The federal budget for fiscal 2013-14 has JEA officials concerned about the future of the utility's budget because limitations have been proposed on the tax-exempt status of interest on municipal bonds.
"We've got some bad news coming from Washington (D.C.) in terms of tax-exempt financing in the president's budget, as well as the (U.S.) House budget," said Paul McElroy, JEA managing director and chief executive officer, at Tuesday's meeting of the JEA board of directors.
"There is an attack on the tax-exempt status of interest on municipal bonds coming from both sides of the aisle," he said.
The federal fiscal year begins Oct. 1 and ends Sept. 30.
Municipal bonds are debt obligations issued by states, cities, counties and other public entities that use the loans to fund public projects such as the construction of schools, hospitals, highways, sewers and universities, according to Fidelity Investments' website.
The federal budget proposes to limit "the tax rate at which high-income taxpayers can reduce their tax liability to a maximum of 28 percent, a limitation that would affect only the top three percent of families in 2014," according to the Budget of the U.S. Government, Fiscal Year 2014 document.
The limit would include itemized deductions and tax-exempt interest.
"Municipal bonds are the primary mechanism utilized by cities to fund their infrastructure investments. Capping the deduction amount and thereby limiting the exemption for interest earned on municipal bonds will significantly raise the costs for cities doing these projects," said Clarence Anthony, executive director of the National League of Cities, in an April 10 news release.
McElroy agreed on the importance of having the bonds as a tool to complete infrastructure projects.
"Seventy-five percent of infrastructure projects in the country are funded through tax-exempt bonds. If this passes, it will affect prospective debt, as well as debt already on the books," he said.
The tax-exempt status and the stability of having a loan being paid back by a municipality make the bonds attractive to investors, but that could change if the tax exemption is reduced, according to Paul Mason, chair of the Economics and Geography Department of the University of North Florida.
"That would be a major blow, particularly to elderly investors who invest in municipal bonds for their stability," said Mason.
"My mother has about 90 percent of her portfolio in tax exempt bonds. That's a substantial amount of wealth that she will have to look elsewhere for," said Mason.
While he might not look favorably on the move, Mason said the market would adapt to the policy change.
"Markets will adjust, if municipalities don't have the advantage of being tax exempt they will still get people to buy their bonds. (Municipalities) will just have to pay more and that, ultimately, will cost the taxpayers more," said Mason.
McElroy informed the board Tuesday that JEA has lobbyists working to defeat the proposed budget item.
"This is not a tax on the wealthy, this is a tax on the people who can least afford it. What it will do is cause our rates to increase, we will have to pass it along to our customers, and it will have an adverse effect on infrastructure," said McElroy.
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