, except for
support of the SRFs and reinstatement of
for supporting the SRFs, excluding water infrastructure PABs from the state volume cap, and
reinstating Build America Bonds, as reflected in its budget
requests.
Author Contact Information
Claudia Copeland
Specialist in Resources and Environmental Policy
ccopeland@crs.loc.gov, 7-7227
Steven Maguire
Specialist in Public Finance
smaguire@crs.loc.gov, 7-7841
William J. Mallett
Specialist in Transportation Policy
wmallett@crs.loc.gov, 7-2216
Steven Maguire
Acting Section Research Manager/ Specialist in
Public Finance
smaguire@crs.loc.gov, 7-7841
59
U.S. Congressional Budget Office, Preliminary Analysis of the President’s Budget for 2012, March 18, 2011, p. 7.
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