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AMERICAN PUBLiC powirP I ��TM ASSOCIATION Powering Strong Communities ISSUE BRIEF January 2017 Municipal Bonds and Public Power Summary requiring issuers to register bonds for the interest to be exempt Tax-exempt municipal bonds have financed$2 trillion in new from tax—and to tax the interest on bonds determined not to be for governmental purposes. By way of example of the latter, investments in infrastructure in the last decade,including $112 billion in new investments in electric power generation, the 1986 Tax Reform Act substantially revised the tax treatment transmission and distribution,and should be the cornerstone of private activity bonds.'In 1988,a slim U.S. Supreme Court of any plan to address the significant challenges of funding and majority in South Carolina v.Baker found that municipal bonds financing new investments in public infrastructure.Federal tax could be taxed,but Congress has been unwilling to overturn exemption reduces costs at the margin,but municipal bonds are decades of precedent by changing the tax treatment of govern- subject to local control and responsibility.Therefore,the Amer- ment purpose bonds. ican Public Power Association(Association or APPA) opposes any efforts to limit or eliminate municipal bonds given these adverse impacts on our public power utility members and their Strengths and Benefits of Municipal Bonds customers. State and local governmental entities—including public power utilities—have limited means to raise funds for their commu- nities'capital needs.The municipal bond market gives close to Background and History 42,000 governmental issuers access to investors.This is partic- The first recorded municipal bond was issued in 1812.Today, ularly important to the vast majority of small towns,counties, there are$3.7 trillion in municipal bonds outstanding,with cities,and publicly owned utilities that issue municipal bonds. more than$200 billion funding new projects every year.Close The median corporate bond issue is$210 million. Conversely, to five percent of those issuances(as much as$11 billion every while roughly five percent of municipal bond issuances are for year) finance new investments in power generation,distribution, $200 million or more,the vast majority of municipal bonds, reliability,demand control,efficiency,and emissions control:all including for public power investments,are far smaller: the needed to deliver safe,affordable,and reliable electricity, median municipal bond issuance is$7 million. In addition to infrastructure for public power utilities,these The federal tax exclusion of bond interest means issuers can bonds finance roads,bridges,sewers,hospitals,libraries,schools, finance their investments affordably. Over the past 20 years,the town halls,police stations,and every other sort of govern- average yield of Standard&Poor's Corporate Bond(Aaa) Index ment-purpose investment made by state and local governments. has been 130 basis points higher than that of Moody's High- In fact,nearly three-quarters of the infrastructure investment in Grade Municipal Bond Index.Adjusting for the cost of call provisions common in municipal bonds,but rare in corporate the U.S.is financed by state and local government bonds. Since the creation of the federal income tax in 1913,interest on government purpose municipal bonds has been excluded 'Private activity bonds differ from government purpose municipal bonds in from federal income tax.This dates back to a series of U.S. that they can be issued by a state or local government to finance certain private Supreme Court decisions in the 1800s concluding first,that a projects.Interest on qualifying private activity bonds is exempt from regular federal income tax,but subject to the federal Alternative Minimum Tax(AMT). state tax on a federal enterprise inherently violated the Constitu The volume of private activity bonds that can be issued in a state is subject to an tion and,second,that a federal tax on municipal bond interest annual cap.While power generation and distribution are among the qualified likewise would be unconstitutional.Subsequently,the U.S. private activity bond activities,other restrictions and considerations make Supreme Court has given the federal government the right to the use of tax-exempt private activity bonds rare for such purposes.Of 1,150 municipal bonds issued for public power projects from 2007-2011,just 30 were regulate government purpose municipal bonds—for example, private activity bonds. PublicPower.org 6s 243