The Study looks at its citizens as one – ratepayers, taxpayers, workers, producers, and consumers. Many of the recommendations look to ease the burden of government by being better stewards of public assets and resources, including maximizing the tax advantages under the Federal Tax Code.

Among the many good ideas advanced by the study was the need to optimize asset values across the broad spectrum of public assets, including water and sewer, toll facilities, especially proposed “high occupancy toll” (HOT) lanes and dedicated truck lanes, parking assets, building and land reuse, university assets (district energy, housing & dining), etc.

In the aftermath of the dramatic reductions in the Federal tax benefits of SALT, API formed the Public Pension Infrastructure Investment Collaborative to garner support for tax law changes benefitting states and local governments; the group of nearly 20 public plans has an AUM of over $1T. Those efforts resulted in the US Treasury and the IRS issuing new tax regulations (IRS Reg. 2019-06937) that clarified provisions of the 1986 Federal Tax Act that prohibit states and municipalities from issuing tax-exempt debt and depositing such tax subsidized debt proceeds into the pension funds, declaring that act a prohibited “arbitrage.”

However, to increase infrastructure investment in the U.S., this new Federal tax regulation permits states and municipalities to now transfer infrastructure assets that benefit from tax- exempt debt to public pension funds and avoid being deemed a prohibited arbitrage.

Private versus public ownership of public infrastructure can raise significant tax, funding, governance, and regulatory considerations. State and local government infrastructure ownership, including holdings by qualified U.S. public pension plans, is for the benefit of the “public,” i.e., public customers and taxpayers. Accordingly, such ownership enjoys a substantial “tax shield” under the Federal Tax Code, and depending on the jurisdiction, exemption from state and local taxes as well as other permitted accommodations:

• Exempt from Federal Income Taxes

• Exempt from State and local income taxes

• Exemption from taxes on good and services procured for operations, maintenance & capital

• Exempt from property taxes

• Exempt from utility and business taxes

• Interest on debt is exempt from Federal income tax and is treated as governmental debt vs. “private activity bonds” so no interest yield penalty for Federal “alternative minimum tax”

• Eligible for grants from Federal, state, municipal, and private sources

• Access to loans at preferential interest rates, including state revolving loan fund programs and the Federal

• TIFIA, WIFIA, USDA Rural Development programs

This is particularly important when considering public-private partnerships (P3s), private to public asset sales, and asset in-kind contributions (AIKs) to public pensions. These tax and other benefits can have a huge impact on valuations, deal structures, affordability, and ultimately cost to citizens.

The New Jersey Supreme Court declared it unconstitutional for legislatures to bind future legislatures to dedicate taxes to address long-term pension legacy costs. That ruling left the issuance of taxable pension obligation bonds (POBs) as one of the only financial tools to combat pension underfunding. POB proceeds are used to reduce an issuer’s “net pension liabilities” (NPLs) but also leave issuers at risk that their pensions do not realize the rate of return that equals or exceeds the borrowing cost of the POBs. But then, New Jersey’s $13 billion “Asset In-Kind Contribution” (AIK) of state’s lottery to the pension funds introduced a new powerful tool to reducing NPLs. API served as a pro bono advisor to the New Jersey Senate on the Lottery AIK.

Unlike POBs that involve investment risks, AIKs offer pensions a great opportunity to improve portfolio performance by giving them access to stable, long-term assets that investors highly covet. Moreover, public pensions can offer better public stewardship conducted by professional asset managers, economies of scale and now a “Super Tax-Exempt” enterprise model to maximize tax benefits. By transforming public infrastructure into high performance-driven enterprises, pensions will increase asset values by generating operating and capital efficiencies and capturing that “trapped equity” for taxpayers through reductions in future required pension contributions.

These taxpayer savings make new water investments more affordable.