CHICAGO – Infrastructure financing and tax reform will be major issues for presidential and other candidates in November, said municipal market participants.
They made their comments during a panel discussion on Thursday at the National Federation of Municipal Analysts' annual conference here.
Frank Shafroth, director of the Center for State and Local Leadership at George Mason University, said the lead-contaminated water crisis in Flint, Mich., should draw politicians' attention to infrastructure and muni bond-financing issues.
"There can't be a city in America where mothers and fathers aren't worried about the drinking water in their homes" after Flint, Shafroth said, later adding, "I think it has been an enormous wakeup call to Congress."
Shafroth suggested that Flint may be more of an attention-getter than Puerto Rico, which is struggling with roughly $70 billion of debt as well as a health crisis involving the growing Zika virus.
"When you think about your children, what kind of future they have, you might be a little scared of the Zika virus, but I think you're far more scared if there's lead in the water that you are serving your children before they go to school in the morning," Shafroth said.
George Friedlander, managing director of municipal macro strategy and policy for Citigroup Investment Research and Analysis, said the muni industry has made progress in educating Congress about the role tax-exempt bonds serve. He agreed with Shafroth that infrastructure nationwide is a pressing problem. He warned that "bridges will fall into rivers."
"We know there is an infrastructure problem," he said. "Flint highlighted that."
Friedlander cited a study that found new money municipal bond financing, for the period between 2011 and 2015 averaged 40% below that for previous ten years, not adjusted for inflation.
"That is startling, shocking and suggests the total lack of a cost-benefit focus on what it means if we don't fix our roads [and] fix our water systems," Friedlander said. "These are serious economic issues that get back to our competitiveness as a country but also affect the ability of state and local governments to do what they do in their own neighborhoods. The whole case for state and local governments to have capacity to do what they need with some support from the federal government is a war we need to re-fight."
One driver of infrastructure problems, according to Shafroth, was Ronald Reagan's elimination of revenue sharing, which had helped smaller cities with less revenue generating capabilities, like Flint, to function properly. Richard Nixon introduced the concept during his presidency.
"I don't know what will happen under a Trump or a Clinton-Two administration but the kinds of issues and challenges will be unlike anything we have had since before Richard Nixon was president," he said.
One audience member asked the panelists how Congress will be able to get anything done given the political "logjam" right now.
Susan Collet, president of H Street Capitol Strategies, said there have already been some changes "around the edges" of Congress like the five-year highway bill enacted late last year. That new law shows "Congress is slightly getting their mojo back," she said.
Friedlander said he doesn't believe there will be a tax reform bill "anytime soon" and added that entitlement reform "is going to be a bear," given the aging population that still actively votes.
Shafroth, who was more optimistic, said there will likely be some "tough discussions" between state legislators, governors, county elected officials and municipal elected leaders during the next year.
"You're dealing with a large and growing deficit and federal debt, so, certainly under [House Speaker Paul] Ryan, [Congress] will have a lot of pressure to use tax reform to help deal with the federal deficit and debt," Shafroth said.
Tax reform will force municipal officials to discuss where cuts can be made, including to the tax exemption for muni bonds, he said.
Shafroth said it is hard to justify that convention centers and sports arenas are essential public services, drawing on past experience from when he was talking to members of Congress on behalf of the National League of Cities.
"[Tax reform] not going to happen scot-free," he said.
