5.3. ERMUSR 02-12-2013 �1
Elk River t;
Municipal Utilities UTILITIES COMMISSION MEETING
TO: FROM:
Elk River Municipal Utilities Commission Troy Adams, P.E. —General Manager
John Dietz—Chair
Daryl Thompson—Vice Chair
Al Nadeau—Trustee
MEETING DATE: AGENDA ITEM NUMBER:
February 12, 2013 5.3
SUBJECT:
Tax Exempt Financing
BACKGROUND:
For more than 100 years, the concept that one body of government should not tax another body of
government has existed. Currently, the owners of municipal bonds are not required to pay federal income
tax on the interest income they receive from the bonds. (And,the owners of federal bonds are not
required to pay state and local income tax on the interest they receive from those bonds.) Municipal
bonds are a tool that local government entities finance their critical infrastructures including but not
limited to: electric, water, wastewater,and gas systems; roads and bridges;government buildings,
schools, and hospitals.
DISCUSSION:
Beginning in 2010 and again with the recent"fiscal cliff' negotiations,Congress and the Executive
branch have discussed making changes to the federal income tax exemption on municipal bonds. The
elimination of these exemptions would result in one body of government taxing another. This would also
result on a crippling effect on local government's ability to finance new or maintenance on critical
infrastructures. The increase cost of money to finance these critical infrastructures would inevitably be
passed on through taxes, fees, and rates. For municipal utilities, this additional cost of doing business
places additional burdens on the utility's ability to remain competitive.
The elimination of tax exempt financing does not provide any real savings to taxpayers. The savings at
the federal level would just be passed down to taxpayers at the state and local level. Federal deficit
reduction efforts should focus on potential reduction strategies that provide saving, not pass them on to
others. Because of the ramifications of the elimination of tax exempt financing to municipal
governments, this topic will be a priority for MMUA this year.
ACTION REQUESTED:
Staff recommends the adoption of the attached resolution supporting the preservation of tax exempt
financing.
ATTACHMENTS:
• Proposed ERMU Resolution Number 13-1
�$ Page 1 of I !POWERED
NATURE
Reliable Public
Power Provider P O W E R E D T o S E R V E
RESOLUTION No. 13-1
BOARD OF COMMISSIONERS
ELK RIVER MUNICIPAL UTILITIES
A RESOLUTION OF BOARD OF COMMISSIONERS OF ELK RIVER
MUNICIPAL UTILITIES IN SUPPORT OF THE PRESERVATION OF TAX
EXEMPT FINANCING
WHEREAS, municipal bonds are the means by which local governments finance the
critical infrastructure of the nation, including roads, bridges,hospitals, schools,
wastewater facilities, water systems and electric and gas utility systems; and
WHEREAS, under current law the owners of municipal bonds are not required to pay
federal income tax on the interest income they receive from the bonds; and
Whereas, exempting municipal bond interest results in lower capital costs to local
governments, which is key in enabling them to make timely investments in critical
infrastructure; and
WHEREAS, municipal bonds are a sound, time-tested financing tool that provide a
natural test of project viability, as issuers must convince investors to purchase the bonds
for feasible projects that will realize a return on investment ; and
WHEREAS, this tax exemption is part of a more than a century-long system of reciprocal
immunity under which owners of federal bonds are not required to pay state and local
income tax on the interest they receive from those bonds; and
WHEREAS, the precept that one level of government should not tax another was set out
by this nation's founders and has been embodied in statute since enactment of the first
federal income Tax Code in 1913; and
WHEREAS, Congress and the President are considering proposals to eliminate or alter
the federal tax exemption of interest on municipal bonds; and
WHEREAS, the capital cost of building new municipal infrastructure has increased
greatly since the last major revision to the federal income Tax Code in 1986. One of the
major drivers in the increased capital costs is the cost of compliance with a broad matrix
of increasingly stringent federal regulations; and
WHEREAS, in prior years cities could often obtain grants to cover as much as ninety
percent of the capital cost of developing new infrastructure such as water and wastewater
treatment facilities; and
WHEREAS, cities today must typically bear the full capital cost of developing these
expensive new facilities; and
WHEREAS, eliminating the tax exemption on municipal bonds would increase
borrowing cost and make it more difficult and, in some cases, impossible for cities to
provide vital repairs and improvements to essential infrastructure;
NOW, THEREFORE, BE IT RESOLVED, that Elk River Municipal Utilities ,opposes
any effort to eliminate or limit the federal tax exemption on interest earned from
municipal bonds.
This Resolution Passed and Adopted this day of , 2012.
John J. Dietz, Chair
Troy Adams, P.E., General Manager