Private Activity Bonds Under President Trump's "Legislative Outline for Rebuilding Infrastructure in America"
The White House released a 53-page framework on Tuesday setting forth its legislative goals for rebuilding America's infrastructure (the Infrastructure Plan). The Infrastructure Plan is intended "to lead to at least $1.5 trillion in investments to rebuild our failing infrastructure and develop innovative projects" through $200 billion in federal funding to promote state and local governmental and private sector investment over the next 10 years. This would largely shift funding for infrastructure away from the federal government to state, local and private sector funding sources.
According to a statement on the plan issued by the White House, $6 billion of the federal funding over 10 years is expected to go to expanding private activity bonds (PABs). The House bill introduced in connection with the 2017 tax act (known as the Tax Cuts and Jobs Act) would have eliminated the tax-exemption for all PABs, but the final bill left PABs untouched. In publicly reported statements made after the release of the Infrastructure Plan, U.S. Rep. Kevin Brady, Chair of the House Ways & Means Committee, expressed concern over the scope of projects financed under current law with PABs, so it is not clear if PABs may still be subject to revision or elimination as the Infrastructure Plan makes its way through the legislative process.
The Infrastructure Plan would make six changes to current provisions related to tax-exempt bonds to address perceived roadblocks to financing of infrastructure needs:
1. New and Modified Categories of Exempt-Facility PABs
The Infrastructure Plan would add three new categories of PABs and modify some other categories. Many of the existing categories enacted decades ago do not address current needs and other services and facilities have developed more recently with no corresponding additions to the categories of exempt facilities.
New categories of exempt-facility PABs:
Flood control and stormwater facilities
Rural broadband service facilities
Environmental remediation costs on Brownfield and Superfund sites
Updating of current categories of exempt-facility PABs:
Docks and wharves would be expanded to include maritime and inland waterway ports, and waterway infrastructure, including dredging and navigation improvements.
Qualified highway or surface freight transfer facilities would be expanded to include roads, bridges, tunnels, passenger railroads, and other facilities that are eligible for federal credit assistance under the Transportation Infrastructure Finance and Innovation Act (TIFIA).
Environmental enhancements of hydroelectric power-generating facilities would not be limited to promoting fisheries and wildlife resources (so-called "fish ladders") and recreational facilities required under federally licensing, but would be expanded to include new construction of hydroelectric power-generating facilities.
Facilities for the furnishing of water
Solid waste-disposal facilities
2. Condition enhanced access to PABs for infrastructure projects with certain required "public attributes"
The tradeoff for increased private business use of infrastructure projects under the Infrastructure Plan would be the imposition of requirements similar to those currently on PABs for airports, docks, and wharves, as well as mass-commuting facilities, high-speed rail and some solid waste-disposal facilities. Under current law, these facilities must be governmentally owned, defined to include certain long-term leases and management contracts with private entities viewed as not transferring ownership to the private entities. The Infrastructure Plan would allow private business use for public infrastructure projects having the "public attributes" of (i) either (A) state or local governmental ownership or (B) private ownership under arrangements in which rates charged for services or use of projects are subject to state or local governmental regulatory or contractual control or approval; and (ii) the availability of projects for general public use (such as public roads) or provision of services to the general public (such as water service).
The existing categories of PABs included in the list of public purpose infrastructure projects currently have elements of some or all of the public attributes and the expansion of the PAB categories incorporates these requirements in a modified form.
3. Liberalization of safe harbor for private leases and management contracts that would meet the governmental ownership prong of the public attributes requirement
In tandem with the new expanded public attributes test, the Infrastructure Plan provides for a longer term for private leases or operating/management contracts of governmentally owned facilities that would still meet the governmental ownership requirement. Under the new safe harbor, the term of the private lease can be up to 95 percent of the reasonably expected economic life of the facility (rather than 80 percent under the existing safe harbor). This proposal addresses a long-standing hurdle for private companies seeking to recoup their investment in long-term infrastructure projects, though it does not deal with other requirements of the safe harbor that have deterred private investment, including the prohibition on giving the private company an option to purchase the facilities at any price other than fair market value determined at the time the option is exercised.
4. Removal of State Volume Cap and Nationwide Transportation Volume Cap on PABs for Public Purpose Infrastructure Projects
Since the 1980s, the tax code has sought to contain the issuance of PABs by subjecting them to annual state volume cap limits based on the resident population of the state. Although competition for volume cap has lessened since the volume cap was indexed for inflation, infrastructure projects typically required relatively large allocations of cap and had to compete with other categories of PABs within a state. This created uncertainty as to whether a long-term project, such as an infrastructure project, would be able to secure the full amount needed to make the project work financially. Certain government-owned PABs were fully or partially exempt from the state volume cap. PABs for highway or surface freight transfer facilities had a unique approach, with the $15 billion volume cap awarded to and allocated by the U.S. Department of Transportation (DOT).
The Infrastructure Plan proposes to eliminate the constraints and uncertainty caused by the volume cap in two ways:
No state volume cap applicable would be required for "public purpose infrastructure projects" meeting the requisite public attributes test.
No volume cap would be required from DOT for PABs issued for the expanded highway or surface freight transfer facilities category.
5. Elimination of Interest on PABs as an Item of Tax Preference for Purposes of the Alternative Minimum Tax
The Infrastructure Plan proposes to even the interest rate playing field for PABs and governmental bonds by removing PABs from the list of tax preference items for purposes of the alternative minimum tax (AMT). A similar provision in 2008 made PABs for affordable housing bonds more attractive. The Tax Cut and Jobs Act generally repealed the corporate AMT, so the practical effect of the proposal would be on the individual taxpayer market still subject to AMT.
6. Expand remedial actions for private lease of governmental facility financed with Governmental Bonds
The Infrastructure Plan proposes new change-of-use remedial actions to preserve the tax-exempt status of bonds issued to finance governmental facilities that are to be privatized through a long term lease. Remedial actions currently allow a state or local government to retain tax-exempt financing on a facility sold to a private party if the transaction is solely for cash. Under current law, in cases where the governmental use is changing to private business use because of a lease to a private party, the state or local government is able to preserve the tax-exempt bond financing only if it redeems the bonds (which means paying out of pocket in the case of a lease) or converting the bonds to a PAB (if one of the permitted categories of PABs), which involves obtaining volume cap and making a payment to the federal government representing the AMT premium.
The Infrastructure Plan would add a new remedial action, allowing the state or local government to recycle an amount equal to the total present value of a private lease of any project financed with governmental bonds into expenditures for governmental use within two years of the date the private lease payment is received.
The additional remedial action combined with the expansion of the public purpose infrastructure PABs and elimination of volume cap and AMT, should eliminate many of the financial impediments to the privatization of governmentally owned infrastructure facilities with outstanding tax-exempt bonds.
There have been numerous proposals to deal with the country's infrastructure needs over the years, including PABs and tax credit bonds. This comprehensive Infrastructure Plan will restart that discussion.
Attorneys in Ballard Spahr's Public Finance Group have extensive experience with the rules and regulations set by the IRS and U.S. Treasury. Working closely with attorneys in Ballard Spahr's P3/Infrastructure Group, they routinely monitor and report on new developments that impact federal and state infrastructure programs.
Copyright © 2018 by Ballard Spahr LLP.
(No claim to original U.S. government material.)
All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, including electronic, mechanical, photocopying, recording, or otherwise, without prior written permission of the author and publisher.
This alert is a periodic publication of Ballard Spahr LLP and is intended to notify recipients of new developments in the law. It should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own attorney concerning your situation and specific legal questions you have.