WASHINGTON — Transportation advocates told members of Congress on Wednesday that a healthy tax-exempt bond market, an expansion of the use of private-activity bonds, and the reinstatement of Build America Bonds would help finance much-needed infrastructure improvements.
A Morgan Stanley managing director and the president and chief executive of the American Road and Transportation Builders Association, pushed for bond financing at a hearing held by the Senate Committee on Commerce, Science, and Transportation.
Their calls come as some lawmakers have remained opposed to BABs and have urged that all new munis be taxable as part of tax reform initiatives.
J. Perry Offutt, who heads infrastructure investment banking for the Americas for Morgan Stanley, submitted written testimony to the committee that said while his firm estimates more than $300 billion of private capital has been raised to invest in infrastructure, the funding needs are greater and tax-exempt financing should be in the mix of available options. Private capital needs to be leveraged with public capital from federal, state, or local governments, he said.
The American Society of Civil Engineers reported in 2009 that $2.2 trillion would be needed over the next five years to raise the nation’s infrastructure from a “poor” to a “good” rating, Offutt said. Of that amount, $930 billion would have to be spent on bridges and roads alone, he added.
“Unfortunately, the current proposed infrastructure initiatives do not address the magnitude or the immediate urgency of this problem,” he wrote in his testimony.
“In order for the nation to finance such a wide range of projects, sponsors need to have access to a large variety of public and/or private financing alternatives,” Offutt wrote.
“Therefore, I personally see the benefits of providing a greater number of grants and low-cost loans … as well as taking steps to promote competitive capital market alternatives” such as maintaining “a healthy tax-exempt bond market,” he said. “In many cases, public capital from federal state and/or local sources can be leveraged with additional capital from the private sector.”
Offutt said the federal government should develop a long-term plan for the development and maintenance of the country’s infrastructure that includes creation of a national infrastructure bank. Other countries such as the U.K. have done this, he said. Projects also can be financed through public-private partnerships, but they must be commercially and financially viable and have political support through completion, he said.
T. Peter Ruane, president and CEO of the American Road and Transportation Builders Association, called for an expansion of the private-activity bond program, as well as reinstatement of the BAB program.
He also called for an expansion of the Transportation Infrastructure Finance and Innovation Act program, which provides loans and other federal credit assistance to projects.
Polly Trottenberg, the Department of Transportation’s assistant secretary for transportation policy, wrote about the importance of private activity bonds in her testimony. She told the lawmakers that the participants of one ongoing transportation project estimate PABs could save close to 7% of the project’s cost. She did not identify the project.
But she wrote that PABs are now being incorporated into the financing plans of several major P3s.
“To date, the DOT has approved almost $6 billion of PAB allocations for eight projects, of which over $2 billion have been issued for five projects,” Trottenberg wrote. “Increasingly, PABs and TIFIA credit assistance are being used together to support multibillion-dollar projects.”
She cited the I-635 Managed Lanes Project, which will relieve congestion north of Dallas of 13 miles of Interstate highway, as an example. The project, which estimated to cost $2.6 billion is being developed by a P3. The U.S. DOT provided an $850 million for the project and authorized $606 million in PABs for it, she wrote.
The TIFIA program is “one of the department’s most important and successful programs for facilitating private investment,” Trottenberg told the lawmakers.
Despite Ruane’s pleas for BABs, most Republicans have remained opposed to them, contending they mostly provide lucrative fees for underwriters and encourage muni issuers with lower credit ratings to sell more bonds for higher subsidy payments.
BABs, which were created and issued during 2009 and 2010 under the American Resource Recovery Act, are taxable and the Treasury provides issuers with subsidy payments equal to 35% of their interest costs. President Obama has proposed permanently reinstating BABs with a 28% subsidy rate.
Sen. Ron Wyden, D-Ore., has proposed tax reform legislation that would make all new munis taxable, tax-credit bonds. And two high-level commissions have produced reports on reducing the deficit that recommended making new munis taxable. One would make all new munis taxable, the other would make all new private-activity bonds taxable.
