State and local authorities might issuer fewer tax-exempt bonds to fund water infrastructure projects if Congress approves pending legislation to establish a $10 billion water trust fund, market participants said Friday.

Some of the authorities that are backing the bill expect its grant provisions to be a boon to infrastructure projects. But others believe the tax provisions could be a major obstacle to getting the measure passed.

The bill, introduced last week by Rep. Earl Blumenauer, D-Ore., would establish a trust fund within the Treasury Department to finance clean and drinking water infrastructure projects. It would authorize the Treasury to collect a projected $10 billion in new tax revenue annually and distribute the funds through clean and drinking water state revolving funds, which are currently funded by annual appropriations. SRFs provide loans to publicly owned water agencies that are sometimes used in conjunction with bonds.

Almost half of the $10 billion would be distributed through clean water SRFs. States would be required to provide grants with some of that funding. More than one-third would be distributed as loans through drinking water SRFs. These funds would be targeted towards larger systems, while the rest would go to various projects.

The new grants and loans would allow water agencies that have strong credit ratings - such as those in large cities - to forgo the bond market for some of their financing.

"If this went through, and there was all of a sudden a couple billion dollars a year available for grants, [then] that's $2 billion that they wouldn't need to go to the bond market for," said Rick Farrell, executive director of the Council of Infrastructure Financing Authorities. But there would be a continued need for bond transactions, he said.

"States that have bigger demand for water infrastructure would still be in the bond market because they'd still be leveraging," he said. "There's still a large demand and not enough money to meet it."

Another group that supports the bill agrees that bond issuance could change but would not disappear.

"Would they go to the bond market less? It would depend on the agency," said Susie Bruninga, public affairs director for the National Association of Clean Water Agencies. "Obviously, we're big advocates of grants. But the needs out there are so great that I think there would probably still be opportunity to go to the bond market."

The program also would help distressed and small communities such as Rust Belt communities that cannot afford more debt service, she said.

Funding for the $10 billion program would come from new taxes, including a four-cent per container tax on water-based beverages such as soft drinks; a 3% tax on items such as toothpaste, cosmetics, and toilet paper that are disposed of in wastewater; a 0.5% pharmaceuticals tax; and a 0.15% tax on corporate profits over $4 million.

"The real issue is how realistic is that revenue, based on the people being taxed," Farrell said, adding that lawmakers may oppose the new taxes. "I don't think this is something that's going to move anytime quickly."

Members of CIFA also worry that the legislation would focus the SRFs on grants rather than loans, he said.

Agencies that perform wastewater infrastructure projects need $23 billion per year more than they currently receive from the federal government, Blumenauer said last week during a hearing before the House Transportation and Infrastructure water resources and environment subcommittee. Clean and drinking water infrastructure face a $534 billion gap between investment and projected needs over the next 20 years.

"Municipalities face serious challenges in meeting their clean water goals, including a growing population, aging infrastructure, increased regulatory requirements," said Thomas Walsh, treasurer of the Upper Blackstone Water Pollution Abatement District in Worcester, Mass. Walsh said his utility had to increase rates by 450% in the past nine years to cover debt service.

"If highways merit a trust fund with $30 billion per year, and airports $10 billion per year, why should we not have one for water, a resource each of us uses every single day?" Walsh said.

Subscribe Now

Independent and authoritative analysis and perspective for the bond buying industry.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.