Water agencies lobby for tax-exempt bonds to finance lead line projects

Bloomberg News

It would be easier for water agencies to issue tax-exempt bonds to finance costly lead pipe replacements under a bill introduced Monday by a bipartisan group of lawmakers.

The bill comes amid uncertainty about how the Trump administration will treat the Environmental Protection Agency's ambitious new lead pipe replacement rule, which was crafted last year under the Biden administration.

The Financing Lead Out of Water, or FLOW, Act, would allow public utilities to bypass the IRS' private business use test when using tax-exempt bonds to finance the replacement of privately owned lead lines. 

Replacing the public lines can already be financed with tax-exempt bonds, but the bill would modify the IRS rule that requires utilities to prove that no more than 10% of bond proceeds would benefit a private trade or business. Under the legislation, the "private business use" test would exempt "qualified lead service line replacement uses."

The FLOW Act was introduced Tuesday in the Senate by Sen. Jim Justice, R-W.Va., and Michael Bennet, D-Colo. and in the House by Rep. Claudia Tenney, R-N.Y., and Rep. Gwen Moore, D-Wis.

Bennet noted that the bill is modeled after the experience of Denver Water. The utility replaced all the city's lead pipes, including the homeowner's section, in a bond-financed program. Before embarking on the work, the utility needed to determine whether every property on its list was rented or if it housed a private business — a process that it said added six to eight months of administrative work.

This marks the third time the FLOW Act has been introduced. Previous efforts have failed to gain traction.

The Biden administration in October finalized a rule that would eliminate all lead service lines, estimated at 9.2 million, by 2037. The administration's final rule, which also lowers the lead concentration ceiling to 10 parts per billion from 15 parts per billion, replaced a rule put in place by the first Trump administration.

The American Water Works Association, an advocacy group for water utilities that supports the bill, puts the cost of replacing the nation's lead lines at $90 billion. The Environmental Protection Agency tags it at $20 billion to $30 billion. The process is complicated as homeowners are responsible for half of the infrastructure. Federal rules require utilities to replace the entire lines, meaning that homeowners will need to be involved and likely covering some of the costs.

"Community water systems across the country are working hard to remove and replace lead service lines, but current IRS rules make it hard for utilities to finance these projects with tax-exempt bonds carrying the lowest interest rates," said AMWA CEO Tom Dobbins. "The FLOW Act will simply allow these replacement projects to proceed more quickly, while minimizing costly interest charges that are ultimately borne by ratepayers."

In December, AMWA sued to block Biden's lead and copper rule, saying it would prove too expensive for many communities in part because of the requirement to replace lead lines on private property.

Shortly after taking office, the Trump administration asked for and received a freeze on the litigation, and the lawsuit remains paused while the administration considers how it wants to move forward.

Separately, House Republicans in February tried and failed to roll back the rule through a Congressional Review Act resolution.

Biden's Infrastructure Investment and Jobs Act allocates $50 billion for drinking water and wastewater infrastructure upgrades, including $15 billion for lead service line replacement, which is appropriated in $3 billion tranches annually through 2026 through Drinking Water State Revolving Funds.

Another $11.7 billion for state revolving funds that can also go to lead service line replacement but traditionally has been used for other water infrastructure projects.

Water Infrastructure Finance and Innovation Act loans, which are generally reserved for larger projects, are another option for some cities and states.

Some cities have also relied on Community Development Block Grant funds to fund lead line replacement. Trump's budget proposal would eliminate the CDBG program.