WASHINGTON — House Appropriations Committee Chairman Hal Rogers, R-Ky., has written a letter to U.S. Treasury Secretary Tim Geithner supporting a proposal to eliminate rules requiring municipalities to defease outstanding bonds when selling or leasing their water systems to a private company.

The proposal, which Rogers' letter says he learned of recently, was submitted by the National Association of Water Companies and American Water. It seeks an "administrative change" to the current remediation rules under section 141 of the internal revenue code, which the water companies say imposes "a significant financial penalty" on local issuers who pursue public private partnerships for their water systems.

Since current rules cause any munis used to fund the water system to lose their tax-exempt status, issuers must defease the bonds by buying other securities to meet interest and principal payments for the remainder of the life of the bonds.

"With interest rates at an all-time low this defeasance, depending on the terms of the debt service, can drive up the cost of these projects by around 15%, further straining already tight community budgets," Rogers wrote.  "I write to ask that you give due consideration to any and all innovative solutions that can be implemented by your department to reduce the obstacles to municipalities seeking to obtain capital financing. In particular, our Byzantine tax code contains provisions that, contrary to their original intent, can raise the costs for local governments to make modest improvements in clean water and disposal services."

Rogers represents a large region in southeast Kentucky, which he said faces a $300 million water infrastructure funding gap.

Attached to Rogers' letter was a white paper produced by American Water, the largest publicly traded water and wastewater company in the U.S.

The paper says the change would only apply where the private entity assuming control of the infrastructure does not benefit from the tax-exempt status of the muni bonds through the assumption of debt service.

"All other regulatory requirements, including a fair look at the issuer's intentions when the bonds were first issued, would remain in place. This minor evolution of regulatory policy would result in substantial benefits to local governments and water utility customers around our country," the American Water paper argues.

"Section 141 and the regulations thereunder are intended to limit the amount of tax-favored governmental bond proceeds that are used by nongovernmental persons," responded Mark Mazur, assistant secretary for tax policy at the Treasury in a letter back to Rogers Oct. 16.

Mazur said state and local governments often redeem or defease bonds no longer qualified for tax-exempt status when they enter into P3s for their water or sewer systems.

"We appreciate your comments and will take the proposal under consideration," Mazur wrote.

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