Tax Code Change Encourages Partnering

By Roger Feldman, Esq.,

New York has always been a leader in environmental quality as evidenced by the recently passed Clean Water/Clean Air Bond Act and the still vibrant Environmental Facilities Corporation.
In financing water/wastewater facilities, however, New York has lagged, by severely limiting the extent to which private firms could become involved in project ownership or long-term operation. Other states such as New Jersey last year enacted comprehensive public-private partnership legislation, and this year benefited through major private capital involvement in urban wastewater upgrades.
The excuse had always been “the Feds won’t allow it, anyway.” Federal tax laws had converted existing tax-free debt to taxable debt if a municipality sold a wastewater plant or turned it over to private operation for a term of more than five years. If a municipality received a Federal grant in connection with a facility, the depreciated value of the Federal grant would have had to be repaid.
Now, however, as Federal emphasis has shifted to block grants and municipal self-help, the importance and attractiveness of private capital involvement has effectively reorganized grant provisions. The IRS has redefined “safe harbor” terms for up to 20 years for infrastructure development; and when selling an asset it is now possible to keep its debt from becoming taxable. Federal reform of the rules governing grant repayment enable municipalities to have their cake and eat it to: sell assets, not buydown outstanding debt, and be able to apply the proceeds to new infrastructure.
This means if New York is to return to a leadership position in water/wastewater it needs to modify its current legislative framework to make possible the transactions which the tax laws encourage. This would give communities a new choices to adapt to environmental regulatory change.
The Water Industry Council strongly endorses a proposal originally formulated by the New York City Bar allowing municipalities to engage in long-term service contracts in the water/wastewater field. This would complement the Environmental Facility Corporation’s initiative to allow its funds to effectively leverage capital obtained from the private sector. The WIC advocates that the rules governing solid waste in New York be extended, with certain refinements to water and wastewater systems.
As counsel to the WIC, I am privileged to be part of that effort.
Mr. Feldman is a partner in Bingham, Gould & Dana LLP and can be reached at 202-778-3181.