federal income taxes and are eligible to issue tax-exempt bonds. Many times these private systems have gone so far as to question municipal systems very right to exist. These arguments are one-sided and often misleading. There is no mention of the fact that municipal systems pay no federal income taxes because they make no income since they are not-for-profit utilities. There also is no mention of the fact that municipal systems issue tax-exempt debt as entities of state and local governments, just as investor owned utilities are eligible to enjoy certain tax benefits by nature of their being private corporations. Moreover, public power systems, because of their nature (not-for-profit, consumerowned entities) have historically served as a check against monopolistic shareholder owned private power companies. Often public power rates are used as a “yardstick," helping to keep investor-owned rates at a more reasonable level than they would be otherwise. More specifically, private power companies have used this new competitive environment to oppose H.R. 677 a bill which, if enacted would promote partnership arrangements between municipally-and investor-owned utilities to the benefit of both. When hearing arguments against this provision it is important to separate the rhetoric from the merits of the proposal. H.R. 677 does not give preferential treatment to public power utilities. As mentioned above, municipal utilities are entitled to issue tax-exempt bonds because they are part of state and local governments, just as investor owned utilities are eligible to enjoy certain tax benefits because they are private corporations. H.R. 677 does not make it easier for a municipal utility to compete outside its service territory. The bill has nothing to do with service territory. Decisions about service territory and who serves whom at the retail level are governed by state law, not federal tax policy. Congress also did not "deliberately" impose a special private-use test on public power because the industry operates in a competitive market. In fact, the industry does not, and will not, operate in a truly competitive environment so long as private power companies are guaranteed a rate of return as they are now. Many other services provided by state and local governments are also provided by private industry such as schools, police, water and road systems. These systems do not adhere to the special $15 million private use restriction. Opposition to this bill by private utilities is based on a long-standing hostility toward public power, rather than the merits of the proposition. H.R. 677 is good for consumers. It simply eliminates a discriminatory provisions in the tax code that is not supported by any public policy justification and has little to do the competition between private power companies and publicly-owned systems. Conclusion Private use restrictions limiting the benefit available to private parties from publicly financed facilities are based on fiscal and public policy considerations. However, the restrictions should apply equally to all governmentally financed and operated facilities. The special and discriminatory $15 million private-use restriction that applies only to publicly owned electric and gas facilities is not supported by any public policy justification. It discriminates against communities that elect to provide their electric and gas utility services. It may force developers of electricity generation and transmission facilities to forego the most economic and environmentally beneficial uses of those facilities, particularly in the early years of their service. APPA strongly supports the inclusion of H.R. 677 in any tax bill considered by the Committee. Attachment ATTACHMENT Airports Council International-North America (ACI-NA) American Public Power Association (APPA) American Public Works Association (APWA) Association of Metropolitan Sewerage Agencies (AMSA) Government Finance Officers Association (GFOA) National Association of Higher Educational Facilities Authorities (NAHEFA) National Association of Towns and Townships (NATaT) May 18, 1995 National School Boards Association (NSBA) Honorable Bill Archer Committee on Ways and Means U.S. House of Representatives Dear Chairman Archer: RE: Tax-exempt Bond Simplification Provisions We are writing on behalf of our members who are state and local government officials who rely on the issuance of tax-exempt bonds to finance infrastructure and other public facilities. You have recently indicated a willingness to develop tax legislation that would include miscellaneous reforms of a technical nature and simplification provisions. We urge you to include five tax-exempt bond provisions in this tax legislation that conform to the criteria you have established for consideration. These provisions, which are described below, have been the subject of Congressional hearings; have been seriously considered or approved several times by Congress; and have broad support from state and local government officials. members of Congress, federal agencies, the municipal bond industry, and various study commissions. Each year, approximately 10,000 tax-exempt municipal bond issues are sold. The changes we support in the bond area will benefit small and large issuers and issuers nationwide. These provisions are not wholesale changes to the municipal bond laws, but instead would modify or remove overly burdensome and costly regulatory requirements that stand in the way of efficient and cost effective municipal bond financings. These changes are an important first step in improving tax-exempt bond policies and mitigating the overly burdensome regulatory structure that serves no federal purpose, costs state and local governments billions of dollars in compliance costs, and benefits the array of consultants hired by state and local governments to interpret overly complex and intrusive tax law provisions. They are not comprehensive, complicated or controversial changes. They simply provide a modicum of relief for state and local governments that are charged with increased demand for essential public services. We would welcome the opportunity to work with you and your staff on the following five key provisions: The arbitrage rebate requirement was perhaps the most intrusive and ultimately costly provision for state and local governments included in the 1986 Tax Reform Act. Although the concept of "rebating" earnings on the investment of bond proceeds to the federal government may seem simple, its implementation indisputably is not. The small-issuer rebate exemption currently is $5 million and has not been increased since the enactment of the rebate on governmental and 501(c)(3) issuers in 1986. An increase from $5 million to $25 million was recommended by the Anthony Commission on Public Finance and would provide relief for a significant number of issuers not currently eligible at very little cost to the federal government. This occurs because a large number of issues (approximately 80 percent of the total) account for a small percentage of total tax-exempt volume (approximately 20 percent). Such a change would give small state and local government issuers more flexibility to finance necessary public projects without cumbersome restrictions that were intended to prevent abusive transactions engaged in by other types of issuers. Moreover, an increase in the small-issuer rebate exemption has passed Congress on two separate occasions, but never signed into law because of unrelated issues. It also was included in H.R. 3419, the Technical Corrections and Simplification Act of 1993 and H.R. 13, the Tax Simplification Act of 1993. It is particularly important to provide small-issuer rebate relief because the present-law two year construction bond exception to the arbitrage rebate is too complex for small issuers and imposes overly harsh financial penalties if unanticipated events prevent an issuer from meeting spending targets. 2. Increase the small-issuer bank interest deduction limit. Current law permits banks to take an 80 percent interest deduction for bonds issued by small government issuers and small 501(c)(3) issuers. Bonds issued by such issuers are eligible for the bank interest deduction if the issuer does not issue more than $10 million in volume on an annual basis. Prior to 1986, this deduction was available for all bonds held in banks' portfolios. This tax law change has significantly reduced bank demand for tax-exempt securities and resulted in higher borrowing costs for issuers, greater market volatility and less liquidity. Increasing this small issuer exemption would provide relief for a large number of issues that account for only a small percentage of total volume in the market. The provision should also be changed to allow issuers to elect whether to apply the exemption at the issuer level or the borrower level. This $10 million limit has not been increased since enactment of the 1986 Tax Reform Act. The Anthony Commission on Public Finance called for the limit to increase to $25 million in 1989 and the provision has been included in three tax bills since that time. but because of unrelated concerns, those bills did not become law. In the interest of simplicity, this small-issuer limitation and the arbitrage rebate small-issuer exemption should be set at the same dollar amount. 3. Repeal of the five percent unrelated and disproportionate use rule. This requirement apparently stems from Congressional concern that significant amounts of bond proceeds from governmental issues were being used to finance private activities unrelated to the public activity being financed with a governmental tax-exempt bond and for which Congress had not specifically authorized tax-exempt financing. Under current law, not more than five percent of bond proceeds may be used for facilities "unrelated' to the financed public facility. Additionally, the related use must also be proportionate to the governmental or public use financed with the bond proceeds. Problems arise in applying this test because of (1) the unavoidable vagueness inherent in the concept of "relatedness" and the application of a "facts and circumstances" standard, (2) the infinite number of factual situations that arise, and (3) the problems of attempting to allocate mixed-use facilities between related and unrelated uses and governmental and private uses. There is also no demonstrable need for the imposition of the related-use requirement, particularly in light of the fact that the private loan financing test imposes a five percent limit on the loan of bond proceeds to a nongovernmental person. This provision is a perfect example of an unworkable section of the code. It has never met its intended purpose and therefore leads to confusion and increases in legal fees. It has been included in three different tax bills, two of which were vetoed by President Bush for unrelated reasons. More recently, it was included in H.R. 3419 and H.R. 13. 4. Repeal $15 Million Private-Use Restriction on "Output" Facilities In addition to the 1986 reduction of the private-use limitation from 25 percent to 10 percent, the federal tax code also provides that for certain output facilities--public power and public natural gas generation and transmission facilities--the private-use limit is the lesser of 10 percent or $15 million. Private use restrictions limiting the benefits available to private entities from publicly financed facilities are based on sound and appropriate public policy considerations. However, the restrictions should apply equally to all governmentally financed and operated facilities. The special $15 million private-use limitation that applies only to publicly owned electric and gas facilities is not supported by any public policy justification. It may force local governments that provide generating and transmitting facilities to have their surplus capacity sit idle rather than having it sold to others in order to avoid the private-use limitation. This provision should be repealed because it is discriminatory and it encourages practices that are not environmentally or economically sound. Under current law, issuers are not required to rebate arbitrage earnings if bond proceeds are spent within six months of the date of issuance. However, the rebate exemption period may be extended to one year for proceeds held in a bona fide debt service fund or a reasonably required reserve or replacement fund and in other limited instances if the unspent portion does not exceed the lesser of five percent of the proceeds or $100,000. Modifying this |