NEW YORK — Municipal issuers' financial challenges are preventing them from issuing more bonds to take advantage of low interest rates, Virginia Treasurer Manju Ganeriwala said here on Thursday.
"Our finances have been stressed," she said during at a panel on infrastructure financing at the National Association of State Treasurers' issues conference in New York.
Much of the infrastructure in the United States is in poor condition at a time when the cost of capital is low. Issuance of investment-grade corporate debt has been high because companies are taking advantage of the low rates to invest in the future. However, municipal bond issuance, especially new money issuance, has been low, said Richard Kolman, head of the municipal securities group at U.S. Bank.
"It's a mystery to a lot of people" why municipal issuers haven't taken more advantage of the low borrowing costs, he said.
But Ganeriwala said Virginia and many other states are facing challenges such as rising education and Medicaid costs while their revenues have declined. Unlike in the corporate market where an issuer may not have to pay any principal for a long period of time, state bond issues tend to have annual serial maturities. Also, "states generally don't try to time the market, so we don't normally issue and raise funds that we may not need," she said.
Kolman said that states' financial pressures could make funding infrastructure through user fees attractive. The challenge with user fees is getting customers to accept them and understand that the fees will be beneficial to governments economically in the long-term. He said use of public-private partnerships has been limited but is growing.
Ganeriwala noted that P3s traditionally use a user-fee model, but another P3 model that is becoming popular outside the U.S. is called the availability payments model, in which the private party gets paid for performance, including both construction and maintenance. She called this model "intriguing" because the U.S. has crumbling infrastructure due to the fact that projects haven't been well maintained.
Caitlin MacLean, associate director of financial innovations labs at the Milken Institute, said that an availability payments model could circumvent the resistance communities have to user fees, and the pushback to user fees makes alternatives interesting. The question with a pay-for-performance model is whether the investors trust the government who would be paying them.
MacLean also said that institutional investors see three main barriers to P3s: the financial and credit risks, the construction risks, and the political risks. However these barriers are not insurmountable, she said.
"There's still significant interest in the market, it's really about structuring the investments or structuring the products effectively to make that happen," she said.
In a recently released report mentioned by MacLean, Milken described potential solutions to making P3s more viable.
There could be a national infrastructure council that would review government programs to "modernize financing processes, reform inefficient funding programs, reduce unnecessary programs, and highlight areas for new funding," the report said.
Another option is that there could be a network of regional infrastructure exchanges and a national exchange that coordinates them, MacLean. This could be a "one-stop shop where you can understand what funding programs are available to you, you can try to find new investments. It wouldn't be a trading platform, but it would be an opportunity to understand the market and better understand the opportunities that the market has for you." she said.
Michael Wetherell, director of the office of construction oversight of the Metropolitan Transportation Authority who was also a panelist discussed several of the agency's projects and their financing. Ganeriwala asked Wetherell what financing options the MTA is looking at other than grants and fares. Wetherell said the MTA is starting to hold discussions about what could be done to make a project attractive for private-sector involvement.
