WASHINGTON - President Bush has signed into law a bill that could weaken demand for tax-exempt bonds by easing rules that have prompted nuclear decommissioning trust funds to invest heavily in municipals over the last several years.
Bush's action came on Saturday. at the same time that the White House received the urban aid tax bill. By late yesterday the President had not acted on the tax bill, though administration officials have said he will veto it. Bush has until Nov. 5 to make a decision on that measure.
The change affecting nuclear trust funds was included in a comprehensive energy package that at one time had also contained two provisions beneficial to the municipal market. But those items, which would have increased the supply of bank-qualified bonds and eased volume cap restrictions on highspeed rail bonds, were dropped by tax conferees crafting the final version of the measure earlier this month.
The nuclear trust fund provision updates a 1984 law, which permits utility companies to receive tax breaks for setting up funds to save for future costs of shutting down nuclear power plants. Under that law, those funds could invest only in U.S. Treasury securities, bank deposits, and tax-exempt municipal bonds.
But the law enacted on Saturday waives those investment restrictions, and lowers the funds' 34% tax rate to 22% in 1994 and 20% in 1996.
Wall Street analysts have said there are no firm estimates of how much money, nuclear trust funds have put into municipals. But according to some estimates, the funds currently are about 80% invested in municipals. Cost estimates for shutting down the more than 100 nuclear plants around the country range from $60 billion to $100 billion.
Earlier this year, Rep. Beryl Anthony, D-Ark., had attempted to blunt the provision's potentially negative effect on municipal bond demand when the legislation was under consideration by the House Ways and Means Committee. Anthony, a Ways and Means member, proposed increasing the supply of bank-qualified bonds.
Under current law, banks may deduct 80% of the cost of carrying tax-exempt bonds if they are purchased from an issuer who expects to sell no more than $10 million annually. Anthony's proposal, which the committee added to the House version of the energy bill, would have increased that amount to $20 million.
House and Senate conferees dropped Anthony's amendment from the final energy bill because an identical proposal was included in the final version of the urban aid tax bill. But with the tax bill under a veto threat, the provision on bank-qualified bonds stands little chance of becoming law.
Also dropped from the final energy bill was a Senate-passed provision proposed by Sen. Steve Symms, R-Idaho.
The provision would have ended the requirement that issuers of high-speed rail bonds obtain an allocation under the private-activity bond volume cap for 25% of each issue. The provision was not included in other legislation and is dead for this year.
The new energy law does contain a provision that applies to investor-owned utilities that issue tax-exempt bonds to finance so-called wheeling activities. Wheeling refers to the practice whereby utilities act as conduits for power generated by independent producers.
The new law authorizes federal regulators to require local utilities to step up wheeling. It also waives Internal Revenue Service rules against exporting power, to preserve the tax-exempt status of bonds issued for wheeling.
But under a provision added by the Ways and Means Committee and preserved in the final version of the bill, the waiver is limited to utilities that already qualified for bond financing under the prior law.