Positive signal on tax-exempt bonds, but there’s still work to do

There is a reason it has been over 30 years since Congress last reformed the federal tax code; tax reform is complicated and its outcome touches every American. Congress is currently undertaking this monumental task to reduce tax rates, simplify the tax code, and create a fairer system.

We applaud House Ways and Means Committee Chairman Kevin BradyKevin Patrick BradyRyan pledges 'entitlement reform' in 2018 Senate approves motion to go to tax conference Overnight Finance: GOP delays work on funding bill amid conservative demands | Senate panel approves Fed nominee Powell | Dodd-Frank rollback advances | WH disputes report Mueller subpoenaed Trump bank records MORE (R-Texas) for introducing legislation that would preserve the current law treatment of tax-exempt municipal bonds – a provision that has stood the test of time for over 100 years and has significant ramifications for public power.

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However, more work needs to be done. We are very disappointed about the decision to eliminate advance refunding for tax-exempt bonds for the public power sector and other state and local governments. Doing so would increase costs for customers and disrupt the industry’s flexibility regarding long-term financing.

The tax-exempt bond market has financed trillions of dollars of investment in vital public infrastructure like schools, hospitals, roads, and energy infrastructure, and has saved taxpayers hundreds of billions of dollars in interest costs. Efforts to reduce tax exemption on municipal bonds would adversely impact public power and the millions of customers we serve nationwide. This is particularly significant for members of the Large Public Power Council (LPPC), which represents the 26 largest not-for-profit, consumer-owned utilities in the United States.

Public power systems have limited means to raise funds for our communities’ capital needs. Our primary means to raise capital is the issuance of tax-exempt bonds, which carry lower interest rates that reduce the cost of building our country’s public power infrastructure. They are our single most important financing tool. Each year, on average, public power utilities make $15 billion in new investments financed with municipal bonds. LPPC’s 26 members alone expect to issue $14 billion in tax-exempt municipal bonds over the next five years to ensure reliability and modernize the electric grid.  

Municipal bonds are used to finance investments in power generation (including through natural gas, renewable and alternative fuels), transmission, distribution, reliability, demand control, efficiency, and emissions controls. While the typical power-related bond issue is relatively small, electric generation and transmission projects often cost hundreds of millions or even billions of dollars and can have up to a 50-year operational life. For example, in Nebraska, the R-Project (a $365 million, 225-mile-long 345kV transmission line) will improve the reliability of the transmission grid in the central United States.

Because of the length of these bonds, the industry relies on advance refunding as an important tool to enable communities to lower their borrowing costs when market conditions warrant and keep electric rates low as a result. Restricting advance refunding would significantly limit the flexibility of municipal bond issuers. As a result, issuers would be required to pay a higher interest rate on their debt and would be unable to take advantage of lower interest rates. Higher interest rates would lead to higher costs for our customers.

We urge Chairman Brady to reconsider his decision to repeal advance refunding of municipal bonds. Just like homeowners who refinance their 30-year mortgages, public power utilities use advance refunding to secure better interest rates to keep costs in check.

Another point worth clarifying about tax-exempt bonds is that the burden of taxing municipal bonds is borne by states, local governments and public power systems – not high-income investors. Limiting the exclusion of state and local bonds would not address the fairness issue despite arguments that doing so would limit the tax benefit for rich Americans. Instead it would mean a reduction in infrastructure investments and a price increase for public power customers – such as small business owners and low- and fixed-income households. 

According to the American Public Power Association, a $250 million power plant would cost $80 million more to finance if tax-exempt bonds were repealed; $40 million more if the tax exemption were “capped”; and $30 million more if municipal bonds were replaced with direct payment bonds. 

In the coming decades, public power will require significant capital to meet customer and load growth needs. Replacing retiring generation, meeting cyber security needs, integrating new renewables, and modernizing the electric grid to meet changing demands will require new infrastructure investment to ensure service reliability. We know from experience that lower borrowing costs for bond-financed projects allow for greater investments, reduce rates for residents, help create jobs, and spur innovation and economic growth. Tax-exempt financing works, and advance refunding is a necessary provision to improve long-term financing while keeping costs down. We hope Congress will take note.

Timothy J. Burke is the CEO of Omaha Public Power District (OPPD); Paul McElroy is the CEO and Managing Director of JEA; Arlen Orchard is the CEO and General Manager of SMUD; and Phil Wilson is the General Manager of Lower Colorado River Authority (LCRA). These utilities are significant public power utilities who rely upon municipal bonds to finance public purpose energy infrastructure. They also represent the geographic diversity of LPPC’s membership.