WASHINGTON -- The White House on Friday proposed a new “Rebuild America Partnership” program that would allow direct-pay American Fast Forward bonds to be used for any project that can currently be financed with tax-exempt private activity bonds.
The AFs bonds would subject to a 28% subsidy rate under which the Treasury would pay issuers 28% of their interest costs. The AFF bond-financed PAB projects would still be subject to state volume caps.
The program is an expansion of the BAB program that was created in 2009 and expired at the end of 2010. Using taxable bonds to fund infrastructure projects broadens the pool investors to public pension funds and others that would not receive a tax benefit from tax-exempt bonds.
The President’s program would also ease restrictions on certain PABs. It would increase the national limit for highway and service freight transfer facility bonds to $19 billion from $15 billion and would eliminate the PAB volume cap for water infrastructure projects.
The Environmental Protection Agency estimates there is a $600 billion need for capital investment in waste water, storm water and drinking water infrastructure over the next 20 years
The administration also would permit private ownership of tax-exempt PAB airports, docks, wharves and mass commuting facilities.
In addition, it would increase to 35% from 25% the limit on the use of bond proceeds for land acquisition, to enable more PABs to be used for projects in areas with land costs.
The administration is proposing to authorize another $4 billion in funds in 2014 for grants, loans and loans guarantees for the Transportation Infrastructure Finance and Innovation Act (TIFIA) and the Transportation Investment Generating Economic Recovery or TIGER program.
Administration officials reiterated their proposal for a $10 billion to create and capitalize an independent National Infrastructure Bank with the goal of leveraging up to $20 for every federal dollar of infrastructure investment.
They said the bank would be a government-owned entity that would be operated independently by non-partisan infrastructure and financial experts. Eligible projects would include transportation, water and energy infrastructure, would have to be at least $100 million in size, and be of national or regional significance.
The loans would extend to 35 years allowing the bank to be a “patient” partner side by side with state, local and private investors. The administration also would reform tax laws to attract foreign investors for U.S. infrastructure projects. But the bank would not be allowed to finance more than 50% of the total cost of a project.
A senior administration official said that these proposals would be part of the president’s fiscal 2014 budget to be released on April 10, but would be subject to congressional authorization legislation. All of the tax proposals involve in $7 billion of tax reform measures, the official said.
These proposals are “a very important part of the president’s overall economic strategy” and are key to “how you make America a magnet for jobs,” the senior administration official said on a conference call with reporters.
The proposals come as the president is traveling to Miami and touring a port tunnel project and will deliver a speech promoting plans to create jobs by attracting private capital to invest in infrastructure projects Friday afternoon.
While muni market participants will surely applaud these proposals, the question is whether they will gain any traction in Congress. Republicans have been steadfastly opposed to BABs, which have a higher 35% subsidy rate, believing they encourage issuers with the lowest credits to issue the more bonds.
Further, some issuers’ enthusiasm for direct-pay bonds has dampened, now that it has become clear that their subsidy payments can be cut through offsets, if they owe the federal government money, or because of sequestration, which wrapped BAB payments into the list of federal program cuts.
The proposals to ease restrictions on PABs come as House Ways and Means Committee chairman Rep. Dave Camp, R-Mich., former Municipal Securities Rulemaking Board executive director Kit Taylor and some state and local officials have questioned whether PABs should be tax-exempt. Camp has promised his committee will examine the tax laws governing PABs to see if these bonds are the best use of a government subsidy.
The president has been proposing a reinstatement of the BABs program at a 28% subsidy rate and creation of a national infrastructure bank for years, but neither proposal has moved forward in Congress.