Tax-Exempt Municipal Bonds!

Preserving a Critical Water Infrastructure Financing Tool

Tax-exempt municipal bonds have been a key tool for financing municipal investments, including water and wastewater infrastructure, since 1913. In 2016 alone, nearly $38 billion in tax-exempt municipal bonds were issued for water and wastewater projects – supporting crucial investments in maintaining infrastructure, building capacity, meeting regulatory requirements and protecting public health and water quality.

With tax reform a top priority for Congress, NACWA is working hard to ensure that this exemption is not reduced nor eliminated. The Association recently collaborated with the Association of Metropolitan Water Agencies (AMWA) to estimate the value of tax-exempt municipal bonds to water and wastewater infrastructure nationwide and in each state – updating a 2013 joint NACWA - AMWA report on the same topic. The new analysis1 revealed:

  • Communities nationwide issued nearly $38 billion worth of municipal bonds in 2016 to fund investments in drinking water and wastewater infrastructure.
  • Under current laws that exempt municipal bond interest from federal income tax, these issuances are estimated to lead to $63.6 billion worth of debt service costs over 30 years. 
  • If municipal bond interest were fully taxed, these debt service payments would increase to $79.8 billion – an increase of $16 billion, or 25% – significantly increasing costs to ratepayers and constraining further utility investments.

* NOTE: State-specific fact sheets are available for download (bottom), along with a nationwide fact sheet.

After much anticipation, both the House and Senate released proposed tax reform legislation in November 2017. Unfortunately, both the House and Senate proposed a mixed path forward for municipal bond issuers. Under the tax reform proposals, the tax-exempt status of municipal bonds was maintained—an important win—but the ability for bond issuers to advance refund bonds to take advantage of lower interest rates, should they arise, was repealed. In the final bill signed into law December 22, 2017, the tax-exemption for municipal bonds was preserved, but advance refunding bonds were repealed. The Association is very pleased that tax-exempt bonds will remain an valuable financing tool for communities investing in water infrastructure. We are disappointed that Congress ultimately did not choose to preserve advance refunding, which has saved many communities long-term financing costs and enabled further investment in local infrastructure

Under prior law, advanced refunding was allowed one time. Historical data obtained by NACWA and collaborating organizations found that between 2012 and 2016, there were 941 instances of advance refunding of tax-exempt municipal bonds for water and wastewater infrastructure investments, saving a total of at least $1.36 billion for local communities and ratepayers. Clean water agencies are continually evaluating opportunities for advance refunding, and this repeal eliminates opportunities to reduce costs and leverage changes in the market.

Take Action Now!

  • Communicate with your Members of Congress regarding specific examples of how municipal bond financing and advance funding have reduced financing costs and supported clean water investments in your community.
  • Please share home-state data with your members of Congress as well – see state-by-state and national fact sheets below.
  • Engage on social media: NACWA is working in collaboration with many other national, state and municipal organizations to advocate on this issue. The hashtag, “#builtbybonds“ has been used across infrastructure sectors as a way to highlight bond-built investments. Highlight your local #builtbybonds projects! 

What's New

  • Senate Bill: NACWA and other water sector organizations are advocating in the Senate against the repeal of advance refunding. The repeal was included in the initial Senate proposal, which is presently being considered by the Finance Committee (week of November 13, 2017).
  • House Bill: NACWA and other water sector organizations advocated against the repeal of advance refunding included in the House bill. While concerns were raised around this issue by Members of Congress during the Committee process, the House passed the Tax Cuts and Jobs Act (H.R.1), on November 16, 2017 with the advance refunding repeal in place. H.R.1 also eliminates Private Activity Bonds, a significant concern for the private utility sector.
  • NACWA signs "Don't Mess with Our Bonds" letter to Congress in support of preserving tax-exempt municipal bonds (March 29, 2017).
  • NACWA Members took to the Hill during Water Week 2017 to share their experiences using tax-exempt municipal bonds to finance water and wastewater projects and communicate the importance of preserving financing tools that help make local water projects more affordable.
  • NACWA submitted a “Dear Colleague” letter on March 8, 2017, expressing strong support for tax-exempt municipal bonds during Congressional debates on tax reform and infrastructure financing—the letter contained a truly remarkable 156 congressional signatures, representing significant support from both political parties. Strong bipartisan support in Congress is crucial to preserving this critical, long-standing financing tool for state and local governments. The letter is addressed to leadership of the federal tax-writing committee – House Ways & Means – specifically, Committee Chairman Kevin Brady (R-TX) and Ranking Member Richard Neal (D-MA). The letter was organized by the bipartisan Municipal Finance Caucus. Thank you to those NACWA members who urged their Representatives to sign this important letter.
  • The 115th Congress and the Trump Administration have both identified comprehensive federal tax reform as an agenda priority, along with addressing the infrastructure backlog our nation and local communities face. In prior years, some proposals on tax reform and infrastructure investment from Republicans and Democrats have included cutting or eliminating the federal tax-exemption for municipal bonds. Crucially, the exemption has remained in place as a vital tool for municipal entities. Unfortunately, proposals emerging since early 2017 could again eliminate the exemption
  • In light of these discussions, NACWA is advocating on the Hill and working with other associations to communicate the importance of the municipal bond tax-exemption for water and wastewater infrastructure. Tax-exempt municipal bonds are a critical tool for local entities to address water and wastewater needs. Actions to address infrastructure investment, including increased direct federal spending, could be counterproductive if this widely-used tool is reduced or eliminated.
  • NACWA signed the “Municipal Bonds for America” letter to Congress in early 2017, supporting the preservation of tax-exempt municipal bonds.

1     The analysis was conducted by SJ Advisors, LLC.  For simplicity, these estimates were calculated based on the current interest rate environment, and by assuming all bonds were issued for uniform $50 million projects with "AA" credit ratings and 30-year loan maturities. The figures do not include any water infrastructure projects that may have been funded through general obligation bonds.