Sequestration Affecting Clean Water Programs

sequestration

As previously anticipated, on March 1 automatic spending cuts known as sequestration went into effect as required by the Budget Control Act of 2011 (BCA). These cuts likely will mean a $74.9 million decrease to the Clean Water State Revolving Fund (CWSRF), putting it at $1.393 billion.  In addition, the Build America Bond Program is experiencing federal cuts and the tax exempt status of municipal bonds is at risk.

Taken together, these financing issues could prove problematic for clean water agencies.

The BCA mandated automatic cuts of $1.2 trillion to most discretionary and non-discretionary programs over 10 years.  Majorities in both the House and Senate voted on the agreement in August 2011, which included the threat of sequestration as a way to force Congress to approve a budget and reduce the deficit.  Sequestration will remain in place unless Congress can reach a deal to reverse or replace the cuts.  

In the interim, lawmakers are trying to pass a Continuing Resolution (CR) to keep the government funded at FY 2012 levels for the rest of the year.  The current CR expires on March 27. Earlier this month, both the House and Senate passed resolutions that would fund the government through the end of the fiscal year. The House proposal would cut $10 million in unallocated funding from both the CWSRF and the Drinking Water SRF.  The Senate proposal included an additional cut of $136 million from EPA, beyond the House reduction. A vote on the Senate resolution is expected early next week.

Another impact of sequestration is a reduction in the level of federal assistance provided under the Build America Bond Program.  Direct Payment Build America Bonds (DPBABs)—one of two types of bonds offered under the program—provide a federal subsidy of 35% of the interest paid on the bonds. The bond issuer receives the subsidy through direct payment. This subsidy makes the DPBAB bonds more cost-effective than traditional tax-exempt revenue bonds. However, with sequestration in place, the federal subsidy payments have now been reduced.

In addition to these actual cuts, a result of the current budget environment, there has been talk about scaling back or eliminating tax exempt municipal bond status. NACWA is working with a broad coalition to ensure that Congress and the Administration do not cut the tax exempt municipal bond status to generate revenue. These bonds provide a key source of funding for infrastructure repair and replacement.  It has been estimated that without the tax exemption on municipal bonds, local and state governments would have paid an additional $495 billion in interest costs over 10 years.

We will continue to track developments on the Federal budget and its effects on clean water programs as they occur. We are also interested in hearing from members of the clean water community that expect this or other effects from sequestration. Please share your story using the comments box below or contact us at blog@nacwa.org

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