WASHINGTON — The National Association of Water Companies is urging the Treasury Department and the Internal Revenue Service to change the remedial actions that must be taken when bonds no longer meet private activity bond restrictions, claiming the current ones deter or burden public-private partnerships.

In a July 19 letter sent to Treasury assistant secretary for tax policy, Mark Mazur, NAWC's executive director Mark Deane asked the agencies to include a project to amend these rules under Section 141 of the tax code on their 2013-2014 priority guidance list.

Under existing tax rules, when private parties buy or agree to manage public facilities that were financed with tax-exempt bonds, one of three remedial actions must be taken for the bonds to remain tax exempt, the group said. One is that the bonds be defeased. Another is that the bonds be considered reissued, meaning they would become subject to the latest tax requirements and might need volume cap. A third is that the public body uses the proceeds from the ultimate disposition of the facility for a governmental purpose, the group said.

The defeasance requirement "is impractical and extremely costly in the current interest rate environment" and "imposes a major burden on issuers seeking to take advantage of public-private partnerships," the group said in its letter

The reissuance requirement also is "impractical," NAWC said, noting that a state would have to apply some of its annual volume cap to a reissuance of bonds for water and waste water treatment facilities.

It is unclear how the third remedial action - using the proceeds from disposition of the facility for public purposes - would apply to the long-term concession arrangements of P3s, the group said.

"We believe the IRS and Treasury have multiple options for modifying one or more of the remedial action rules to reduce hindrances to public-private partnerships due to outstanding tax-exempt bonds," Deane wrote. "Perhaps the simplest approach would be for the IRS and Treasury to clarify that an issuer's expenditure of lease payments, or ongoing payments under a concession arrangement, for governmental purposes satisfies the remedial action rules for alternative uses of disposition proceeds."

An alternative approach would be for the Treasury and IRS to waive the defeasance requirement where the concessionaire does not receive the benefit of the tax-exempt bonds through an assumption of the debt service. Another option would be for the IRS and Treasury to waive the requirement that the state allocate volume cap to the bonds at the time of the concession arrangement, the NAWC said in the letter.

"As you know, the president has proposed removing the issuances of tax-exempt bonds for water infrastructure from state private-activity bond volume caps," partly to encourage P3s, Dean said. "Any regulatory adjustments by the IRS and Treasury that remove hindrances to the use of such partnerships in cases where there is outstanding tax-exempt debt would be fully consistent with the president's proposals," he added. "We are confident the IRS and Treasury can eliminate or reduce the burden through clarifications in the regulatory requirements for remedial actions," NAWC said in the letter.

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