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The Bond Buyer
Copyright (c) 2001 Thomson Financial, Inc. All Rights Reserved.

Thursday, November 1, 2001

Vol. 338, No. 31256

CIFA Seeks Removal of Arbitrage Restrictions for Water SRF Bonds
By Humberto Sanchez

WASHINGTON -- The Council of Infrastructure Financing Authorities urged Congress yesterday to consider removing all arbitrage rebate restrictions from tax-exempt bonds sold for clean water and drinking water state revolving funds and to increase funds available under the program.

CIFA, which represents state and local officials that operate SRFs, believes
the funds should be granted arbitrage relief since any money made on
investments is mandated by law to be used by the program, under which states
provide low-interest loans to localities to finance their sewer and drinking
water infrastructure needs.

"This greatly reduces the resources available to fulfill the funds' purpose
of providing below-market financial assistance to help communities meet
federal standards for their water programs," CIFA executive director Rick
Farrell told the Senate Environment and Public Works Committee's subcommittee
on fisheries, wildlife, and water. "CIFA estimates that in the absence of
these restrictions, the affected states could earn an additional $100 million
to $200 million annually on their SRF capitalization funds, which, when
leveraged, would permit an additional $200 million to $400 million annual
investment in needed water projects."

Although the panel does not have jurisdiction over tax issues, Sen. Bob
Graham, D-Fla., the subcommittee chairman who also sits on the Finance
Committee, which does have jurisdiction, said he is interested in exploring
some kind of arbitrage rebate relief for SRFs. Graham and other members of the
subcommittee stressed the need to consider making innovations in the SRF
program that could maximize federal funds, which, for fiscal 2002, are slated
to amount to $1.35 billion for clean water SRFs and $850 million for drinking
water SRFs.

"We're not going to get there, unless we find some other creative ways of
financing," said Sen. Christopher S. Bond, R-Mo. One group -- a coalition of
local elected officials, drinking water and wastewater service providers, and
others known as the Water Infrastructure Network -- has estimated that a $23
billion gap exists between infrastructure needs and current spending.

Despite support on the panel for arbitrage rebate relief for SRFs, removal
or reduction of such restrictions is likely to run into strong opposition from
the Treasury.

One investment banker testifying at the hearing argued that another avenue
to stretch federal dollars for water infrastructure would be to encourage more
private participation in the financing of water treatment plants and sewers.

One way to do that would be to classify water infrastructure projects with
private involvement as exempt facilities -- similar to some airport and
solid-waste projects -- which, under the tax code, would enable private
companies to use tax-exempt financing subject to the private-activity bond
volume cap, a move advocated by Stephen E. Howard, senior vice president with
Lehman Brothers.

Howard told the subcommittee there was a similar problem with solid waste
disposal in the 1980s.

As a consequence of reclassifying solid waste as an exempt facility, "over
the next 10 years there has been $20 billion of investment in
state-of-the-art assets to properly manage that particular waste problem ,"
Howard told the subcommittee. "We feel that the same approach, if it were
applied to the water sector, would significantly facilitate the development of
water and wastewater infrastructure, particularly from small and medium-sized
communities that can really benefit from entering into partnerships with the
private sector."

The subcommittee will also explore why all of the states don't leverage
their SRF money. Sens. Lincoln Chafee, R-R.I., and Jon Corzine, D-N.J., are both urging the subcommittee to figure out a way to encourage more states to use their SRF capitalization grants and matching funds as collateral to borrow in the public bond market to increase their loan pools.

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