Democrats' infrastructure agenda would benefit market
Democrats’ stated goal of ramping up investment in resilient, sustainable infrastructure would bode well for the municipal bond market if presidential hopeful Joe Biden takes office in January.
The Democratic Party officially released its 2020 platform during its national convention this week, and unsurprisingly, it’s broadly similar to its platform four years ago. A political platform is a set of goals and statement of principles backed by a political party to gather public support and set the agenda for the next four years.
In the 2020 platform, Democrats vow to increase investment in broadband, ports, freight, clean water, wastewater, light rail, buses, and transit systems. They also plan to install 500,000 public charging stations for electric vehicles and create a national infrastructure bank.
On Tuesday, former president Bill Clinton applauded Biden’s own plans for resilient infrastructure which includes investments in roads, bridges, green spaces, transit, clean energy, broadband among others.
“He’s given us smart, detailed plans to invest in areas vital to our future,” Clinton said. “Innovative financing for modern factories and small businesses, good jobs in green energy and conservation to combat climate change, a modern infrastructure that brings small town and rural America the connectivity and investment others take for granted, and a plan to ensure that Black Americans, Latino Americans, Native Americans, women, immigrants, and other communities left behind are full participants in our economy and our society.”
Infrastructure is one of the Democrats’ top priorities, but for now, they have their eyes set on a coronavirus relief package, said Tom Kozlik, head of municipal strategy and credit at Hilltop Securities. A section of the 2020 platform was dedicated to just coronavirus recovery efforts.
But infrastructure’s involvement could be a part of future stimulus bills, Kozlik said, mirroring the American Recovery and Reinvestment Act passed to mitigate the effects of the Great Recession. ARRA provided $48.1 billion to the U.S. Department of Transportation and billions for highways.
“A lot of it has to do with pandemic timing and the poll of the landscape,” Kozlik said. “Generally, at some point, it will be considered to be part of stimulus measures. I would put it (infrastructure) at the top of their (Democrats) list.”
There are municipal bond-friendly elements that could be part of a stimulus infrastructure package. However, Democrats would have to take the House, Senate and the White House to make infrastructure happen, Kozlik said.
“To me, that is definitely not a given,” Kozlik said. ”It’s a possibility for sure, but we’re still a little less than 80 days from the election and there is a lot that can happen from now to then.”
It would be difficult for anything on infrastructure to happen if Democrats don’t get all three, Kozlik added. Specific items such as adding charging stations for electric vehicles might also be unrealistic, he said.
A party platform is not a governance document or policy blueprint, said Marc Scribner, senior transportation policy analyst at the right-leaning Reason Foundation.
“The party platforms are messaging documents to policy activists, they’re not serious policy proposals, so it will be interesting to see as the campaign continues and as we expect Joe Biden to flesh out some of his infrastructure talking points,” Scribner said.
However, if Democrats are able to push infrastructure legislation, it would increase the potential for the use of municipal bonds.
“Support for infrastructure creates huge potential for the use of municipal bonds under existing law and certainly under how it might be revised,” said Chuck Samuels, general counsel to the National Association of Health and Educational Facilities Finance Authorities.
The Democrats’ 2020 proposal does not include the mention of municipal bonds, though in 2016, they voiced support for the muni tax exemption and said they would work to establish a permanent version of Build America bonds.
Municipal bond stakeholders have continuously pushed for direct-pay bonds like Build America Bonds, increasing the bank-qualified bond cap and the reinstatement of tax-exempt advance refunding — taken away in the 2017 Tax Cuts and Jobs Act.
In both 2016 and 2020, Democrats pledged the creation of an infrastructure bank.
“Democrats support the creation of an infrastructure bank, a public bank that will leverage public and private resources to build infrastructure projects of national or regional significance, including in rail and transit, clean energy and water infrastructure, broadband, and affordable housing,” the DNC wrote this week in their platform.
The idea of doing a central federal infrastructure bank has been kicked around for years, but has never become a reality despite legislation having been introduced various times in the past decade. It could be used by municipalities to leverage federal dollars and then recycle those repayments into a revolving loan fund to finance future projects.
It’s not certain on whether the bank would be a freestanding financing mechanism or it would be supplemented by state and local funding. If it’s the latter, policymakers have to make sure state and local financing will work with the infrastructure bank, Samuels said.
“Then the question will be, do we have a system of municipal bond financing that maximizes the opportunities to be supportive of infrastructure?” Samuels said.
Democrats’ wish list comes as state and local governments are struggling to weather the COVID-19 pandemic. Tax revenues have plummeted as millions of Americans have lost their jobs and thousands of retail businesses have closed.
“Between all the things that Trump and the Republicans didn’t handle, and COVID and the deep recession resulting from COVID — there is so much that they can spend money on just to get back to some sort of break-even before making real progress,” said George Friedlander, a municipal market strategist. “It’s going to be a tough fight.”
Friedlander said a relief bill, which would potentially provide more direct aid to state and local governments among others, is unlikely to happen when lawmakers come back to Washington in September.
“There is a lot of it that isn’t being taken care of this year that will have to be taken care of next year and we don’t know how long the pandemic is going to last and how deep it is going to get in Phase 2,” he said.
The Democrats also said they would raise the corporate tax rate, which was cut during the 2017 Tax Cuts and Jobs Act. That will have a positive impact on municipal bonds by making them more valuable relative to taxable bonds, Friedlander said.
Emily Brock, director of the Government Finance Officer Association’s federal liaison center, noted that the platform’s focus on the pandemic and the virus gives hope to state and local governments.
“Democrats will extend significant aid to state and local governments, school districts, and public and nonprofit colleges and universities, including HBCUs (Historically Black Colleges and Universities) and MSIs (minority-serving institutions), to address these budget shortfalls and secure jobs,” the Democrats wrote.
Democrats are also known for reaching across the aisle for the sake of the municipal bond market, Brock said.
“It’s symbolic that many of the Democrats that subscribe to this do make an effort to reach across the aisle and say our market efforts are especially important as to achieving our mutual goals,” Brock said.