7913

• UCREFRP Catalog Number: 7913
• Author: Freshwater Society.
• Title: Water Management in Transition, 1985.
• USFW Year: 1985.
• USFW - Doc Type: Navarre, MN.
• Copyright Material: YES

The Alliance recognizes that
Congress has been a
microcosm of the nationS
conflicting regional needs for
water financing.

There is a serious water
problem based on a new
economic reality . . . and the
solution lies in the creation
of alternatives to the
traditional direct federal
financing of the past.

The significance of these legislative recommendations - the inventory study,
capital budgeting proposals, infrastructure bank creation and water resources
cost -sharing proposals - is that, individually and collectively, they represent a
recognition by the federal government that there is a serious water problem
based on a new economic reality and that the solution lies in the creation of
alternatives to the traditional direct federal financing of the past.

Water Committees vs. Tax Committees

Amain issue in the transition from major direct federal grants to alternative forms
of financing will be the interplay - or lack thereof - between the substantive
water committees in Congress and those responsible for tax legislation. In the
last Congress, while the water-related committees were painstakingly searching
for solutions to the tremendous water financial needs, the tax-writing committees
were proposing to restrict existing incentives for alternative systems of financing.

For example, IDBs were under attack at the federal level because of perceived
revenue losses to the US, Treasury and perceived abuses due to particular uses
of IDBs - racquetball courts, for example. Certainly major abuses should be
prevented. But to go beyond the specific problem area can wreak havoc with
a critical financing mechanism. ID Bs are now used by state and local governments
to finance a wide range of public purposes, including water and wastewater
treatment facilities which are owned and operated by private companies to the
benefit and welfare of the entire community.

In another provision, significant restrictions would have been placed on the tax
benefits associated with service contracts. These contracts shift the responsibility
for water projects from the public to the private sector. The private sector would
design, construct, own and operate the facility providing services to the
community. Under a long-term service contract, the company would be
responsible for all state and federal permitting requirements and for plant
operation and maintenance,

The House proposal would have put into law a series of restrictions on these
contracts, making it more difficult for companies to qualify for investment tax
credit and accelerated cost recovery benefits. By making these benefits less
accessible, private sector investment for the provision of public services would
have been discouraged.

Recognizing this, a provision was accepted in the Senate which would provide
special rules for property under contract involving water treatment works
facilities. This provision would protect against the abusive use of tax-exempt
entity leases for tax avoidance and yet support national water goals.

Legislative Results-and Effects

As so often happens legislatively, the results of the tax bills - from the standpoint
of water- were mixed, In the Deficit ReductionAct of 1984 CP.L. 98-369) Congress
did impose a population-based cap on each state's ability to issue IDBs. The cap
is the greater of $150 per person or $200 million per year. Bonds issued in an
amount which exceeds the cap lose their tax-exempt status,

The impact of this Act was immediate, No less than fourteen states had to reduce
their IDB issuance as compared to previous years, At least twelve states have
initiated an intrastate allocation mechanism - all different, creating implicit
barriers to interstate industrial development.

The picture in regard to the service contracts is more positive. The provision
in the Senate bill did prevail and wastewater service contracts must meet a
reasonable set of criteria for tax purposes, preserving the incentive ofACRS and
ITe. However, where these benefits are used, the project may not utilize IDB
financing - a definite loss for the financial viability of these projects.

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