More Calls for Withdrawal of Proposed Political Subdivision Rules

WASHINGTON – Airport groups, public power systems and a muni advocate group have joined the growing chorus of muni market participants calling for the Internal Revenue Service to withdraw its proposed rules on political subdivisions.

A public hearing will be held June 6, where officials from many market groups and other organizations are expected to testify against the proposed rules.

Among the 73 comments submitted to the IRS and Treasury by Monday's deadline were concerns expressed by the American Association of Airport Executives, Metropolitan Washington Airports Authority, Large Public Power Council, American Public Power Association and Municipal Bonds for America.

They worried the new rules proposed by the IRS and the Treasury Department in February would prevent airports and public power systems from qualifying as political subdivisions and issuing tax-exempt bonds.

Under the current definition, an entity is a political subdivision that can issue tax-exempt bonds if it has a right to exercise a substantial amount of at least one of three sovereign powers of a state or local governmental unit: eminent domain, taxation or police.

The regulations proposed in February by Treasury and IRS add two new requirements – that political subdivisions serve a governmental purpose "with no more than an incidental private benefit" and be governmentally controlled.

To be governmentally controlled, a political subdivision would have to be controlled by a state or local governmental unit or an electorate. The American Association of Airport Executives, which represents management at 850 airports and organizations that support airports, said determining the incidental private benefit provision in the regulations' current form could spell confusion for agencies.

In a three-page letter sent Monday to the IRS, Joel Bacon, AAAE's executive vice president of government and public affairs, said the governmental purpose requirement would prove difficult for airports that operate commercial airlines.

"Commercial service and general aviation airports around the country clearly serve a vital public purpose and provide a 'significant public benefit,'" Bacon wrote. "Unfortunately, the proposed rule fails to provide a specific definition of what constitutes public purpose."

Without a clear definition, Bacon argued, it is unclear whether airports that serve commercial airlines provide more than incidental private benefit. This could jeopardize airports' ability to issue bonds, which Bacon said is "by far" the largest source of funding for capital development and infrastructure projects.

Not only did AAAE call on the IRS to reconsider its political subdivision rule proposal, but it also called for Congress to eliminate the alternative minimum tax. Airport bonds that are classified as private-activity bonds are subject to AMT and carry higher interest rates because they are not as attractive to higher income investors.

The Metropolitan Washington Airports Authority, which operates Washington Dulles International Airport, Ronald Reagan Washington National Airport and the Dulles Toll Road in northern Virginia, also called for the IRS and Treasury to withdraw the proposed rules.

If a full withdrawal can't be considered, the rules should be modified to eliminate the "no more than incidental private benefit" provision, the authority said. Additionally, the governmental control requirement should be revised so that only entities with government appointees and no private members satisfy it and to permit one or more governmental units to have the power to appoint and remove a majority of its board.

MWAA is governed by a 17-member board: Virginia's governor appoints seven members, Maryland's governor appoints three members; the District of Columbia mayor appoints four members; and the president of the U.S. appoints three members.

Board members can be removed or suspended only for cause; no single jurisdiction can appoint or remove a majority of members. No private party can appoint or remove any members of the board.

"The authority requests that the IRS and Treasury … modify the proposed regulations to allow entities such as the authority to continue to qualify as political subdivisions even though they are controlled by multiple governmental entities and have board members removable only for cause," Andrew Rountree, MWAA's vice president for finance and chief financial officer, wrote in a five-page letter to the IRS.

Should IRS and Treasury finalize the proposed regulations, Rountree said the authority "probably would no longer qualify as a political subdivision" and would lose its ability to issue tax-exempt bonds to support airport infrastructure.

As of December, MWAA had $4.78 billion in outstanding bonds issued to fund improvements at Reagan National and Dulles International, as well as another $2.21 billion issued to fund improvements to the Dulles Toll Road and the construction of the Dulles Corridor Metrorail project.

According to the U.S. Census, there are more than 38,000 special districts, authorities and other entities that are currently defined as a political subdivision.

Municipal Bonds for America, the non-partisan group of muni issuers and state and local officials that advocate for tax-exempt bonds, called for the IRS to rewrite and re-propose the rules, which it warned would cause "enormous confusion and uncertainty."

Several public power groups and systems were also among those that submitted comments opposing the proposed regulations. Public power systems include state agencies, municipal utility departments, public utility districts and irrigation districts, the majority of which are owned by municipal governments.

The Large Public Power Council, which represents 25 U.S. power systems and advocates for policies that allow power companies to build infrastructure and provide service at low rates, said in its May 20 letter to the IRS that the longstanding requirement to possess one of the three established sovereign powers "should be the sole requirement for qualification as a political subdivision."

LPPC, whose members include the New York Power Authority and the Los Angeles Department of Water and Power, also took issue with the proposed rules' requirement that sovereign powers be conveyed through a law of general application, which it said should be removed from the proposed regulations.

The organization said this requirement could affect the standing of many public power systems that are created and authorized by their own statutory provisions.

Susan Kelly, the president and CEO of the American Public Power Association, said the proposed political subdivision rules would raise tax policy and technical questions that could prove cumbersome for the Treasury and IRS as well as the public finance community.

"The proposed regulations disturb well-settled law and, as such, create unnecessary confusion, uncertainty and do not improve administration of the federal income tax laws," Kelly wrote.

Others who have urged the proposed political subdivision rules be withdrawn include the National Association of Bond Lawyers, the Government Finance Officers Association, the Securities Industry and Financial Markets Association, Bond Dealers of America, Florida Gov. Rick Scott and several port authorities. NABL said the new rules would infringe upon states' rights and would jeopardize the tax-exempt status of millions of dollars of municipal bonds.

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