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Infrastructure

Tax-Credit Bonds Get New Push

DEC 17, 2012 3:42pm ET
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WASHINGTON — The Los Angeles County Metropolitan Transportation Authority is spearheading a nationwide push to create a new tax-credit bond program to finance transportation projects.

The authority is beginning to reach out to drum up support for America Fast Forward Transportation Bonds, said Raffi Hamparian, the authority’s government relations director.

The proposed $45 billion, ten-year program would be a continuation of the authority’s broader America Fast Forward initiative, which helped obtain an expansion of Transportation Infrastructure Financing and Innovation Act grants but failed to get a new tax-credit bond program authorized in the most recently enacted surface transportation funding law.

Under the proposal, the U.S. Treasury Department would set the maximum reimbursable rate for the bonds marketed each day that would enable them to be sold at their face amount without interest cost to the issuer, said David Yale, Metro’s executive officer of countywide planning and development. Every month, the Treasury would establish the maximum permitted final maturity that would result in the discounted present value of the bonds equaling 20% of the maturity value.

The program would differ from Sen. Ron Wyden’s proposed transportation and regional infrastructure project, or TRIP bonds, which would be issued through state infrastructure banks.

Yale said he hopes the cap on the authority’s proposed bond program would allay fears of lawmakers, particularly Republicans, over the cost of issuing heavily subsidized bonds. The project would cost $7.5 billion in lost taxes over the ten years, Hamparian said, adding, “They are fairly inexpensive for the federal government to do.”

Tax-credit bonds have not traditionally been as popular with investors as direct-pay bonds, in part because of the complexity involved in setting the rates. Although the wildly popular Build America Bonds program allowed bonds to be issued either as tax-credit or direct pay bonds, all of them were issued as direct-pay.

The budding coalition behind the effort maintains the program makes sense because Congress has already authorized tax-credit bonds in five other areas: forestry conservation, renewable energy projects, energy conservation, qualified ozone academies and new school construction.

Hamparian said Metro is on the lookout for lawmakers to introduce the legislation next year, and that a bipartisan coalition would be its preference. The legislation could be drafted to target specific areas of need. An internal document submitted to the LA Metro authority’s finance committee in November explored several possibilities.

“Various proposals could be considered with respect to the allocation of America Fast Forward Transportation Bonds, including the concept of having minimum set-asides annually for mega-projects (over $1 billion in cost), for rural states and a possible formula to guarantee that a portion of the national volume cap be apportioned evenly to states based on their population,” that document states.

LA Metro hopes to have the U.S, Conference of Mayors, U.S. Chamber of Commerce, American Public Transit Association, and American Association of State Highway and Transportation Officials fully on board soon, Hamparian said.

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A recent phenomenon is the emergence of bonds with shorter call protection as funding alternatives for municipalities. However, the shorter call protection also dampens the potential upside for investors, which in turn reduces the price they are willing to pay.

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