Municipal market participants do not think President Obama’s $21 billion multi-pronged infrastructure proposals will gain traction from the issuer community or lawmakers on Capitol Hill.
Municipal Market Advisor managing director Matt Fabian claimed in a note on Monday that the proposals are “the most tone deaf of the year so far” and that the Obama administration “may be the most anti-infrastructure Presidency in decades.”
The president’s plan, he said, once again attempts “to disrupt and shrink the primary means of private financing for public infrastructure in America: tax-exempt municipal bonds.”
Obama last week, on a short day trip to the Port of Miami, outlined his plans to restore the nation’s crumbling infrastructure to help spur job creation and economic growth. A key part of the plan is for Congress to create a new taxable, direct-pay bond program called America Fast Forward, under which the Treasury would make subsidy payments to issuers at a rate of 28% of their interest costs, and allow those bonds to be used to finance projects that otherwise would be financed with tax-exempt private-activity bonds.
Obama also called on Congress to ease restrictions on private activity bonds, enact a National Infrastructure Bank capitalized with $10 billion, and allot $4 billion in new competitive funding for the Transportation Infrastructure Finance and Innovation Act (TIFIA) and the Transportation Investment Generating Economic Recovery or TIGER program.
The AFF bond program would expand on Build America Bonds by spreading the use of taxable, direct-pay bonds to a huge new chunk of the muni market. But Fabian pointed out that with offset and sequestration cuts to BABs, “issuers have (finally) realized that any planned stream of direct payments by the federal government can¬ ¬— and likely will — be adjusted to suit the political and policy needs of future Congresses.”
“There is a definite serious hit on the credibility of direct pay bonds” due to sequestration, revenue offsets and changes in the terms and conditions of these bonds, agreed Chuck Samuels, a lawyer at Mintz, Levin, Cohn, Ferris, Glovsky and Popeo PC.
“In any re-launch of BABs, ostensible issuers would now demand far more flexible call options to protect themselves against demonstrated federal caprice,” Fabian warned investors, adding, “of course this is exactly what taxable investors don’t want.”
“MMA does see value in broadening the universe of lenders for US infrastructure. But we believe a focus on improving the lending side of infrastructure is deeply misplaced and will lead to little net increase in total projects financed,” he said.
Bill Daly, director of governmental affairs for the National Association of Bond Lawyers, said absent congressional action, sequestration will be in effect until 2021, and its unclear what the spending cut levels will be in future years to direct-pay bonds, he said.
It’s hard to see Republicans coalescing around them, Daly said. Some of the president’s infrastructure proposals, which have been proposed before, could gain traction but it’s unlikely to happen in the short-term, he said.
Obama’s push for easing restrictions on qualified PABs comes as lawmakers have vowed to re-examine rules for PABs in light of concerns about their use raised at a recent House Ways and Means committee hearing.
Daly said Obama’s proposal could help with the perception of PABs. Congressional “members didn’t really understand the range of activities that are financed through PABs,” he said. “Having the administration out there saying that PAB finance some really important infrastructure in this country will help educate members on the role of PABs.”
But Fabian suggested that issuers may not wholeheartedly embrace the PAB proposals. “We see the main issuer organizations as generally more amendable to losing PABs than to accepting damage to the tax-exemption generally,” he told investors.
In fact, while some state and local groups were encouraged that the president has placed infrastructure investment at the forefront of his agenda, they made clear they support tax-exempt over taxable bonds. “We appreciate the interest in infrastructure but we are concerned by the potential threat in the president’s upcoming budget that may call for a cap” of the value of tax exemption, said Lars Etzkorn, program director for the National League of Cities. “That’s what is working right now to fund three-quarters of the infrastructure in the country. There is a disconnect right there.”
“The mere questions about muni bonds caused them to trade at a higher interest rate,” Etzkorn said. “Markets like certainty. There is uncertainty here.”