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Obama proposes to cut water infrastructure funding

President Obama released his Budget Proposal for FY 2014 on April 10. In it he proposes cuts to both the Environmental Protection Agency’s (EPA) state revolving loan funds (SRFs) and the Rural Utilities Service’s Rural Water and Waste Disposal program. He also proposes changes to the tax code that would affect water infrastructure funding.

For the SRFs, the Budget proposes a combined $1.912 billion for Federal capitalization of the SRFs, representing a reduction of $448.5 million (or 19 percent) from the 2013 enacted level without factoring in FY 2013 sequestration cuts. Assuming these cuts, this would be a reduction of $330.5 million (or 15 percent). This is roughly equal to cuts proposed last year in the president’s budget. According to the proposal, “The Budget also proposes a gradual reduction to focus on communities most in need of assistance, but will still allow the SRFs to finance approximately $6 billion in wastewater and drinking water infrastructure projects annually…Going forward, EPA will work to target SRF assistance to small and underserved communities with limited ability to repay loans.”

For Rural Utilities Service’s Rural Water and Waste Disposal program, the budget proposes a combined $304 million for direct loans and grants for the program, representing a reduction of $264.7 million – or 47 percent – from the 2013 enacted level without factoring in FY 2013 sequestration cuts. Assuming these cuts, this would be a reduction of $220.4 million, or 42 percent. This is considerably more than cuts proposed last year in the president’s budget, which were only 12 percent. However, according to the proposal, “Consistent loan performance and low interest rates have made USDA’s rural water and wastewater direct loans less expensive to administer and allows the Budget to propose $1.2 billion in loan level from the $794 million level enacted in 2012. Higher loan levels at lower interest rates means that less grant funding is needed to fund each facility.”

For tax policy, President Obama is again proposing to cap the value of interest earned on municipal bonds at 28 percent for certain income earners. Under the federal tax code, investors do not pay federal income tax on interest earned from most bonds issued by state and local governments. This tax exemption for municipal bond interest allows state and local governments to receive a lower interest rate on their borrowing than they would if their interest was taxable to investors. A recent report by the National Association of Counties, National League of Cities, and U.S. Conference of Mayors concludes that tax-exempt municipal bonds are the most important tool in the U.S. for financing investment in schools, roads, water and sewer systems, airports, bridges and other vital infrastructure. The study goes on to explain that if the proposal to enact a tax-benefit cap of 28 percent for certain taxpayers had been in effect during the last decade, it is estimated that this would have cost states and localities an additional $173 billion in interest expense for infrastructure projects financed over the past ten year period.

On the positive side, the president’s budget includes the removal of water and sewer projects from the private activity bond volume cap, a provision that AGC has been in favor of for many years. In the Treasury Dept.’s General Explanations of the Administration’s Fiscal Year 2014 Revenue Proposals (also known as the Greenbook), the administration notes “a significant need for capital funding to upgrade the nation’s water and wastewater infrastructure facilities” and that “removing the volume cap on tax-exempt qualified private activity bonds for water and wastewater infrastructure facilities would encourage additional needed private investment and public-private partnerships in these infrastructure facilities.” The industry estimates that this proposal would generate an additional $2 to $5 billion annually in water infrastructure funding. Read the full Treasury document here.