New Type Of Bonds Get Push

WASHINGTON — Congress should create two types of direct-pay transportation bonds to help states and localities build and repair crumbling infrastructure, market participants told the Senate Environment and Public Works Committee during a hearing Tuesday.

The two types of new bonds would be variations on programs that Congress created in the stimulus law: Build America Bonds that provide a federal subsidy payment to issuers equal to 35% of their interest costs, and so-called qualified tax-credit bonds, which in the direct-pay mode provide issuers with federal payments equal to up to 100% of their interests costs.

“Recognizing that tax code changes are not under the jurisdiction of your committee, we believe Congress should consider a surface transportation version of the highly effective 'qualified tax-credit bond’ programs,” David Seltzer, principal at Mercator Advisors LLC, told members of the committee.

Los Angeles Mayor Antonio Villaraigosa, who also spoke at the hearing, suggested extending BABs for another decade and creating a new kind of direct-pay bond for transit construction that would provide subsidy payments of 100% of interest costs.

Transportation projects already can be financed using an array of bonds: BABs, tax-exempt or tax-credit bonds, private-activity bonds with a national cap of $18 billion specifically for transportation projects, other private-activity bonds allocated among states, and grant anticipation revenue bonds, or Garvees, which are backed by federal grants.

Seltzer and Villaraigosa both said Congress should expand the BAB program that is set to expire at the end of this year.

Seltzer said BABs should be broadened so that issuers could use them to raise funds for projects that involve private-sector investment, such as toll roads or other public-private partnerships. BABs currently are limited to governmental projects that are eligible for tax-exempt bond financing, not those that involve private management or equity investment.

The new BAB-style transportation bond could be called “public benefit bonds” and would be separate from the private-activity bonds that can already be issued on a tax-exempt basis, Seltzer said.

Both Seltzer and Villaraigosa also said Congress should add a transportation category to the style of tax-credit bonds that received a significant boost from a jobs bill enacted in March. The law allows issuers to choose to take a federal cash subsidy of up to 100% to defray their interest costs instead of providing investors with a tax credit.

The law currently offers the subsidy for bonds issued for certain projects related to school construction, forest conservation, clean and renewable energy, energy conservation, and school improvement.

“We believe there is an equally compelling case to be made for public transit and propose the creation of a qualified transportation improvement bond program with the same subsidy level,” Villaraigosa said.

Seltzer said in an interview following the hearing that the “qualified” transportation projects should have different criteria because the bonds would offer “a much deeper federal subsidy.”

Eligible projects would meet “certain policy thresholds regarding accessing new non-federal revenue streams, [providing] substantial benefits on environmental quality and so forth,” he said. “Those tests would not pertain to the public-benefit bonds [modeled after BABs] or the taxable PABs for public purposes.”

An Obama administration official also told committee chairman Barbara Boxer, D-Calif., that the president’s vision for a national infrastructure bank could provide the federal assistance that Villaraigosa is seeking for a major transit initiative in Los Angeles.

The Los Angeles initiative would finish 30 years’ worth of transit projects in 10 years. It would have a revenue stream from a voter-approved 30-year sales tax, but Villaraigosa has been pushing for federal support as well.

“What we’re looking at with the future of credit assistance going forward, how the infrastructure bank would work actually sounds like what you exactly described,” said Roy Kienitz, undersecretary of policy for the Department of Transportation, after Boxer described Los Angeles’ proposal.

Also Tuesday, the National Governors Association sent a letter to the leaders of the Senate Environment and Public Works, Finance, and Banking committees urging them to protect the authority of states to do public-private partnerships when the lawmakers consider a multi-year transportation bill.

The letter, sent by the NGA’s economic development and commerce committee, cautioned the senators against approving some of the provisions already included in a multi-year bill pending before the House Transportation and Infrastructure ­Committee. Those provisions include ­creating a new federal office to oversee tolling and other P3 agreements and setting new requirements and limits for ­tolling and P3s.

“State and local authorities, as the principal owners and operators of the surface transportation system, must retain flexibility to determine the appropriate level of private sector participation,” the letter said. “Therefore, we urge the Senate to avoid including these House provisions in any Senate draft.”

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