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Market Reacts to Obama's America Fast Forward Bond Program

President Obama proposed a Build America Bond-like program to be used as a tool to help finance infrastructure. The taxable, direct-pay America Fast Forward bond program falls under the president’s larger push to invest in the country’s crumbling infrastructure, which he outlined in his state of the union address. The AFF bond program has its roots from a Los Angeles County Metropolitan Transportation Authority proposal that launched last year. The LA Metro initiative included a $45 billion, 10-year taxable tax-credit bond program and an expansion of the Transportation Infrastructure Finance Innovation Act. While many muni market participants are encouraged by the president’s focus on infrastructure investment, they are concerned that recent threats to tax exemption might still be on the table as a way to raise revenue. They worry that the AFF bond program might serve as a substitute to traditional tax exempt financing.

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Rep. Sander Levin, D-Mich., ranking minority member on the House Ways and Means Committee Rep. Sander Levin, D-Mich., ranking minority member on the House Ways and Means Committee “If House Republicans were serious about creating jobs and investing in our nation’s infrastructure, the President’s package is the place to start. The Build America Bonds program was highly successful and we should build off that success. The real obstacle is the House GOP’s insistence on doing nothing.”

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Michael Decker, managing director and co-head of the municipal securities division at the Securities Industry and Financial Markets Association Michael Decker, managing director and co-head of the municipal securities division at the Securities Industry and Financial Markets Association ”In the past the administration has proposed curtailing the tax exemption for municipal bonds. It’s encouraging and helpful that they continue to support the notion of direct pay bonds, which we fully support and would like to see return. That appears to be inconsistent with the idea of curtailing tax exempt financing, which has been around for 100 years and financed trillions of dollars of infrastructure and is a well-tested and proven financing tool. We would like to see Build America Bonds or something similar return but we also feel strongly that we would like to see the tax exempt portion of the market retained.”

Image: Bloomberg News

Mike Nicholas, Bond Dealers of America chief executive officer Mike Nicholas, Bond Dealers of America chief executive officer

"The BDA is in full agreement with the National League of Cities and others when expressing real concern if the AFF is viewed as a replacement for tax exempt municipal bonds. There already exists an efficient model with a defined marketplace that has benefited state and local governments and tax payers for 100 years - the tax exempt municipal bond market. Moreover, sequestration, with its arbitrary cuts to reimbursement payments for direct-pay bonds like AFF, will do real, long lasting harm to the marketability and desirability of direct-pay bonds for issuers and investors. "

Bill Daly, director of governmental affairs for the National Association of Bond Lawyers Bill Daly, director of governmental affairs for the National Association of Bond Lawyers

“There is not a lot of detail the White House put out but at least they recognize the role state and local governments have with infrastructure. This is encouraging. But this isn’t likely to gain momentum in the short-term. This would have to take a tax bill being passed and that seems unlikely. This isn’t going to go anywhere until deficit reduction is resolved.”

Tom Doe, Municipal Market Advisors’ chief executive officer Tom Doe, Municipal Market Advisors’ chief executive officer

“We are all aware that there are huge infrastructure needs and they create jobs. The question is BABs originally were successful because the subsidy was so large and they were cheap. It all depends on what the incentive is to the investor and until that is defined, it’s just a nice idea. The problem is you have huge infrastructure needs and what kind of fiscal stress does it place on states and municipalities. You are saying your fed government is creating a program to encourage more borrowing to build projects. Should states borrow more? That’s not fiscally prudent.”

Chuck Samuels, a lawyer at Mintz, Levin, Cohn, Ferris, Glovsky and Popeo PC Chuck Samuels, a lawyer at Mintz, Levin, Cohn, Ferris, Glovsky and Popeo PC

“The president’s support for critical infrastructure investments is very much appreciated. The proposal to create a new form of Build America Bonds probably will be widely supported in the muni community based on the success of BAB’s although the details of the level of federal support for the bonds will be important and the sequestration threat to BAB’s payments certainly has taken some of the luster off this form of financing. The critical error, however, would be to think that this is a substitute for traditional tax exempt financing and widely applicable across thousands of issuers and borrowers. That's wrong and the administration’s neglect, disinterest and treatment of tax exempt financing, as exemplified in the 28% cap proposal is very unfortunate.”

Manju Ganeriwala, National Association of Treasurers president and Virginia Treasurer Manju Ganeriwala, National Association of Treasurers president and Virginia Treasurer

“To the extent that America Fast Forward bonds represent another arrow in the quiver for state and local governments to access private capital markets, state treasurers would generally look upon it favorably. We would be interested in hearing more specifics. The National Association of State Treasurers first priority, however, is to maintain the current tax-exempt status of municipal bonds, as they are the primary and most efficient financing mechanism for state and local governments.”

Toby Rittner, council of development finance agencies president Toby Rittner, council of development finance agencies president

"CDFA commends the President for his bold thinking in accelerating infrastructure investment through the America Fast Forward Bonds proposal. The bond finance industry has embraced direct subsidy bonds in the past and we imagine that these tools would be embraced again if approved by Congress. Unfortunately, the details of the President's proposal - namely the amount of the subsidy and the amount of available resources - does not provide a full basis to make an evaluation. CDFA also has concerns about the nature of how traditional tax-exempt bonds, namely private activity bonds, are characterized in the proposal. We believe that any proposal to increase infrastructure investment must come with reciprocal and complimentary tax-exempt bond reform. If the President is serious about improving infrastructure, there will also need to be supportive bonds financing for private industry. Manufacturing, exempt facility and 501c(3) bonds are all in need of significant reforms and improvements. Paired with the President's proposal, these tools could make a far greater impact in moving the country's economic and infrastructure forward."

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