The Power of Private Activity Bonds: Why is Congress Blocking Much-Needed Investment in Our Nation’s Water Infrastructure?

U.S. Capitol building

Last year, Congress gave the American people the largest infrastructure investment in decades, the Infrastructure Investment and Jobs Act (IIJA). Signed into law by the president on Nov. 15, 2021, its $1.2 trillion package of resources will deliver jobs, projects, and improvements to all sectors of the economy and all 50 U.S. states and the District of Columbia.

It’s a great start to the investment we need in our nation to update obsolete water and wastewater systems, new highways and bridges, and modern port facilities. The American Society of Civil Engineers estimated in 2021 that we need about $434 billion more by 2039 in just our sector alone to keep up with our infrastructure needs. Overall, there is about a $2.5 trillion in additional needs over the same time period for all sectors of the economy.

That’s a lot of money. Where is it going to come from? For Congress, the beleaguered U.S. taxpayer is seemingly the first one chosen to pay these enormous bills. But there are other options available for infrastructure, and for the heavy civil engineering sector, private activity bonds (PABs) can be tapped for these future resources.

First, what are private activity bonds? Private activity bonds are a qualified tool used by a private entity. In order for a private activity bond to become qualified and available for public use, it must meet two requirements set by the U.S. tax code. The first requirement is a ‘use test’, where more than 10% of the proceeds are confirmed to be used for any private business use. The ‘security test’ comes next, where the payment of more than 10% of the proceeds are confirmed to be secured by interest in property or derived from payments in respect to property. If the bond issue passes both texts, the qualified private activity bond is born and can qualify for tax-exempt financing under the law.

There’s more, and it gets complicated. In the tax code, there is also a list of “qualified private activities” that are granted special status. Only twelve activities were originally defined as qualified private activities by the 1968 law authorizing these funds for public projects, but now the list has grown to thirty activities.

What do private activity bonds have to do with water infrastructure? Well, our industry is always looking for more ways to invest in the nation’s drinking water, wastewater and stormwater infrastructure, and private activity bonds represent another avenue of investment. Over the next 20 years, there is an ongoing gap of around $500 million in investment funding for upgrades and repairs to public water and wastewater systems. Private activity bonds could be used to fill that gap, but two hurdles remain in the way.

Drinking water and wastewater projects are eligible today for private activity bonds usage, but there are two obstacles that diminish the investment potential. Annual state volume limits (or separate national aggregate limits) originated in the Deficit Reduction Act of 1984, where Congress shared a high concern for “the volume of tax-exempt bonds used to finance private activities” that is now outdated given the urgent needs for our nation’s infrastructure financing.

The second obstacle is the restriction of different qualified private activities. Certain qualified private activities are not subject to the volume cap, like government-owned airports, municipal-owned solid waste disposal facilities, recovery zone facility bonds, and other green building and educational facilities. Unfortunately, private activities like water furnishing facilities, sewage facilities, broad- band projects, small issue bonds, and redevelopment bonds are subject to the restricting volume cap.

In 2022, the volume cap is the greater of $110 per capita or $335 million. The $335 million floor causes a bit of an imbalance, where many smaller states are allowed to issue relatively more private activity bonds (based on the level of state personal income) than larger states.

If Congress allowed private developers and operators to access tax-exempt interest rates, the cost of capital would decrease significantly and enhance investment prospects. Lifting the cap would allow for more public-private relationships in state and local governments where mutually beneficial infrastructure projects can become a reality. Simple regulatory changes to outdated concerns could unlock $43 billion in incremental water infrastructure investments and $25 billion in wastewater investments.

There are two clear solutions ahead for NUCA members. First, Congress needs to increase the volume cap for investments in our nation’s drinking water, wastewater, and stormwater infrastructure. Volume cap exemptions are currently provided for facilities like airports, ports, housing, high-speed intercity rail, and solid waste disposal sites.

Second, water infrastructure projects need to be included in the qualified private activities. The Infrastructure Investment and Jobs Act of 2021 (IIJA) expanded the list of eligible activities for exempt facility bonds to include qualified broadband projects, carbon capture facilities, and highway and surface freight transfer facilities.

NUCA members highlighted this issue to their Congressional lawmakers at our May Washington Summit, but an advocacy program is a long-term commitment. Legislation is required, along with Congressional supporters and champions. We believe that the next Congress (2023-24) may be the better environment to introduce and pass these changes. For this Congress, NUCA is seeking out bill sponsors in both parties and will have more to report on this topic in the 12 months ahead.

For more information, check out our advocacy resources online at NUCA.com, and at NUCA.com/fixwater, where you can find state-by-state water needs assessments, White House/ USDOT infrastructure fact sheets, and more information about private activity bonds.

Ryan Lake Schrader of Wyman Associates is a registered lobbyist for NUCA and can be reached at ryan@wymanassociates.net.

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